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New Colorado law: Sales tax collections excluded from school projects

Aug 18, 2022

On August 10, 2022, a significant piece of legislation, House Bill 1024, took effect in Colorado requiring all municipalities to exempt public school construction materials from the collection of sales tax. In doing so, it stopped the transfer of funds from the capital projects of the state’s schools to the general fund of the cities.

Anyone involved in bidding on these construction projects knows the sales tax is added to the price of the materials and passed to the end consumer — in this case, the schools. By taxing building materials, the cities were increasing the price of school construction and increasing the collections credited to their general fund.

The legislation ended this practice as of August 10. The bill had easily passed the Colorado legislature with bipartisan support, with a 49-12 vote in the House and a 20-12 vote in the Senate.

Contractors should be aware of its impact on the implementation for existing contracts, bidding on future contracts and state of the legal challenge now underway.

Immediate impact

The legislation had no provision grandfathering existing contracts. As a result, it would appear that contractors may be able to discontinue paying sales tax on materials purchased after August 10. This might create a windfall for existing contracts since in the bidding process the contractors included the expected sales tax effect.

Future contracts

Regarding current bids on future school contracts in previously taxed jurisdictions, contractors may need to adjust their bidding methodology for sales tax on materials and equipment. Because of possible legal challenges, contractors may want to include a contingency for the risk that future material purchases may be subject to tax. Contractors should specifically exclude state and local sales tax from their bids and final contracts.

Legal challenges

The cities of Denver, Boulder, Commerce City, Pueblo and Westminster sued the state in Denver District Court in July, challenging House Bill 1024. The lawsuit seeks to block implementation of the measure.

As of the law’s effective date, no apparent action has taken place on the challenge. The suit might create a risk that cities could attempt to claw back sales tax not paid on school projects. 

How Wipfli can help

Wipfli’s construction and real estate team will continue to monitor the state of the litigation and its potential impact on contractors and school districts Our professionals can provide the insights needed to navigate the complexities of the state sales tax system in Colorado. Estimators, project managers, accounting staff and construction executives can all benefit from an up-to-date understanding of how tax provisions affect construction projects.

Contact Wipfli to learn more about legal challenges affecting the construction business and learn more about our business strategy and tax services for the construction industry.

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Author(s)

Bill Hughes, CPA
Partner
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