DENVER — Five cities have filed a lawsuit against the state and Gov. Jared Polis over a new law that is expected to go into effect next month.
HB22-1024 requires self-governing cities to exempt construction and building materials used in the construction of public schools from sales and use taxes. These taxes are collected from contractors and sub-contractors as part of the process of building and repairing schools.
“This is really designed to reduce the amount of sales tax that is charged on school construction projects, and we really felt it was urgent because Colorado is dealing with a huge backlog in school construction. schools across the state,” said Sen. Chris Hansen, D-Denver, one of the bill’s sponsors.
Boulder, Commerce City, Denver, Pueblo and Westminster all joined the lawsuit, which was filed Thursday in Denver District Court.
Self-governing municipalities are authorized to levy their own taxes based on Article XX, Section 6 of the Colorado Constitution, which gives them the power of self-government in matters of local and municipal concern.
Of Colorado’s 272 municipalities, 104 are self-governing; of these self-governing cities and towns, 69 collect sales and use taxes themselves.
“For the most part, self-governing municipalities that collect themselves find that they collect more taxes owed than if the state did it for them. That, and they can also resolve issues much faster,” said Kevin Bommer, executive director of the Colorado Municipal League.
The five cities suing are the only ones in the state that currently do not exempt building and construction materials for schools from sales and use taxes.
The cities argue that the new law erodes the autonomy’s fiscal authority, which they say is essential to their very existence.
Lawmakers, however, considered building and maintaining schools a state concern under the new law, not a local matter.
“We just think it’s appropriate for statewide betterment not to charge sales tax on building materials for the school.” So it’s very narrow, very focused,” Hansen said.
They argue that contractors should not be required to pay a tax to a government on building materials that will benefit that same government. They also argue that the ability of the state to honor its responsibilities to provide a uniform system of free public schools is hampered by these taxes.
“This challenge to an unconstitutional piece of legislation passed by the General Assembly and signed by the governor is a great test of this self-governing authority,” Bommer said.
However, he points out that the state Supreme Court has said three times in the past that municipal authority over local sales and use taxes is a matter of local concern. He expects a similar decision for this trial.
He also points out that tax revenue collected from construction and repairs is often used to help schools and that the state is trying to cut local revenue at a time when it still owes schools hundreds of millions through the tax factor. fiscal stabilization.
The law enjoyed bipartisan support and passed relatively early in the 2022 legislative session. It was signed into law on April 18 but has a 90-day petition period after the last day of the legislative session before it enters in force. It is expected to come into force on August 10, but the lawsuit is asking for an expedited court ruling on its constitutionality.
Lawmakers say removing the tax would reduce the cost of construction and that it would benefit taxpayers since they would not see construction taxes passed on to them.
Denver estimates that it collects between $2 million and $4 million annually in revenue by taxing these materials for schools that it will not be able to collect under HB22-1024.
Meanwhile, the lawsuit claims Boulder will lose $450,000 a year in tax revenue, Commerce City will lose $600,000 a year, Pueblo will lose $3-4 million a year and Westminster will lose $100,000 a year if the law is passed. authorized to enter into force.
Roger Tinklenberg, Commerce City’s city manager, said this lawsuit was not about money but about the principle of self-governance and what something like that might mean for other local decisions in the future.
“It doesn’t matter if it’s a city-specific project, a school project, a state project or a private contract, all of them. The basic principle is that the contractor must pay a use tax on the materials used in the construction project,” Tinklenberg said.
He also points out that Commerce City has a special account set aside for tax revenue from these projects. This money is then funneled directly back into the community, often to improve playgrounds, ball diamonds, gymnasiums and more.
“There is a beneficial use for both the community and the students in the school district,” he said.
Hansen says that’s great for Commerce City, but other municipalities aren’t doing it, so the state is paying too much to build schools, which falls on taxpayers.
Ultimately, it will be up to a judge to decide whether the state or municipalities should have the final say on these taxes.