Colorado Now Accepts Crypto for Tax Payments

On 9/1/22, Colorado became the first state to accept cryptocurrency for all tax payments. There are many ways this could have been structured and I think the state picked an interesting one which I assume makes it easier for the state.

Payments have to come from PayPal Cryptocurrencies Hub. The PayPal account has to be a personal one rather than a business one. Per the DOR website on this:

"A sufficient amount of cryptocurrency to cover the tax, obligation and fees is converted to dollars and remitted to DOR to complete the online transaction. Service fees include an additional $1.00 plus 1.83% of the payment amount. You must have the entire value of your invoice in a single cryptocurrency in your PayPal Cryptocurrencies Hub. Effective on the date initiated, USDs will transfer in 3-5 business days." [also see https://www.colorado.gov/revenueonline/_/#1]

Per the PayPal crypto website, you can buy, transfer or sell Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.

So, sounds like if I owe $100 to the Colorado DOR, I can only pay in crypto if I have at least $103 worth of one of the four cryptocurrencies in my PayPal account. If I have $50 of Bitcoin and $53 of Litecoin, that won't work. I'd need to acquire more of one of those cryptocurrencies via my PayPal account to do the transaction.

Tax considerations: Per the website, PayPal is converting my crypto to dollars and remitting to the DOR. So, any broker reporting falls on PayPal. The taxpayer has a barter transaction per Notice 2014-21 and needs to calculate gain or loss using the value of the crypto used less their basis in that crypto.

Why might Colorado be doing this? Well, this question has been posed by many people for years - can I pay my taxes in crypto? I think this is only of interest to someone who happens to have sufficient crypto in an account to make the payment or doesn't want to convert it to cash first to pay. I think few crypto owners will pay taxes this way, but it is good to have the option. And it looks like for Colorado, they are just getting the cash as they typically would.

And Colorado will know which taxpayers have crypto because they received payment via PayPal Cryptocurrencies Hub.

But the state has to devote resources to explaining this. At 10/2/22, they even have 10 FAQs on this payment technique. 

FAQ #5 is interesting - Taxpayer changed their mind mid-transaction but realize afterwards that their crypto is gone from their PayPal account. What happened? "If you leave the process after selling your cryptocurrency in your PayPal Cryptocurrencies Hub, but before completing the entire checkout process, your cryptocurrency will still have been sold and the US dollar equivalent deposited into your PayPal balance."

So, be sure you want to pay via crypto before starting your tax payment transaction.  The FAQ should add here (and other places) - and you need to calculate the gain or loss from that conversion (whether or not it resulted in cash used to pay your taxes or for a transaction cancelled mid-point, cash in your PayPal account).

FAQ #10 - If I need a refund, will it be based off the current exchange rate of the cryptocurrency? "If a refund is to be provided for any reason, this will only be provided in US dollars for your invoice amount."

A few observations on FAQ #10:

• Why not just make it really clear on the website that taxpayers are converting crypto in their PayPal account to cash with PayPal submitting that cash to the DOR?  And adding that you are really paying in cash and creating a gain or loss from the conversion of your crypto to cash. Then it would be more clear that, of course, any refund is going out from the DOR in US dollar. But perhaps taxpayers might think that the DOR will send the dollars to PayPal who would use it to buy more of the crypto that had been converted to US dollars to pay the tax.
• If a person pays too much to the DOR and the value of the crypto converted to cash to pay the tax bill goes up, they lost out on that value by converting too much (or even using any of it to pay their taxes) and don't get any relief because the refund is NOT done by having that same quantity of crypto that was overpaid going back to them as a refund.

What do you think? Should more states and even the IRS do what Colorado DOR is doing?  Or allow another payment structure or just take the crypto directly and hold onto it?

Odd tax holiday in Colorado today

Several states have "sales tax holidays" where for a day or a few days specified during the year, there is no sales tax on specified items.  For example, it might be on children's clothes or school supplies close to the time when school begins. Some states have them for guns and emergency preparedness items. The Federation of Tax Administrators maintains a list of these holidays in the states.

Today, September 16, 2015, Colorado has a holiday on marijuana - but just the special 10% and 15% taxes (there are a lot of taxes on marijuana in Colorado). The reason is complicated and ties to the fact that when recreational sales became legal in Colorado and new taxes added, they raised more than allowed. HB15-1367 explains some of this (in 33 pages!).

All of this is odd and bad tax policy. For Colorado, too bad no one thought of a law modification earlier that if too much marijuana taxes were raised, it would be used to reduce other taxes or for backlog infrastructure projects, or something other than a one-day tax holiday. I'll get back to the tax issues next, but also want to note that this is also odd - isn't the state now encouraging more people to buy marijuana today due to the greatly reduced cost?  What is the purpose of that?

Tax problems include the inequity of making somethings tax exempt, but not other things. Also, everyone, regardless of need gets the tax break. For example, someone making $200,000 per year who buys school supplies for their child during a state sales tax holiday period for these items saves a few dollars of tax. Why?  If the holidays are to help low income individuals, it would be better for the state to give them gift cards for stores that sell these items (or some other way to give money for them). 

Some might be too broad. For example, what all falls under school supplies or emergency preparedness?  Time is needed by the tax agency to define the terms, if possible.  And how, for example, does the store know if someone buying paper during the holiday is doing so for school?

The compliance and administrative burdens are also high. A vendor needs to be sure it handles the holiday correctly and the state needs some way to verify that it did. 

And the effect to vendors is odd.  The holidays will cause many people to wait to buy items then causing operational challenges for stores and theirs suppliers.

What do you think?

Sales tax complexity example

Colorado map from the USGS

Many local governments have sales tax in addition to the state's sales tax. Tax rates likely vary among local entities. Thus, it is necessary to define that local jurisdiction.  We might assume that should be easy because it would be based on the name of the city or the zip code - something easily known. But, that is not true, there are many areas where zip codes do not tie to the local sales tax rate.

Thanks to Karen Davis of T.M. Byxbee Company, P.C. in Connecticut for pointing out to me an example of the complexity that can exist in trying to determine the proper sales tax rate to charge.  The Colorado Department of Revenue has a web tool where you can determine the local sales tax.  For some of the jurisdictions though, you'll also need a map to determine the rate. For example, here is the description provided for the city of Aurora (emphasis added). Also note that unlike other states, such as California, there might be separate filing obligations for the cities (rather than reporting everything on one sales tax return).

"AURORA:
The city sales tax rate is 3.75%. Please note that this is a Home Rule City. The Colorado Department of Revenue does NOT collect sales tax for home rule cities. Aurora is located in three counties: Arapahoe, Adams and Douglas.

ADAMS COUNTY:
The county sales tax rate is 0.75%. The Regional Transportation District sales and use tax of 1.0% applies in Adams County West of Box Elder Creek. The Scientific and Cultural Facilities District sales and use tax of .1% applies to all of Adams County.

ARAPAHOE COUNTY:
The county sales tax rate is .25%. The Regional Transportation District sales and use tax of 1.0% applies to that portion of Arapahoe county which is south of Interstate 70 and west of Picadilly Road to Jewell, and west of Gun Club Road to Quincy, and generally west of Monaghan Road, including Arapahoe Park and Aurora Reservoir.  The Scientific and Cultural Facilities District sales and use tax of 0.1% applies to all of Arapahoe County.

DOUGLAS COUNTY:
The county sales tax rate is 1.0%. The Lincoln Station Local Improvement District near Interstate 25 on Park Meadows Drive has a sales tax of .5%. The northeast portion of Douglas County, Highlands Ranch, the Park Meadows Mall area, Lone Tree, Acres Green, and Lincoln Station LID are located in the Regional Transportation District, which has a sales and use tax of 1.0%.  The Scientific and Cultural Facilities District sales and use tax of .1% applies to all of Douglas County except in the towns of Castle Rock and Larkspur."

To see others, go to the Department's website and click on "View Local Sales Tax Rates."

Can it be easier?  YES.  One easy approach would be to have just one rate per state with some portion of that going to cities. That might not be politically easy as each local jurisdiction might have varying needs for sales tax revenues depending on other sources of revenues and spending their needs. I think though, that cities and counties would be well-served by working to get to one-rate-per-state because it would then be easier for vendors to collect and remit sales tax. And perhaps Congress would be more willing to enact the Marketplace Fairness Act if sales tax collection were easier. There would still be a need to identify the location of the buyer to get the sales tax to the correct place, unless there is reliable data on spending among local jurisdictions so that the total local portion could be apportioned among local jurisdictions using that data.

What do you think?

Marijuana and the Tax Law

It's unlikely anyone missed the news stories about marijuana sales becoming legal in Colorado on 1/1/14. The Huffington Post reported on 1/8/14  that sales in the first week were about $5 million. That also generated a lot of tax revenue for the state because Proposition AA* that Colorado voters passed in November 2013 allows for a 15% excise tax when unprocessed retail marijuana is sold by a cultivation facility to a retailer AND a 10% sales tax (on top of the normal Colorado sales tax of 2.9%) when the retailer sells the marijuana. That proposition suggested that $70 million would be generated annually with the first $40 million to be used for public school capital construction. Additional revenues would be used to enforce regulations on the retail marijuana industry and the balance for other needs (apparently at the discretion of the legislators).

Recent guidance from the Colorado Department of Revenue (Sales 93) notes that there is a Retail Marijuana Sales Tax Return. Also, there is apparently just one possible exemption, described in "Sales 93" as follows:

"Medical marijuana is exempt from state sales tax for patients that are issued a registry card that has a tax-exempt status notation from the Colorado Department of Public Health and Environment (CDPHE). A person qualifies for the tax-exempt status if, depending on the number of people in the patient's family, their income is below a certain level. The tax-exempt patient must provide the tax-exempt registry card to the retailer at the time of purchase in order to be exempt from sales tax."  [This appears to be something new because a 2009 opinion from the Colorado Attorney General said it was subject to sales tax.] "Excise 23" explains the 15% excise tax. Medical marijuana is not subject to this tax.

Some observations:

• These are high sales tax rates on top of the normal sales tax. Depending on what additional costs the state incurs from the sales, it seems to be a significant source of revenue. A 1/9/14 story in the Wall Street Journal - "Pot Legalization Crimps Funding of Drug Task Forces," notes that states that legalize marijuana lose funding because some of the seized assets are used by law enforcement.
• Are there other items consumers are willing to pay an additional 10% sales tax on?  Perhaps the Colorado state sales tax of 2.9% is too low?
• Registry card - This card used by a low income patient to obtain a sales tax exemption on medical marijuana is interesting. Generally, it is difficult to target sales tax relief because a vendor doesn't know if a person is low-income and eligible for tax relief. This is why states typically deliver sales tax relief in overbroad ways, such as by exempting food purchases. Such broad exemptions provide significant relief to high income taxpayers who spend more on food than do lower-income individuals, and likely don't need a sales tax break. Perhaps this approach works for medicinal marijuana sales as other documentation might exist and these sales are far fewer than food.  I think the system would not work for other types of sales, such as food, due to possible abuse and added administrative costs. I think that food should be subject to sales tax with relief provided to low-income individuals via a refundable income tax credit.
• Income taxes - Since 1982, federal income tax law has denied operating deductions for a business of selling controlled substances (IRC Section 280E). The business can subtract cost of sales from its revenues, but not operating expenses such as utilities. While most businesses aim to treat expenditures as period costs rather than inventory costs, marijuana retailers would be incentivized to treat as many expenditures as possible as inventory costs so they can include them in cost of sales under the IRC Section 263A ("unicap") rules. [For more on this topic, see (1) IRC Section 280E, (2) Olive, 139 TC No. 2 (2012), and (3) "Federal Income Taxation of Medical Marijuana Businesses," by Professor Roche at the University of Denver law school, August 2013.]
  
  Query: Do the states that have legalized marijuana sales conform to this federal rule?
  
  Query: Will federal legislation pass to change 280E, such as H.R. 2240 that would make IRC 280E non-applicable in a state where sale of marijuana is legal? A problem with such legislation is that it would cause federal law to not treat all federal offenses the same given that the marijuana is a controlled substance under federal law.
  
  Query: How much will federal and Colorado income tax revenues increase due to sales by Colorado marijuana retailers?
• Practitioners - There seems to be an open question of whether a tax practitioner (particularly a licensed CPA or attorney) can assist a marijuana retailer with their tax compliance and planning, given that it is an illegal business, at least under federal law. Is there any ethical violation?

What do you think?

*For more on Prop AA, see Ballotpedia and Project Vote Smart.

States still seeking sales tax

States continue to find ways to improve sales tax collection from online sales. They would like to see Congress help, but in the meantime, they find other ways.  In 2010, Colorado enacted a law to require vendors with over $100,000 of sales to Colorado customers to notify the customers of possible use tax responsibilities. In addition for any customer with over $500 of sales in the year, the remote vendor also had to issue an annual summary statement to the customer, and a report to the state of all customer purchase totals. When first challenged, an injunction was issued to not enforce the law. That was recently found improper.

Utah and Missouri have taken more recent actions to address varying aspects of the sales tax colletion issue.  I have more in a short article in the 9/12/13 AICPA Tax Insider - Still seeking sales and use taxes.  Please take a look.

What do you think states should do to improve sales and use tax collections?

Tax system modernization recommendation in Colorado

Recently, TBD Colorado, a non-partisan, community group issued a report (11/14/12) with various recommendations to help improve the state's tax system, budget, education, transportation, workforce and health care.  I like the tax system recommendation as it seems to be getting at the need to modernize and update the system.  The recommendation states:

"Consider changes to the tax code so that it more accurately reflects Colorado’s underlying economy. Some of the fastest growing sectors of the economy are either exempt or taxed at a lower rate than others. Changes to the tax system that are revenue neutral on a current basis, reduce marginal rates, exemptions and deductions, but simplify the tax code and broaden the tax base should be considered."

There is not much detail in the report on what is exempt. But a review of Colorado sales tax rules shows that while electronically delivered software is taxable, there is no tax on digital goods or most services. These are growing sectors of the economy. Broadening the tax base to include these items when sold to individual consumers, would be more equitable and allow for a lower tax rate.

I also like their last sentence which needs to be said more often at state and federal levels .... a tax system with a broader base is more likely to meet principles of good tax policy such as equity, neutrality, efficiency, transparency and simplicity.

Unfortunately, these wasn't said enough in California which after the recent election ended up with increased rates for the personal income tax and sales tax which exacerbate problems such as PIT volatility, and inequities in the sales tax.  California's tax problems are with its tax bases, not the rates which were already high.  But I'll save that analysis for a blog post on another day soon.

But in the meantime - nice job by TBD Colorado and the citizens involved with the report in identifying how to truly improve a tax system.

What do you think?

More on Colorado Use Tax Collection Approach

The Colorado Department of Revenue recently issued FYI Sales 79 - Sales of Taxable Items Over the Internet to provide specific guidance on which sellers are required to provide information to customers, such as on invoices, and file an annual report listing particular information about customer purchases for the year. For some reason, the information is not easily found on the Colorado DOR website - but here is their page with a few links about this reporting requirement that was enacted earlier in 2010.

This new Colorado system is a new approach to trying to improve use tax collection. They are not requiring the remote vendors to collect the use tax, but to help the state know about some of the people who owe it. (See my prior post - here.)

The Colorado rule applies to remote (non-present) vendors with annual gross sales of $100,000 or more to Colorado customers. Such sellers must provide a statement that is easy to find that is located near the price charged. The statement must note:

• The seller does not collect Colorado sales or use tax.
• The purchase is not tax-exempt just because it was purchased over the Internet.
• Colorado purchasers must self-report use tax at the end of the year.

The vendors must issue an annual report to Colorado and the customer if sales to that customer for the year exceeded $500. For details and examples, see the Colorado FYI Sales 79 document.

Is this a good approach? Well, it will help educate more people about the use tax? Why doesn't the state of Colorado just give vendors a link to add to their order page or a pop up page so that customers will know about the use tax with even less effort required of the vendor.

A problem will if more states do the same but with different rules. The MTC has a draft law - here.

Also, what about buyers that do not get the annual statement, do they get a hidden message that use tax is not owed?

What do you think?

Oklahoma follows Colorado Approach to Increase Use Tax Compliance

On June 9, 2010, Oklahoma, following the lead of Colorado, enacted HB 2359 to require vendors that sell tangible personal property to Oklahomans and do not collect the Oklahoma sales tax to notify the customers that they may owe use tax. This new rule generally applies to vendors with total sales over a threshold amount to be set by the Oklahoma Tax Commission.

Links:

• State Legislature - search for HB 2359 to get text
• Colorado law - HB 10-1193
• Colorado Emergency Regulation 39-21-112.3.5
• Colorado Department of Revenue information

The Oklahoma Tax Commission is to create a Retailer Compliance Initiative to encourage non-present vendors to register to collect sales/use tax in Oklahoma.

The bill also provides: "D. When assisting taxpayers in preparing an individual income tax return, tax preparers shall advise their clients of their responsibility to remit use taxes through the use tax remittance line on the individual income tax return or by filing a consumer use tax return."

HB 2359 also creates an affiliate nexus provision.

California has a similar proposal - AB 2078. (Click here to search for this bill to obtain its status and analysis.)

Some question whether the Colorado requirement for non-present vendors to provide information to Colorado customers on invoices and to file an annual report with the customers and state are constitutional given that the vendors have no physical presence in Colorado. Physical presence is the nexus standard for sales tax per the 1992 US Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298. Is the standard less if there is no tax required to be collected? Under the Due Process clause, just making a market in Colorado may be enough for the state to be able to make a person subject to their laws. but, does the quantity of sales in the state matter? Perhaps. Here is language from Quill:

"here is no question that Quill has purposefully directed its activities at North Dakota residents, that the magnitude of those contacts are more than sufficient for due process purposes, and that the use tax is related to the benefits Quill receives from access to the State. We therefore agree with the North Dakota Supreme Court's conclusion that the Due Process Clause does not bar enforcement of that State's use tax against Quill."

How significant is "magnitude of those contacts?" What if a vendor with $100,000 or more of total sales, only has 3 out of 100 sales in Colorado and they are not large in dollar amount relative to other sales?

Perhaps in personam jurisdiction cases not involving tax issues are relevant. A 2008 9th Circuit case - Boschetto v. Hansing, found that a Californian who purchased a car on eBay from an individual in Wisconsin could not require the Wisconsin person to come to California for a lawsuit. The court did not find that a single transaction in the state does not mean that the defendant "purposefully availed themselves of the privilege of doing business in California."

Is that relevant to an information reporting requirement that invovles no tax and no travel (although it does potentially involve significant fines)? A court case on this would be helpful.

What about the US Commerce Clause? Will the Colorado requirement impede interstate commerce? There are significant penalties for failure to comply and there are costs to comply. Is it enough to reasonably lead some Internet vendors (including eBay sellers with $100,000 or more of annual sales) to say they will no longer sell to Colorado customers? Probably not, but I could be wrong.

Also, if copycat states enact the exact language of Colorado and work together to have the same reporting forms and due dates and perhaps even a third party vendor arrangement to assist sellers, the Commerce Clause issue seems to be diminished. But, I expect that someone will challenge the constitutionality of the provision - we'll see what happens and how many states follow the Colorado model, which should increase use tax compliance and certainly makes it easier for the state to know who has not complied with the obligation to self-report and pay use tax.

What do you think?