Big Sur Waterbeds, Inc.; Denver Mattress Company, LLC; and Sofa Mart, LLC, Plaintiffs-Appellees,
City of Lakewood, Colorado; and Larry Dorr, in his official capacity as Finance Director of the City of Lakewood, Colorado, Defendants-Appellants.
Jefferson County District Court No. 16CV30877 Honorable Laura
A. Tighe, Judge
Silverstein & Pomerantz LLP, Neil I. Pomerantz, Mark E.
Medina, Michelle Bush, Denver, Colorado, for
Hoffman, Parker, Wilson & Carberry, P.C., M. Patrick
Wilson, M. Keith Martin, Denver, Colorado, for
NAVARRO J. JUDGE.
1 Plaintiffs, Big Sur Waterbeds, Inc., Denver Mattress Co.,
LLC, and Sofa Mart, LLC, purchase furniture (tax free) from
wholesalers worldwide and resell it in stores across the
country, including in the City of Lakewood. At each Lakewood
store, plaintiffs provide a showroom in which they display
some furniture for customers to peruse and try out.
Plaintiffs also maintain warehouses, where they store the
bulk of their inventory. They ultimately sell all the
furniture - including the displayed furniture - and fill
customer orders from either the warehouses or the showrooms.
Plaintiffs' customers pay Lakewood's sales tax on
2 Lakewood assessed use tax on plaintiffs' purchases of
the displayed furniture from 2012 to 2015, on the theory that
plaintiffs purchased the displayed furniture at
retail for their own use in advertising their products.
Plaintiffs challenged the assessments in the district court,
which held a bench trial. They argued that, like all the
furniture they buy, they purchased the displayed furniture
at wholesale - that is, primarily for resale - and
thus those purchases were exempt from use tax. Employing the
"primary purpose" test from A.B. Hirschfeld
Press, Inc. v. City and County of Denver, 806 P.2d 917,
918-26 (Colo. 1991), the court agreed with plaintiffs and
cancelled Lakewood's use tax assessments. Addressing an
issue of first impression, we also conclude that plaintiffs
purchased the displayed furniture primarily for resale.
Therefore, we affirm the judgment cancelling the assessments.
Standard of Review
3 We review de novo a district court's interpretation of
a tax code. Leggett & Platt, Inc. v. Ostrom, 251
P.3d 1135, 1140 (Colo.App. 2010). Generally, when
interpreting tax provisions, we resolve doubts in favor of
the taxpayer. Noble Energy, Inc. v. Colo. Dep't
of Revenue, 232 P.3d 293, 296 (Colo.App. 2010).
When a taxpayer claims a statutory exemption from taxation,
however, we presume that taxation is the rule and resolve
doubts in favor of the taxing authority. Id.
4 "Following a bench trial, we defer to a trial
court's factual findings unless they are so clearly
erroneous as to find no support in the record."
Target Corp. v. Prestige Maint. USA, Ltd., 2013 COA
12, ¶ 24.
Lakewood's Code and Regulations
5 Lakewood's municipal code imposes a three percent use
tax "for the privilege of storing, using, or consuming
in the City any articles of tangible personal property or
taxable services purchased at retail." Lakewood
Mun. Code 3.01.210 (emphasis added). The use tax does not
apply if the purchaser has already paid sales tax on the
item, either to Lakewood or to another municipality, in an
amount equal to or greater than the amount of Lakewood's
tax. Id. at 3.01.220(A)(1), (E).
6 "Retail sale" is defined as "all sales
except wholesale sales made within the city."
Id. at 3.01.020. A "[w]holesale sale" is
"a sale by wholesalers to retail merchants, jobbers,
dealers, or other wholesalers for resale and does not include
a sale by wholesalers to users or consumers not for resale .
. . ." Id.
7 Consistent with the definitions of retail sale and
wholesale sale, the code also expressly exempts from use tax
"the storage, use, or consumption of any tangible
personal property purchased for resale in the city, either in
its original form or as an ingredient of a manufactured or
compounded product, in the regular course of a
business." Id. at 3.01.230(B).
8 Lakewood's sales and use tax regulations supply
guidance on interpreting the code. See id. at
3.01.070 ("The City Council shall adopt rules and
regulations in conformity with this chapter for the proper
administration and enforcement of this chapter."). One
such regulation explains that "[u]se tax is a complement
to sales tax." Lakewood Sales and Use Tax Reg.
3.01.300(1)(b) (adopted June 24, 1985),
https://perma.cc/2LGV-L4B7. Because sales tax is imposed only on
retail sales, which are sales to the user or consumer of
property or services sold, "use tax shall not apply to
the storage, use[, ] or consumption of tangible personal
property purchased by a licensed retailer for resale within
the regular course of a business." Id.
9 Regulation 3.01.300(1)(b) also cautions, however, that
[t]angible personal property that was purchased tax-free for
resale or as an ingredient of a manufactured or compounded
product and subsequently withdrawn from stock for the
purchaser's own use or consumption shall be taxed at
the acquisition cost of all materials. The tax liability
attaches at the time that the tangible personal property is
withdrawn from stock.
Id. (emphasis added).
10 In addition, a special regulation entitled "Initial
Use of Property" states:
Any item purchased for use or consumption by the purchaser is
subject to sales or use tax at the time of purchase, even
though the item shall be resold later in either its original
or altered form. A tax-free purchase is taxable in full at
the first time it is used by the purchaser for a nonexempt
(Example: A junkman may not buy a new car tax-free under the
theory that the car is going to be junked someday and resold
through his business for scrap.)
Lakewood Sales and Use Tax Special Regs., at 41.
Purchased "At Retail" or "At Wholesale?"
11 Lakewood contends that plaintiffs' "initial
purchase and subsequent use of display furniture is a taxable
event." According to Lakewood, "all of
[plaintiffs'] inventory purchases were initially treated
as exempt wholesale purchases for resale." But
"[l]ater, when [plaintiffs] withdrew a portion of this
wholesale inventory for use as demonstration and promotion
tools, the transactions in which the display models were
purchased were properly recharacterized as taxable
12 For its taxation theory, Lakewood relies on the Initial
Use of Property special regulation as well as regulation
3.01.300(1)(b). Respectively, those regulations ask whether
the displayed furniture was (1) primarily purchased for use,
not for resale; or (2) purchased for resale initially but
later withdrawn from stock for plaintiffs' own use (i.e.,
whether their placing the furniture on display revealed that
the primary purpose of their purchase was for their own use
rather than for resale). Because both regulations turn on
plaintiffs' primary purpose, we first look to the
Primary Purpose Test
13 In Hirschfeld, 806 P.2d at 918-26, the supreme
court considered use tax provisions from Denver's tax
code that are nearly identical to Lakewood's code. The
supreme court explained that, in assessing whether a purchase
was made "at retail" or "for resale,"
courts should apply "a primary purpose" test.
Id. at 921.
this test, "a purchase of an item of tangible personal
property is a purchase for resale and therefore not a
purchase at retail if the primary purpose of the transaction
is the acquisition of the item for resale in an unaltered
condition and basically ...