Opinion ID: 2629836
Heading Depth: 1
Heading Rank: 1

Heading: introduction

Text: This appeal requires us to construe the sales tax exemption under the Urban and Rural Enterprise Zone Act, [1] for the purchase of used machinery for use in an enterprise zone. We hold that a taxpayer may receive an exemption for only $150,000 of the purchase price. We briefly explain a few basic tax terms and concepts that are central to this dispute. In this case we determine whether the enterprise zone sales tax exemption [2] incorporates the investment tax credit (ITC) limitation of $150,000 on purchases of used business property. [3] This issue requires an elementary understanding of the difference between the type of tax incentives that the state and federal tax codes provide. Ordinarily, under Colorado law, a taxpayer who purchases retail property must pay a 3% state sales tax on the sale. [4] Therefore, if the taxpayer buys something for $100, she would owe $3 in state sales tax. However, purchases of certain kinds of property for use in economically depressed areas identified as enterprise zones, are exempt from sales tax under the enterprise zone sales tax exemption. [5] If the hypothetical $100 purchase qualifies for this exemption, no state sales tax is due on the sale. The enterprise zone sales tax exemption incorporates the Colorado sales tax exemption [6] by reference, which in turn incorporates the qualifications of the ITC even though Congress repealed tax credits for qualified business property in 1990. [7] It is unnecessary to compute the ITC to resolve the issues in this appeal; however, it is helpful to our analysis to understand the distinction between the application of the ITC to purchases of new business property and to purchases of used business property. Under the Internal Revenue Code (I.R.C.), an ITC was available for certain qualified investments as a deduction from a taxpayer's total tax liability, dollar for dollar, as opposed to a deduction from gross income. [8] If a taxpayer makes a qualified investment, such as a purchase of business property, then the taxpayer may claim a tax credit for ten percent of the cost of the property. [9] For example, if a taxpayer paid $200,000 for new business machinery, that taxpayer would have a $20,000 credit against her tax liability for the year. Thus, if that taxpayer owed $100,000 in tax that year, then her liability would be reduced by $20,000, resulting in an $80,000 tax liability. However, if a taxpayer paid $200,000 for used business property, then only $150,000 of the purchase would be eligible for the ITC. [10] Thus, that taxpayer would receive only a $15,000 tax credit for that year, reducing her $100,000 tax liability to $85,000. Turning to the specifics of this case, the taxpayer, Cray Computer Corporation, sought to enjoin a decision by the Department of Revenue directing it to pay state and county sales tax on a purchase of used business machinery to the extent the purchase exceeded $150,000. The district court ruled against the taxpayer, holding that the enterprise zone sales tax exemption incorporates the $150,000 limitation on tax credit for the purchase of used business property under the I.R.C. Cray Computer appealed. In Cray Computer Corp. v. Colorado Department of Revenue, 988 P.2d 652 (Colo.App.1999), the court of appeals reversed, reasoning that the ITC $150,000 limitation on purchases of used business property, which does not exist for new property, is inconsistent with the purpose and legislative history of the enterprise zone sales tax exemption. Cray Computer Corp., 988 P.2d at 654-655. That court held that the ITC limitation on tax credit for the purchase of used business property should not apply to used property bought for use in an enterprise zone because that limitation has not been incorporated by the enterprise zone sales tax exemption. See id. Thus, the court of appeals construed the enterprise zone sales tax exemption to exempt the full purchase price of the used equipment from Colorado sales tax. Id. at 655. Therefore, the court of appeals held that Cray Computer may claim an exemption from state and county sales tax for the entire purchase price of used machinery. Id. We disagree and reverse. The unambiguous language of both the Colorado sales tax exemption and the enterprise zone sales tax exemption convinces us that both statutes incorporate the ITC distinction between purchases of new and used business property. Further, we hold that the $150,000 limitation on a purchase of used business property is consistent with the purpose and language of the enterprise zone sales tax exemption. Hence, we hold that only $150,000 of the total purchase price of used business machinery at issue in this case is exempt from sales tax under the enterprise zone sales tax exemption. We reverse the judgment of the court of appeals and remand this case to that court to return to the district court to reinstate its judgment.