United States

Colorado: Furniture Retailer Did Not Owe Local Use Tax on Display Items

Aug 07, 2017
From KPMG TaxWatch

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Recently, a Colorado trial court addressed whether a furniture retailer owed use tax to the City of Lakewood on furniture that was displayed before being sold to customers. Primarily because of the length of time the furniture remained on display, the City argued that the taxpayer was using the furniture and that it was not purchased for resale. Interestingly, the underlying audit was instigated after a City of Lakewood employee unsuccessfully attempted to purchase a floor model at another one of the taxpayer’s stores. At trial, various store employees testified that they had the discretion to sell—and often did sell—display items when customers indicated an immediate need for an item.

Under Colorado law, in determining whether the purchase of tangible personal property is for resale, and thus exempt from city use tax, a court must consider five factors. The first factor—and the one that the court addressed in most depth—involves the actual conduct of a purchaser after a disputed purchase. In other words, the court must examine whether the taxpayer treated the property as though it was purchased for resale or the taxpayer’s own use. In the instant case, the court determined that not only were all the floor models ultimately sold, but the taxpayer took actions to ensure that the floor items remained in a saleable condition that was comparable to items that had not been displayed. The court noted that at least two City employees visited the store during the audit attempting to buy floor models. In the court’s view, this preference for floor models indicated that the floor models were kept in the same condition as warehoused items. Further, the court found the City’s focus on whether the displayed furniture was immediately available for sale to be misplaced. Rather, the proper query was the degree to which the taxpayer used the items before selling them. Although the displayed furniture remained on the floor for an average of six to twelve months, in the court’s view, this fact did not preclude a finding that only a “brief utilization” of these items occurred. Other factors to be considered are the degree to which the purchaser (here, the furniture store) controls the manner in which the items are used, altered, or consumed prior to transfer to third parties and the degree to which the form, character, or composition of the items differs from when initially purchased. The court concluded that both of these factors favored the taxpayer, as the furniture did not change form by virtue of being displayed, and the vast majority of the floor model items incurred no damage prior to being sold. The court concluded that the taxpayer primarily purchased the floor model items for resale, and no use tax was owed. Please contact Steve Metz at 303-382-7177 with questions on Big Sur Waterbeds, Inc. v. City of Lakewood.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.