CO: State auditor determines that tax exemptions for alcohol, medical supplies meet their purpose
By Michael Karlik,
April 29, 2020
The Office of the State Auditor has determined that two tax exemptions for alcohol and one for medical supplies are likely meeting their purpose, while giving recommendations to lawmakers for clarifying the scope of the policies.
Under Colorado law, residents who produce limited amounts of beer, wine and cider at home for personal use do not have to pay the alcohol excise tax. The policy dates to 1971 and it limits production to 100 gallons for a household of one person and 200 gallons if there are two people living in the home. Originally, only wine was legal for home production, but a 1986 law legalized home beer and cider.
Although the auditor’s office could not find a purpose for the exemption, it speculated that “it appears that the General Assembly may not have considered it to be cost-effective to require individuals to file and for the State to enforce the excise tax for limited quantities of alcoholic beverages made at home for personal use.”
The state’s Department of Revenue had no data for how often Coloradans take advantage of the feature, but the American Homebrewers Association estimated there were between 50,000 and 100,000 home producers of beer in the state. “According to stakeholders we contacted, there is no confusion in the home brewing community about homemade alcohol’s tax-exempt status,” the auditor’s office added.
Given the average amounts of alcohol made for personal consumption, the auditor estimated that the typical home producer would pay between $1.84 and $4.16 annually in taxes. Altogether, the state likely forfeits between $208,000 and $416,000 due to the exemption.
A similar tax provision from 1969 exempts payment of excise taxes on up to one gallon of alcohol by people who arrive via international flight in Colorado. Tax rates range from $0.08 per gallon for beer and hard cider to $0.6 per liter of spirits and $0.07 per liter of wine. As with the home production exemption, the auditor’s office determined that the maximum amount of taxes collected would be a relatively insignificant $2.41 per person, and the exemption likely prevents unnecessarily complex processing of small payments.
“If 5% of the 1.1 million inbound international passengers who travelled through Denver International Airport during Calendar Year 2019 possessed the maximum amount of alcohol allowed under the exemption,” the auditor calculated, “the exemption would have reduced state revenue by a maximum of $133,000.” However, due to enforcement difficulties, the amount the state could collect in reality would likely be less.
The office recommended that the General Assembly reevaluate whether the tax exemption should apply to alcohol arriving internationally by means other than people carrying it off of a flight.
Finally, the auditor’s office was unable to determine if a sales tax exemption for more than a dozen types of medical supplies conferred any benefits to patients whose insurance covered the products. The exemptions, which began with prescription drugs and prosthetic devices in 1965 and had their most recent update in 2011, likely aim to benefit those who are uninsured or who have high out-of-pocket costs. Because the items are useful for those with medical conditions or require a prescription, the sales tax exemption is targeted toward people who have a health need for the products.
“This is consistent with other sales tax exemptions in Colorado and other states, which commonly exempt items that are considered to be basic necessities for living from sales tax,” the auditor found.
Pharmacies, grocery stores and manufacturers were the source of 81% of tax-exempt sales. The auditor’s office estimated that eliminating the exemption could cost over $100,000 for a cancer patient needing drugs, although such a patient could end up paying none of that amount or over $2,900, depending on their insurance coverage.
The auditor advised the General Assembly to think about whether vendors should report sales tax exemptions by each category of medical product, rather than in one lump sum that is difficult to analyze in detail.