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					      SALT Aspects of Acquisitions—
         A Colorado Perspective

              Presentation by Peter Rose to the
                  Tax Executives Institute
                      Denver Chapter
                        May 23, 2007



Davis Graham & Stubbs       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                Colorado Taxes
  • Income tax
  • Sales and use tax
     – State imposed
     – State collected
     – Home-rule imposed and collected
  • Ad valorem (property) tax
  • Other taxes
     – Severance tax
     – Gasoline and special fuel tax
     – Tobacco tax

Davis Graham & Stubbs       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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           Colorado Income Tax
  • State-level only
  • Flat tax of 4.63%
  • No general capital gains or dividend preference
     – Certain long-term Colorado-source capital gains
       may be non-taxable
     – Individual exclusion for interest, dividends, and
       capital gain is currently suspended
  • Not a detailed code but supplemented by regulations
    and FYIs

Davis Graham & Stubbs      1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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              Statutory Structure

  C.R.S. § 39-22-101 et seq.
  •   Part 1—General rules and individual tax
  •   Part 2—Partners and partnerships
  •   Part 3—Corporations (C and S)
  •   Part 5—Special Rules (mainly credits)
  •   Part 6—Procedure and Administration



Davis Graham & Stubbs    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                  Conformity

  • ―Moving conformity‖
     – Taxable income generally computed from
       federal taxable income
     – Colorado income tax code is ―synched‖
       with federal tax code




Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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          Colorado Adjustments

  • General conformity bows to Colorado
    adjustments
     – Individual adjustments—C.R.S. § 39-22-
       104
     – Corporate adjustments—C.R.S. § 39-22-
       304



Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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          Examples of Colorado
              Adjustments

  • Colorado NOL
     – Portion of federal NOL allocated to
       Colorado
     – Colorado corporate NOL cannot be carried
       back
  • Colorado-source Capital Gains
    Exclusion
Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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  Colorado Capital Gains Exclusion
  Eligible Property
  • Real or tangible property located in Colorado
    at time of sale
  • Interests in Colorado entities
     – 50% or more of property and payroll sourced to
       Colorado in every year of 5-year holding period
  • Does not apply to intangible personal
    property held outside of an entity

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  Colorado Capital Gains Exclusion

  Holding Period
  • Acquired after May 9, 1994
  • Held for 5 years or more
  • Transfers in and out of FTEs may tack—see
    FYI Income 15 and DD-588
  • Expanded holding period rules apply only if
    Colorado has a qualified surplus


Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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    FTEs and Disregarded Entities
  • Colorado follows federal treatment
  • Flow-through entities (FTEs)
     – Any federal tax partnership including
       partnerships and LLCs
     – S corporations
  • Disregarded entities
     – Not a taxable entity in Colorado


Davis Graham & Stubbs    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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    Colorado Income Tax Planning

  • In general federal tax planning will have
    similar Colorado consequences
    because of conformity
  • But always check Colorado adjustments




Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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         Example—Making a § 338
                Election
  I.R.C. § 338 allows the purchaser of stock to treat the stock
     purchase as an asset purchase

  • OldCorp is deemed to have sold all its assets for fair market
    value
  • NewCorp is deemed to have purchased all of OldCorp’s assets
    for fair market value
  • OldCorp recognizes gain on sale and NewCorp has stepped-up
    basis
  • May be beneficial if OldCorp has historic NOLs or if target is an
    S corporation


Davis Graham & Stubbs             1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                         LLP
     Example—Making a § 338(g)
             Election
  Colorado Treatment
  • § 338 gain is included in federal taxable income and
    thus must be included in Colorado taxable income
    (DD-480)

  Colorado NOL Trap
  • Colorado NOL might not be same as federal NOL




Davis Graham & Stubbs       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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           Related Transactions
  • Colorado has not directly adopted substance-
    over-form or step-transaction doctrines
  • Conformity effectively piggybacks Colorado
    onto federal tax law regarding related
    transactions




Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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             Multistate Aspects

  Colorado taxable income is increased or
   decreased by:

  • Allocation of non-business income away from
    or to Colorado based on sourcing rules
  • Apportionment of business income away from
    or to Colorado based on multifactor tests


Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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              Business Income
  • Taxpayer position—gain on sale of out-of-
    state business is non-business income not
    taxable in Colorado
  • DOR position—―regular course‖ of business
    includes strategic acquisitions and divestment
    (DD-507)
  • Consider advantages of applying Colorado
    capital gains exception, if applicable

Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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     Colorado Income Tax Recap
  • Federal income tax planning generally has
    same effect at Colorado level
  • Be aware that Colorado adjustments may
    affect tax consequences
  • Colorado capital gains exclusion is a
    significant Colorado benefit
  • DOR’s broad definition of ―business income‖
    may create taxable gains in Colorado

Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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      Colorado Sales and Use Tax
  • State imposes and collects tax of 2.91%
  • State also collects on behalf of special districts
  • Statutory cities/towns/counties impose their own tax
    on the state tax base, but state collects their tax
  • Home rule cities impose and collect sales and use
    tax pursuant to their own ordinances
  • Use tax is a ―soak-up‖ tax—imposing tax on
    purchases that escaped tax in the jurisdiction



Davis Graham & Stubbs       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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      Sources of Sales and Use Tax Law

  •   C.R.S. § 39-26-101 et seq.
  •   State regulations and FYIs
  •   Municipal ordinances
  •   Municipal regulations and FYIs
  •   Departmental decisions
  •   Case law

Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                 Taxable Sale

  • Sale is an exchange of property or
    services for consideration
  • Taxable sales are
     – Retail sales of tangible personal property
       not otherwise exempted or excluded
     – Retail sales of specified services



Davis Graham & Stubbs    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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             Non-Taxable Sale

  • Wholesale sale—sales for resale
  • Sale of intangible personal property




Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                Sales of Stock
  • Stock sales are excluded from sales and use
    tax because stock is intangible personal
    property




Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                           Reorganizations
   • Reorganizations qualifying under I.R.C. §
     368(a)(1) are generally excluded from
     definition of ―sale‖
         – Always check home rule ordinances
         – Denver does not exclude reorganizations per se
   • Other grounds for exclusion
     – B reorganizations should be excluded because
       transferred stock is intangible property
     – E and F reorganizations should be excluded
       because there is no exchange of tangible personal
       property
Davis Graham & Stubbs         1550 Seventeenth Street, Suite 500, Denver, CO 80202 Tel: 303.892.9400
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     Sales of Partnership and LLC
               Interests
  • Transfers of partnership and LLC interests are
    excluded by state statute
  • Generally, home rule ordinances exclude transfers of
    partnership, but not LLC, interests
  • Are LLC interests excludible as intangible personal
    property?
     – Probably yes
     – Exclusions for partnerships are surplusage reflecting pre-
       RUPA view of partnership interests



Davis Graham & Stubbs           1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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         Non-Corporate Mergers
  Mergers involving partnerships and LLCs
    pursuant to state law should be excluded
  • Transfer is of entity interests, which should
    not be tangible personal property
  • Assets transfer by operation of law pursuant
    to state law merger or ―junction box‖ statute




Davis Graham & Stubbs    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                  Asset Sale
  • Colorado does not have a casual sale
    exemption
  • Asset sales are generally taxable to the
    extent that tangible personal property (not
    otherwise exempt or excluded) is transferred
  • In these respects, home rule jurisdictions
    generally are in accord with state treatment


Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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  Useful Exclusions or Exemptions
      from Sales and Use Tax

  • Real property

  • Inventory

  • Machinery and equipment

Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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         Real Property Exclusion
  • Real property is excluded because it is, by
    definition, not personal property
  • Personal property becomes real property
    when it is affixed to real property
  • Generally applicable to state and home rule
    jurisdictions




Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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            Inventory Exclusion
  • Applies only to property that is inventory in
    the hands of the seller and inventory in the
    hands of the buyer
  • Buyer should have a resale certificate to
    perfect exclusion
  • Generally applicable to state and home rule
    jurisdictions


Davis Graham & Stubbs    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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   Machinery and Equipment Exemption—
            C.R.S. § 39-26-709
  Qualifying machinery
  • Used in Colorado
  • Directly and predominantly to manufacture tangible personal
    property for sale or profit
  • Cost more than $500
  • Capitalized
  • Qualify as creditable property under I.R.C. § 38
     – Tangible personal property with useful life of one year or
        more
     – $150,000 per year limit for used equipment


Davis Graham & Stubbs            1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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   Machinery and Equipment Exemption—
            C.R.S. § 39-26-709

  Scope of exemption is broadened in
   ―Enterprise Zones‖
  • Need not be capitalized
  • Construction or repair material is exempt
  • Mining equipment is eligible




Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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   Machinery and Equipment Exemption—
              Local Aspects

  • M&E exemption is an exception to the
    general rule that state tax base applies
    in statutory jurisdictions
  • Most statutory and home rule
    jurisdictions do not have an M&E
    exemption


Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                www.dgslaw.com
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           Related Transactions
  • Colorado excludes certain transactions from
    the definition of a ―sale‖:
     – Certain corporate, partnership, and LLC
       formations
     – Certain corporate, partnership, and LLC
       liquidations
     – See C.R.S. § 39-26-102(10) (next slide)
  • These exclusions are not uniform across
    home rule jurisdictions
Davis Graham & Stubbs      1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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               C.R.S. § 39-16-102(10) Exclusions

  (a) A division of partnership or limited liability company assets among the partners or limited
       liability company members according to their interests in the partnership or limited liability
       company;
  (b) The formation of a corporation by the owners of a business and the transfer of their business
       assets to the corporation in exchange for all the corporation's outstanding stock, except
       qualifying shares, in proportion to the assets contributed;
  (c) The transfer of assets of shareholders in the formation or dissolution of professional
       corporations;
  (d) The dissolution and the pro rata distribution of the corporation's assets to its stockholders;
  (e) The transfer of assets from a parent corporation to a subsidiary corporation or corporations
       which are owned at least eighty percent by the parent corporation, which transfer is solely in
       exchange for stock or securities of the subsidiary corporation;
  (f) The transfer of assets from a subsidiary corporation or corporations which are owned at least
       eighty percent by the parent corporation to a parent corporation or to another subsidiary
       which is owned at least eighty percent by the parent corporation, which transfer is solely in
       exchange for stock or securities of the parent corporation or the subsidiary which received
       the assets;


Davis Graham & Stubbs                           1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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        C.R.S. § 39-26-102(10) Exclusions (cont.)

  (g) A transfer of a limited liability company or partnership interest;
  (h) The transfer in a reorganization qualifying under section 368(a)(1) of the "Internal Revenue
       Code of 1986", as amended;
  (i) The formation of a limited liability company or partnership by the transfer of assets to the
       limited liability company or partnership or transfers to a limited liability company or
       partnership in exchange for proportionate interests in the limited liability company or
       partnership;
  (j) The repossession of personal property by a chattel mortgage holder or foreclosure by a
       lienholder;
  (k) The transfer of assets between parent and closely held subsidiary corporations, or between
       subsidiary corporations closely held by the same parent corporation, or between
       corporations which are owned by the same shareholders in identical percentage of stock
       ownership amounts, computed on a share-by-share basis, when a tax imposed by this
       article was paid by the transferor corporation at the time it acquired such assets, except to
       the extent provided by subsection (12) of this section. For the purposes of this paragraph
       (k), a closely held subsidiary corporation is one in which the parent corporation owns stock
       possessing at least eighty percent of the total combined voting power of all classes of stock
       entitled to vote and owns at least eighty percent of the total number of shares of all other
       classes of stock.


Davis Graham & Stubbs                           1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                                        www.dgslaw.com
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         D.R.M.C. § 53-24(19) Exclusions

  a.   A division of partnership assets among the partners according to
       their interests in the partnership;
  b.   The transfer of assets of shareholders in the formation or dissolution
       of professional corporations if no consideration including, but not
       limited to, the assumption of a liability is paid for the transfer of
       assets;
  c.   The pro rata distribution of a corporation's assets to its stockholders
       upon dissolution of the corporation if no consideration including, but
       not limited to, the assumption of a liability is paid for the transfer of
       assets;
  d.   A transfer of a partnership interest;
  e.   The transfer of assets to a commencing or existing partnership if no
       consideration including, but not limited to, the assumption of a
       liability is paid for the transfer of assets;
  f.   The repossession of personal property by a chattel mortgage holder
       or foreclosure by a lienholder.
Davis Graham & Stubbs                 1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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       The Drop-Kick Transaction
  • The dropkick combines two excluded
    transactions:
     – Seller transfers assets to a newly formed
       partnership or LLC, an excluded transfer
       under C.R.S. § 39-26-106(10)(i).
     – Seller transfers the partnership or LLC
       interest to Buyer, an excluded transfer
       under C.R.S. § 39-26-106(10)(g).
  • Does this work?
Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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           International Paper v. Cohen
                 126 P.3d 222 (Colo. App. 2006)

  • Seller and Buyer agreed to an asset purchase of
    Denver box plant
  • Seller transferred the box plant to an LLC in
    exchange for LLC interests
  • Seller sold the LLC interest to Buyer
  • Denver audited Seller and assessed sales tax on the
    transfer of the box plant’s tangible personal property
    to the LLC



Davis Graham & Stubbs         1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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     International Paper v. Cohen

  • Denver Sales Tax Code does not exclude
    transfers to an LLC

  • Seller argued that transfer to the LLC was not
    for consideration and thus not a sale



Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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          International Paper v. Cohen

   Court of Appeals upheld Denver
    Assessment
  • Seller received consideration in the form of a
    membership interest for transferring the box plant to
    the LLC
  • The membership interest was valuable consideration
    since the Buyer immediately paid $16.5 million for the
    membership interest
  • The transfer to the LLC was thus an exchange for
    consideration and therefore a sale
Davis Graham & Stubbs       1550 Seventeenth Street, Suite 500, Denver, CO 80202 Tel: 303.892.9400
                                                                                  www.dgslaw.com
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     International Paper v. Cohen

  • Key holding of International Paper is
    that third-party consideration can
    support a taxable sale
  • The Court did not explicitly invoke
    substance-over-form or step-transaction
    doctrines


Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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            Third-Party Consideration
  Colorado’s partnership contribution exclusion
  The formation of a limited liability company or partnership by the transfer of
     assets to the limited liability company or partnership or transfers to a limited
     liability company or partnership in exchange for proportionate interests in the
     limited liability company or partnership….(C.R.S. § 39-26-102(10)(i))


  Denver’s partnership contribution exclusion
  The transfer of assets to a commencing or existing partnership if no consideration
     including, but not limited to, the assumption of a liability is paid for the
     transfer of assets…. (D.R.M.C. § 53-24(19)(e))




Davis Graham & Stubbs                    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                                 www.dgslaw.com
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          Third-Party Consideration
  • Denver may assert that a dropkick involving a partnership is a
    transfer for consideration based on International Paper’s third-
    party consideration holding

  • Outcome of a challenge is unpredictable
      – International Paper did not involve an explicit statutory exclusion
      – International Paper facts were favorable to Denver—will other fact
        patterns favor taxpayers?


  • State law does not qualify its exclusion with regard to
    consideration—third-party or otherwise—so International Paper
    is not directly pertinent to state sales tax

Davis Graham & Stubbs               1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                            www.dgslaw.com
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         Step-Transaction Doctrine
  • Primarily an income tax concept
  • Sometimes applied to ad valorem taxes, for example, in
    California
  • Rarely applied in sales and use tax cases
      – Compare Hutton v. Johnson (Tenn. App. Ct. 1996) (applying step-
        transaction doctrine) with TJX Companies (N.Y. Div. Tax App.
        1995) (refusing to apply step-transaction doctrine)
      – International Paper was not decided on step-transaction grounds
  • Denver and other jurisdictions will continue to press the issue in
    audits, hearings, and appeals




Davis Graham & Stubbs              1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                           www.dgslaw.com
                         LLP
    Sales Tax Liability—Entity Sale
  • Historic sales and use tax liability remains an entity
    liability
  • In general, no transactional sales tax liability should
    be incurred
  • Conventional for sales agreement to include
     – Covenants that sales and use taxes are paid and/or properly
       accrued
     – Indemnification extending past statute of limitations on
       assessment of sales tax for unpaid or unaccrued sales and
       use tax
     – Seller rights in an audit, hearing, or appeal

Davis Graham & Stubbs          1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                       www.dgslaw.com
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    Sales Tax Liability—Asset Sale
  Historic and transactional sales tax liability attaches to
    assets transferred unless buyer complies with the
    procedure of C.R.S. § 39-26-117(d) and (e):
  • Buyer must withhold sufficient funds to cover sales
    tax liability of seller
  • Seller’s final return is due within 10 days
  • Buyer cannot release withheld funds without a
    clearance certificate from DOR
  • Home rule jurisdictions have similar provisions that
    must also be complied with

Davis Graham & Stubbs         1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                      www.dgslaw.com
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    Sales Tax Liability—Asset Sale
  Clearance certificate procedure is rarely used
    by buyers and sellers. Instead, parties
    provide in agreement for:

  • Allocation of transactional sales taxes by contract—
    all to seller, all to buyer, or shared

  • Indemnification for historic tax liability of business


Davis Graham & Stubbs         1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                      www.dgslaw.com
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    Sales Tax Liability—Asset Sale
  Allocations in sales agreement are not binding on DOR
  • Seller is liable if withholding/clearance certificate
     procedure is followed
  • Seller and buyer are liable if withholding/clearance
     certificate procedure is not followed
  • Buyer is potentially liable for use tax




Davis Graham & Stubbs       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                    www.dgslaw.com
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         Ad Valorem Tax Basics
  • Property is assessed on January 1 of the
    taxable year
  • Inchoate lien is created on the assessment
    date
  • Mill levy and thus actual tax is determined
    during the taxable year
  • Tax becomes due and payable on the
    subsequent January 1
  • Tax is delinquent on June 16
Davis Graham & Stubbs   1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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      Liability for Ad Valorem Tax


  Default rule—C.R.S. § 39-1-108

  • Seller pays if conveyance is after June 30
  • Buyer pays if conveyance is before July 1
  • No allocation—default rule is all or nothing



Davis Graham & Stubbs    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                 www.dgslaw.com
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          Contractual Allocation of
             Ad Valorem Tax
  • Default rule only applies if ―instrument of
    conveyance‖ does not contain express
    agreement otherwise
  • To avoid all or nothing default allocation,
    allocate ad valorem tax in the sales contract
    based on date of conveyance
  • Include method to true-up based on actual
    levy

Davis Graham & Stubbs    1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                 www.dgslaw.com
                  LLP

				
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Description: Llc Interest Membership Sale document sample