Colorado Private Letter Rulings

A bit of history

• Colorado had no basis on which to issue binding letter rulings until 2006

• That didn’t necessarily stop us…– Bill Speckman – Agreed to a filing methodology with no apparent

basis. The department disallowed the methodology on audit and made a significant assessment. – t/p is appealing

History (cont.)

• That story is not the only one in which the department gave advice that later turned out to be incorrect.– But we believe it’s the only instance where our

letter purported to be binding on the department.

• Binding letters require some kind of substantial internal review process.

History (cont.)

• A large taxpayer approached the department for a ruling on a potential acquisition/expansion

• The taxpayer was shocked to discover that we did not have an option available to allow the taxpayer to plan the acquisition with the tax issue resolved.

• The taxpayer went forward to the legislature for a solution.

History (cont.)

• The department objected to being required to issue letter rulings without an appropriation to fund the process.

• The legislation requires the department to charge for binding private letter rulings as a means of paying for the process.

• Unfortunately, of course, the process falls far short of funding the department’s activities in this arena.

24-35-103.5

• The statute outlines two kinds of rulings– A non-binding “information letter” (a “general

information letter” or “GIL”)– A binding “private letter ruling” (a “PLR”)– The statute then goes on to specify that the

department is to issue rules governing:• Procedure• Conditions of binding the department• Limitations on who, what, where, and for how long• Declining a request

24-35-103.5 (cont.)

• The statute also specifies (for PLRs)– 90 day turnaround– Publication– Fees for the direct and indirect costs of the

program

Regulation 24-35-103.5 (history)

• The department attempted to promulgate a regulation under Michael Cooke

• The staffing/funding issue could not be resolved

• Current director Roxy Huber insisted on promulgating the regulation and beginning enforcement despite the funding issue remaining unresolved.

Regulation 24-35-103.5

• Subject matter of letters and rulings– GILs are general in nature, will not answer a

specific question or indicate a specific outcome, and are non-binding.

– PLRs are specific in nature, answer a specific question and indicate a specific outcome, and are binding on the department.

• Applications for letters and rulings– A long list of required inclusions

Regulation 24-35-103.5 (cont.)

• Limitations– Debate about whether PLRs should be only for a specified

time period (3 or 4 years) and then require a renewal– Instead we say that the PLR can be withdrawn under a

number of circumstances, including simple notice by the department (or issuance of a contrary regulation / statute)

– The problem here is how does the department keep track of all rulings? Resources again!• Nexus• Point of sale / delivery• Service contract

Regulation 24-35-103.5 (cont.)

• The regulation also specifies fee tiers– Fees range from $500 on up in tiers– $500 covers the initial evaluation and may pay for

the whole thing– If the department estimates that the ruling will

take longer than 10 hours to prepare, the department informs the taxpayer of the estimated cost of the ruling and asks if the taxpayer wants to move forward.

GILs/PLRs issued

• PLRs– 2 issued– 2 ready to be issued– 2 more possible in the pipeline

• GILs– 34 issued in 2007– 36 issued in 2008– 2 issued in 2009 (30+ pending requests)

Dynamics of process

• Everyone wants a GIL– (or wants one before they ask for a PLR)

• The department has responded by reducing the scope of GILs or denying them altogether as not appropriate for a GIL.

• You may notice older GILs that go into much greater detail and respond with much greater specificity than I’m suggesting today.

Examples

• PLR 08-01 – income taxation of exempt insurance company

• PLR 08-02 – sales taxation of discounted goods as part of contract to purchase services– Taxable service vs non-taxable service– Use tax or sales tax– True loss-leader

Examples (cont.)

• PLR 09-?? – How should corporate taxpayer apportion income from the sale of pre-paid debit cards– Standard rule is cost-of-performance– Financial institution rule– Address of customer

Examples (cont.)

• GIL 08-30 – fabrication services purchased from 3rd party that also sells the product

• GIL 08-29 – City and county taxes collected on leased motor vehicles by an out-of-state vendor– Caused us to rethink our approach between single

transaction vs. series of transactions– ?Where a sale takes place?

• GIL 08-13 – therapeutic devices

Conclusion

• The department is experiencing cognitive dissonance– (Even more than usual)

• We need the money• But the rulings/letters allow the department an

opportunity to review and comment on important technical issues

• Rulings also give guidance, not only to taxpayers, but to other parts of the department