Given the options of taking an aggressive or conservative approach to combating “triggered audits,” Colorado lawmakers appear to have chosen the latter.
The Sales and Use Tax Simplification Task Force last week unanimously approved a draft bill that would require any third-party auditors contracted by cities to maintain the same confidentiality with the data they collect Colorado governments. He will also send a letter to the Colorado Department of Revenue urging it to convene a task force to help increase the number of businesses using the existing SUTS tax filing system — a change he believes will would promote compliance with state law.
Members chose that approach over one suggested by a coalition of tax-related business interests, which had sought to mandate the use of nondisclosure agreements by auditors and limit the frequency with which cities could audit companies in compliance. But a Simplify Colorado sales tax executive said her group supported the less aggressive bill because it was more feasible in a local control state and still sends a message to audit firms that they will be penalized if they share findings with governments. unauthorized.
“I don’t know it has teeth. But the biggest problem is that you have to push because nothing is happening,” said Judy Vorndran, a member of Simplify Colorado and a state and local tax partner with TaxOps LLC. “Legislation is to spur action, to say ‘We’re watching. We will do something.”
Issues with coordinated audits
Medium-sized businesses in particular have sounded the alarm this year about the number of audits they’re seeing conducted by a private firm that contracts with about two dozen cities at once to investigate these businesses’ compliance with local tax filings. These coordinated audits are legal, but business leaders say they place a heavy burden on targeted companies, which often find themselves undergoing the same process every three years when cities and contracted firms check on past offenders. .
The prime contractor — Revenue Recovery Group of Baton Rouge, Louisiana, which has conducted 11,200 audits in Colorado in the past 28 years — told the task force it does not share information gathered through audits. Instead, it uses public records to find multi-state companies that don’t appear to be registered in certain cities, approaches those cities to conduct an audit of them, and then shares its findings only with cities that already do. have contracted with him.
But because RRG President and Founder King Woolf refuses to sign NDAs, as he told the task force, some businesses question whether the audit findings can be released to other non-contracting cities, leading in the so-called incentive audits that may come next. And business leaders want to make sure that’s not happening.
How will the law affect local audits?
The bill advanced by the SUTS Task Force to the Legislative Council — a final step before the bill is introduced at the start of the 2025 session — would set statewide standards that prohibit private auditors from disclosing any information found in their examinations. Violation of these confidentiality provisions would be a misdemeanor punishable by a fine of not more than $1,000 per violation.
Sen. Jeff Bridges, the Greenwood Village Democrat who intends to sponsor the proposal, noted that the final bill is the result of discussions between business groups and municipal leaders about what restrictions on audits would be acceptable. The proposal’s wording would allow ongoing coordinated inspections, which are more often used by smaller cities with limited resources to audit taxpayers themselves, but would hold firms more accountable.
“There’s a lot of people that came together to raise what I think is a big bill,” Bridges said.
However, Simplify Colorado had asked for more.
Does the bill have sufficient enforcement capacity?
She wanted a requirement that private auditors would have to sign NDAs, and even floated the idea of giving business a private right of action if those NDAs were violated. The organization also wanted to bar municipalities from conducting subsequent audits for five years on any company that was investigated and found to be in compliance. And he felt that the $1,000 fine was not enough to deter illegal practices.
But Kevin Bommer, executive director of the Colorado Municipal League, said his organization stepped in to assert that lawmakers cannot tell city governments how often they conduct audits under provisions of the state constitution. He also questioned why the state would consider imposing the use of NDAs on other governments, and he said he believes the final draft of the bill reflects that while businesses use the term “prompt audits,” there remains a lack of evidence that they are happening. .
“If we can address confidentiality issues and it can be done with state legislation, you don’t have to deal with bylaws,” Bommer said after the Sept. 25 task force meeting that advanced the bill.
Vorndran said she was particularly disappointed that the five-year audit hiatus was not included in the bill, as this is the biggest problem for businesses that are constant targets of these third-party audits. In fact, she claimed, those audits appear to target such a limited number of companies repeatedly that it leads to noncompliance with state and local tax laws among firms that know they are less likely to be targeted.
“It’s a punitive practice,” she said of the three-year audits of previously non-compliant firms, which some local finance officials acknowledged to the task force as common practice. “Once you enter the audit cycle, you will be audited again.”
Also coming: A new task force to improve the use of SUTS
The need to comply with the state’s byzantine sales tax structure — overlapping municipal and special districts that charge different rates creates about 700 different tax districts nationwide — is one reason lawmakers launched the SUTS system in 2020. Businesses that ship goods pay taxes based on the location of the customer receiving the products and the SUTS database allows them a single option for determining all the taxes they need to pay and then sending them to the state for distribution to local governments .
However, take-up of the system by businesses, particularly smaller ones, remains low and government officials fear this means that many firms, rather than choosing to pay taxes individually to all the governments they owe, they are just not paying taxes. And a letter the task force agreed to send last week aims to address that.
The letter directs the revenue department, which oversees SUTS, to convene a stakeholder group to study the use of the centralized filing portal by businesses and to recommend improvements that will promote its use. The task force – made up of government officials, businesses and tax practitioners – will examine areas such as potentially burdensome user requirements and functionality gaps.
The task force is expected to begin meeting this month and work through next spring. It is then expected to recommend improvements to the legislatively created SUTS Simplification Task Force in time for it to consider possible adjustments that could be made in the 2026 session.