City, mailers square off over use tax

FORT COLLINS — A move by the city of Fort Collins to collect a 3 percent use tax from businesses not previously targeted has raised concerns among those businesses and has both sides scurrying to attorneys.
At issue is whether the city can charge direct-mail companies such as Val-Pak of Northern Colorado Inc. and Money Mailer of Northern Colorado the tax for doing business that has a "nexus" or connection to the city.
"They feel that even though we˜re printed out of state and sent through the mail that we should be taxed," said John Kirsch, owner of the Money Mailer franchise.
Essentially, the city wants to tax the tangible personal property — the coupons — that are printed out of state. Firms such as Val-Pak and Money Mailer allow businesses to share the cost of advertising in packets directly mailed to households. Indeed, the topic has drawn Val-Pak and Money Mailer, normally competitors, together in what is shaping up to be a legal contest with the city.
"The stakes here, while they may not seem large to the city, are very important to these businesses," said Patty Dow of The Dow Law Firm LLC, attorney for Kirsch and Sue Davis, owner of the Val-Pak franchise.
"If we were using a local printer, this would not be an issue," Davis said. "But what we need doesn˜t exist here, so we can˜t purchase here."
Typically, if a local vendor were used, the direct-mail companies would pay a sales tax to that printer for its services, thus satisfying the city.
When Davis first purchased her franchise, she called the city and was told she would need neither a license nor to pay a use tax for her business, she said. Kirsch said that he made similar inquiries and was told the same. Now, however, in addition to requesting that the mailers pay the use tax, the city also is seeking three years of back taxes from the affected businesses.
Several city officials declined to comment. Jennifer Wilmoth, sales tax auditor, who signed the city-generated letters sent to the businesses, referred a call to her supervisor, finance administrator Sherrie Temple. Temple conferred with Carrie Daggett of the city attorney˜s office, who recommended that the city not comment until the issue is resolved.
The issue is growing far larger than just whether the city can tax local businesses, however. Since last spring, when notices apparently were sent out by city officials, questions of equity have been looming.
"I wonder in a way if this doesn˜t have something to do with the Tabor Amendment," said one local business owner who also has been contacted by the city˜s finance department. "Municipalities are looking for ways to tax that don˜t have to go before a vote of the people.
"I think they looked for small- to medium-sized businesses with no corporate connections," the individual said.
The business owner said that some of the small businesses contacted feel that other companies, including U S West, conduct a similar business as the mailers. Indeed, like the mailers, the communications giant contacts local businesses for advertising, then assembles and prints legions of phone books using a nonlocal printer. Ostensibly, the city could ask U S West to pay a use tax on its end products that later return to the city when they are distributed. Apparently, no such move has been made.
Again raising issues of equity, one local franchise owner tells a story of another mailer who was contacted by the city about the same tax. When it was discovered that the second mailer did not own the franchise locally, but rather operated a corporate-owned branch, the city allegedly did not pursue the issue with the branch operator, nor has it contacted his corporate headquarters about paying the tax.
"Fort Collins needs to be prepared that we˜re not going to let this issue lie," Kirsch said. "We˜ make an issue of the fact on a statewide level that Fort Collins is anti-business.
"Direct mail is mainstream marketing," he added. "It˜s for small businesses that can˜t afford to advertise on TV, radio, or other mediums."
Indeed, in 1990 the state of Colorado passed a law determining that cooperative direct mail is exempt from taxation. The goal of the law is not just to protect the direct-mail businesses, but rather to protect the small businesses using such a medium for their advertising.
The city of Fort Collins apparently has chosen not to follow the state˜s direction, indicating that as a home-rule city, rather than statutory, it is free to go ahead and tax the businesses.
Kirsch˜s own research shows that there are 20 home-rule cities in the state.
"We mail to most of them," he said, "and none of them do this."
Patty Taylor, who owns First Class Direct Inc., also received a letter about the tax, but later was told she is not subject to it because she does not sell a product in the city and her business is outside the city limits.
Still , the spectre of the use tax disturbs her, "It˜s the same issue as the Boston Tea Party," she said. "Why can the city tax me when I have no voting rights in the city?"
Davis of Val-Pak said she would consider moving her business out of the city if necessary, but Money Mailer˜s Kirsch said he was led to understand that even if their businesses move, they still will have a "nexus," or connection to the city that would allow Fort Collins to tax them.
He points out, however, that other nationwide direct mailers who don˜t have local offices mail into the city with packets often containing coupons for area retailers with mall-based stores.
"Is that taxable?" he asked. "My guess is it˜s not."