DENVER — Five cities have filed a lawsuit against the state and Governor Jared Polis over a new law that’s set to go into effect next month.
HB22-1024 requires home rule cities to exempt construction and building materials used in public school construction from sales and use taxes. Those taxes are levied on contractors and subcontractors as part of the school construction and repair process.
“This is really designed to reduce the amount of sales tax that is charged on school construction projects, and we really felt like this was urgent because Colorado faces a huge backlog in school construction around 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 in Denver District Court on Thursday.
Home rule municipalities are allowed to levy their own taxes based on Article XX, Section 6 of the Colorado Constitution, which gives them self-governance authority in matters of local and municipal concern.
Of Colorado’s 272 municipalities, 104 are home rule; of those home rule cities and towns, 69 of them self-collect sales and use taxes.
“For the most part, home rule municipalities that self-collect find that they are collecting more of the taxes that are due than if the state does it for them. That, and they can also resolve issues much more in an expedited manner,” said Kevin Bommer, the executive director of the Colorado Municipal League.
The five cities that are suing are the only ones in the state that currently do not exempt construction and building materials for schools from sales and use taxes.
Cities argue that the new law erodes home rule taxing authority, which they say is essential to their very existence.
Legislators, though, considered school construction and maintenance as a matter of state concern under the new law, not a local issue.
“We just feel like it's appropriate for the betterment of the entire state that we not charge sales tax on construction materials for school. So, it's very narrow, very focused,” Hansen said.
They argue that contractors should not be forced to pay a tax to a government on building materials that will benefit that same government. They also contend that the state’s ability to honor its responsibilities to provide a uniform system of free public schools is impeded with these taxes.
“This challenge to an unconstitutional piece of legislation adopted by the General Assembly and signed by the governor is a great test of that home rule authority,” Bommer said.
However, he points out the State Supreme Court has affirmed three separate times in the past that municipal authority over local sales and use taxes are a matter of local concern. He expects a similar ruling for this lawsuit.
He also points out that the tax revenue collected from the construction and repair often goes to help the schools and that the state is trying to cut local revenue at a time that it still owes hundreds of millions to schools through the Budget Stabilization Factor.
The law had 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 goes into effect. It is set to kick in on August 10, but the lawsuit is asking for an expedited decision by the courts on its constitutionality.
Legislators say removing the tax would decrease the cost of construction and that it will benefit taxpayers since they won’t see the construction taxes passed through to them.
Denver estimates it collects $2-4 million in revenue from taxing these materials for schools annually that it will not be able to collect under HB22-1024.
Meanwhile, the lawsuit claims Boulder will lose $450,000 in tax revenue annually, Commerce City will lose $600,000 annually, Pueblo will lose $3-4 million annually and Westminster will lose $100,000 every year if the law is allowed to go into effect.
Roger Tinklenberg, the city manager for Commerce City says this lawsuit is not about the money but the principle of home rule and what something like this could mean for other local decisions in the future.
“It doesn't matter if it's a city's own project or a school project or a state project or private contract, all of them. The basic principle is that the contractor has to pay use tax on the materials that are used in the construction project,” Tinklenberg said.
He also points out that Commerce City has a special account set aside for the tax revenue for these projects. That money is then put right back into the community, often to upgrade school playgrounds, ball fields, gymnasiums and more.
“There's beneficial use to both the community and the school district students,” he said.
Hansen says that’s great for Commerce City but other municipalities don’t do that and so the state is overpaying for school construction, which falls back on the taxpayers.
Ultimately, it will be up to a judge to decide whether the state or municipalities should have the final say on these taxes.