How Does Home Rule Status Impact Sales Tax?
The concept of home rule is one with a long history, and it’s certainly not confined to the United States. In broad terms, it stipulates that a local government has the right to govern in whatever way it sees fit, provided that it doesn’t violate the laws of the governing body. In relation to US cities, that means staying within the bounds of the constitution at both the state and federal level.
While the majority of states in the US allow some level of home rule, cities are not required to participate, and so there are only a handful of places in the country that the impacts of this arrangement can be substantially felt, specifically as they relate to the collection and remittance of sales tax.
Home Rule vs Dillon’s Rule
There are two general ways that states can approach the question of how much latitude to afford local governments. Home rule is one, and the other is Dillon’s rule. The latter stipulates that localities can only exercise powers that are explicitly granted to them by the state government. In home rule states, by contrast, local governments have broad discretion in all aspects of governance, provided they work within the bounds of the state and federal constitutions.
Home Rule in Colorado
Even in the 10 states that have total home rule, not many cities take aggressive advantage of the options open to them. That’s not the case in Colorado, however, as there are currently at least 70 cities that qualify for home rule status. This means that, in those areas, everything from what’s taxable to who has nexus can be determined at the local level.
That arrangement creates a complicated situation for retailers, both those based within the state and any out-of-state retailers making sales into Colorado. That’s because the local determination of nexus in home rule cities impacts when local sales tax rates apply. Home rule cities can also administer their own sales tax, forcing businesses to register and file returns separately at the state and local level to remain compliant in all applicable jurisdictions.
Businesses with a sales tax nexus in Denver, for example, will be responsible for registering with the local government to collect and remit Denver sales tax, and also with the state, to whom they will have to remit the state portion of the sales tax they collect. When shipping a purchase to a customer in another home rule part of the state, however, the state sales tax rates will still apply, while the local rates will not, unless the company has separately established a sales tax nexus in that locality as well. If a separate local nexus does exist, the company will also have to be registered with that local government and file a separate local return.
Other States with Total Rule by Home Rule
There are several other states where total rule by home rule is permitted. These include Louisiana, Alabama, Alaska and Idaho. Arizona now allows home rule only on reservations, while all other localities are administered from the state level for purposes of sales tax. Idaho and Mississippi allow local nexus only for local taxes, as in Colorado, and the number of cities that take advantage of the home rule provisions in their state constitutions varies considerably from one area to another.
The Complications of Home Rule
All of this can make it very confusing and complicated for retailers, particularly those based out-of-state, to determine when sales tax must be collected, what rate applies, and what government the payments must be remitted to. Another complicating issue is that, in addition to setting their own sales tax rates, local jurisdictions in home rule states can make separate determinations about what’s taxable. This means that an item sold or service performed may be taxable in one part of the state and not in another, and state rates but not local rates might apply to a particular sale, or vice versa.
Because the borders of these local jurisdictions don’t always follow the same lines as zip codes, charging tax appropriately requires even more precision in pinning down the exact delivery destination, all of which is a burden to brick-and-mortar and online businesses alike.
Fortunately, although many states technically allow some form of home rule, sales tax compliance is really only impacted in the handful listed above. Particularly in Colorado, though, staying compliant with all independent home rule jurisdictions can quickly become a headache.
Denver skyline photograph by Flickr user: Larry Johnson http://www.flickr.com/people/drljohnson/ – Flickr: http://www.flickr.com/photos/drljohnson/4280266430/, CC BY 2.0, Link