The city of Durango could see some additional tax revenue thanks to a recent U.S. Supreme Court decision on internet sales, but not enough to solve a projected municipal budget shortfall.
The Supreme Court recently ruled in South Dakota v. Wayfair that states and local governments can require remote retailers with no physical presence in a state to pay sales taxes.
“The Supreme Court has recognized that our tax system has changed, our economy has changed and we need to modernize,” said Ali Mickelson, director of legislative and tax policy with the Colorado Fiscal Institute, a nonpartisan organization.
The new sales tax revenues could bring in an additional $168 million to $262 million to the state of Colorado and local governments, according to a U.S. Government Accountability Office report.
But there are unanswered questions associated with the decision, including when new revenue will start to flow and how much local governments might receive.
“I don’t know that any experts are certain about what’s gong to happen,” Mickelson said.
Part of the problem is Colorado’s complicated sales tax structure, which includes many home-rule cities and special districts that collect their own taxes. Sometimes, the taxes applicable to a purchase vary by ZIP code or address, she said.
Some online retailers could argue that paying taxes in Colorado is too complicated and burdensome. If the state Legislature agrees, those companies could be required to pay only the state’s sales tax, Mickelson said.
Conversely, the argument could be made that online retailers with a physical presence in the state are able to navigate the complicated tax system, and other companies should be able to as well, she said.
The Legislature’s Sales and Use Tax Simplification Task Force is likely to discuss the South Dakota v. Wayfair case and how to streamline sales tax payments across the state this year. Streamlining payments for companies could help ensure that local governments receive the new online tax collections, she said.
However, the state of Colorado may be prevented from seeing the full financial benefit of the recent decision because of the Taxpayer’s Bill of Rights, she said.
TABOR’s limits on increases in state revenue could trigger refunds to taxpayers, rather than allowing the state to keep the additional income, she said.
“TABOR is really holding us back from allowing us to modernize,” she said.
If additional revenue reaches Durango, it’s impossible to say how much city coffers might receive.
There is no way to estimate how many internet sales are occurring in Durango, and it could take two to three years to identify a trend, said City Manager Ron LeBlanc.
The new revenue could delay a projected municipal budget shortfall, expected to hit in 2020, for one or two years. But it will not prevent the city’s expenses from exceeding revenues in coming years, he said.
The revenue increase will be limited because the new tax collections will come from only city residents purchasing items online that are not already subject to tax, he said.
There are some purchases, such as some sales on Amazon, that are already subject to local taxes because the companies have a presence in the state, he said.
Durango is a regional retail hub, so city residents represent only about a third of existing overall retail sales tax collections, LeBlanc said.
However, new online sales tax collections could have an indirect benefit by leveling the playing field for local retailers and potentially creating an opportunity for new stores to open, he said.
The city has been grappling with how to deal with a looming budget shortfall and unfunded construction projects in recent months.
Feedback from extensive public outreach in recent months indicates some support for both a moderate property tax increase and a moderate sales tax increase, LeBlanc said in an email.
Durango City Council could make a decision in August about whether to place a tax question on the November ballot, he said.