The use tax could work against local merchants

Sidebar by Ed Quillen

Prisons – November 1997 – Colorado Central Magazine

The Use Tax Could Work Against Local Merchants

Chaffee County plans to pay for building a new jail with a use tax on automobiles and construction materials.

In essence, a use tax is a way to make sure that a sales tax is paid.

Suppose I’m buying a new laser printer for $1,000. If I buy it from a Salida merchant, I pay 3% state sales tax, 2% county sales tax, and 2% city sales tax, for a total rate of 7%, or $70 in sales tax.

But if I just pick up the phone and order a printer from an out-of-state mail-order firm and have it shipped here, there’s no sales tax. I’d have to pay for shipping the printer, but if it’s only $20, then I’m $50 ahead by doing business out of town.

Such a tax structure hardly seems fair to the local merchants, who employ people here, pay property taxes, advertise with me, etc.

If there were a 7% use tax in place, then I’d still be free to mail order. But I’d have to pay the same $70 — in use tax, rather than sales tax — and so the playing field would be more level. So the use tax is an attempt to make the sales tax more fair.

There isn’t a use tax on laser printers because it would be too hard to assess and collect, since the county doesn’t keep track of laser printers.

But the county already keeps track of automobiles, through license-plate registrations, and construction materials, through building permits. So the mechanisms are already in place to collect a use tax on construction materials and automobiles.

As it is, if you live in Chaffee County, buy a car from someone in Lake County, and contrive to have it delivered, then you pay only the 3% state sales tax (since both parties are in Colorado), but no county or city sales tax.

Ditto for a load of lumber ordered from a Denver yard — as long as the dealer delivers it here, you pay only the 3% state sales tax if the county has no use tax.

The Chaffee County Jail Advisory Committee says a use tax on vehicles would bring in $156,000 a year at current levels, and on construction materials, $218,000, for a total of $374,000 a year.

Bond payments on a $4 million jail with a 20-year note are estimated at $355,000 a year, so the use tax would cover the payments. Presumably use-tax revenues would grow, while bond payments would stay the same, and so the jail could be paid off earlier, and the tax would end then.

This sounds quite reasonable, but there’s a possible complication — instead of helping local businesses, it could hurt them.

That’s the opinion of Kirby Perschbacher, a principal in Cut No Slak Construction, one of the largest contractors in the area.

He pulled out his cost file for a 2,000-square-foot house he recently built. The job was bid at $197,272, about $100 a square foot, but “the building permit fees are based on estimated costs much lower than the going rate, about $30 a square foot.”

So for building-permit purposes, the county figured the cost at $60,668, and the use tax would presume that half that cost, or $30,334, would be materials subject to the 2% use tax, which would come to $606.68.

This would be collected at building-permit time. When the job was done, the contractor could appear with receipts for materials. He’d get a rebate up to the amount of county sales tax paid on materials — but the receipts have to be tied to the specific job.

“This would probably work okay if you’re doing your own remodel or addition,” Kirby said, “or for a small contractor who’s doing only one job at a time.”

But his company, and other big contractors, usually have half a dozen projects going at once. They buy materials in bulk — semi-load bunks of 312 two-by-four studs that go to several jobs, rather than just a pickup load destined for only one job.

“So our materials receipts are usually not keyed to specific jobs,” Kirby said, “and almost all of our jobs have subcontractors — plumbers, electricians, roofers, drywallers. We’d have to get them to get material receipts coded to each job, too, in order to get use-tax rebates for local sales taxes we’ve paid.”

That sounds like an accounting and paperwork nightmare. “It would be,” Kirby said. “We couldn’t afford to keep such records. It’s cheaper for us just to pay the $600 use tax on a 2,000-square-foot house, and forget about trying to collect the rebate.”

But if he’s going to pay the $600 anyway, “then why not just get truckloads of materials shipped in from suppliers in Denver, rather than do business with a local lumberyard, where I’d also be paying the 2% local sales tax, too?”

Assume the material prices are the same for a local lumberyard and a city supplier, and we’re looking at a $200,000 house. Materials will cost $100,000.

If he has them shipped in from Denver, Kirby pays 3% state sales tax, or $3,000, and the county use tax of about $600, for total taxes of $3,600.

If he buys at a local lumber yard, he’d pay 3% state sales tax of $3,000, 2% county sales tax of $2,000, and the $600 use tax (theoretically subject to rebate, but not worth the paper trouble), for a total of $5,600 — $2,000 more.

“So the use tax, instead of encouraging me to buy locally, actually discourages it. I’m going to pay the $600 use tax either way, so why not buy by the truckload from Denver?

“The less business we big contractors do with the local lumberyards, the smaller their inventory and selection for the smaller contractors and the guy working on his own house. This won’t hurt us big contractors, who can handle truckload inventories, but it will hurt the small ones, who rely on the local lumberyard to handle their inventories.”

And if fewer building materials are available locally, then general sales-tax revenues could fall, putting the county in a pinch.

“Nobody has repealed the Law of Unintended Consequences yet,” Kirby observed, “and so the use tax could hurt local businesses, rather than help them.”

And there’s another aspect of the construction-material use tax. It covers only projects with building permits. “Remodeling a bathroom or kitchen is expensive — $7,000 or more is typical — and you don’t need a building permit for that, so there’s no way to collect the use tax on such projects.

“You don’t need a building permit, either, for agricultural structures, so there wouldn’t be any use tax collected on those.

“Then observe that two of our three county commissioners are ranchers — they’re proposing a use tax that they wouldn’t have to pay on materials for their new buildings. It makes you wonder how fair this is, doesn’t it?”

But on the other hand, if this use tax does pass, soon all of us may be required to obtain a building permit to reroof a dog house.