GLENWOOD SPRINGS — Garfield County plans to sue the Colorado Department of Revenue, saying the county should not have had to refund several million dollars in sales taxes related to a 2010 court settlement against the state in a case brought by Noble Energy Co.
“The county was not a party to this lawsuit and therefore is not obligated to pay this judgment,” Garfield County Attorney Frank Hutfless said in a news release issued late Tuesday.
Hutfless said the DOR is required to obtain approval from the state Legislature to fund legal judgments. Using of sales taxes that had already been remitted to the county and other local tax entities was illegal, he said.
Since 2010, the county and entities including the Garfield County Public Library District and the county’s Emergency Communications Authority, have either had to return, or had withheld by the state, more than $5 million in sales taxes.
As a result, those entities, as well as programs such as the county’s human service grant fund, have been adversely impacted because of the loss of revenue, the county is prepared to claim in the lawsuit.
The pending lawsuit could be filed in state district court or could go directly to the Colorado Supreme Court, a remedy allowed local jurisdictions whenever an action is taken against the state, Hutfless said.
It was the second legal action announced this week by Garfield County against the state.
On Monday, county commissioners also directed Hutfless to prepare a lawsuit against the Colorado Division of Insurance challenging Garfield County’s inclusion in the more-expensive resort rating area for individual and small-business health insurance under the federal Affordable Care Act.
In both cases, the county says it will file suit unless the respective state agencies work to resolve the issues to the county’s satisfaction.
The sales tax issue stems from a 2010 Colorado appeals court ruling in favor of Noble Energy, which successfully argued that taxes it paid on materials used in the hydraulic fracturing process to drill for natural gas, such as sand, should not have been subject to local and state sales taxes.
The ruling resulted in about $2.8 million in taxes initially paid by Noble being refunded or garnished by the state in subsequent tax distributions to Garfield County in order to pay the settlement.
Another $2.3 million in claims from other energy companies are pending, according to figures provided recently to the county by the DOR. Department officials have said the state will continue to withhold tax distributions until the claims are paid.
Hutfless maintains that the county relied on the state’s interpretation of sales tax laws in that fracking materials purchased within the state were taxable, and that the state should have taken the case to the Supreme Court.
After the initial ruling, the county agreed to backfill the money lost by the library district and other tax entities when the state asked for refunds.
Since then, those same entities have been working with Hutfless and Garfield County Treasurer Georgia Chamberlain to get answers from DOR officials as to when the withholding can be expected to end.
“It’s been kind of a frustrating struggle to get any kind of definitive answers from them,” Hutfless said on Wednesday.
DOR officials indicated in an October 2013 meeting with county representatives that it would try to make revenue distributions more predictable in the future, so that taxing entities can plan their budgets.
Department officials also suggested that the county could seek to overturn the Noble decision by seeking legislation to identify fracking materials as “tangible personal property,” subject to sales tax.
Hutfless said the DOR would have to initiate any legislative action.
“That’s part of the problem, because it was the Department of Revenue’s erroneous interpretation of its own rules that led to this,” Hutfless said.
Carolyn Tyler, spokeswoman for the Colorado Attorney General’s Office, which represents the Department of Revenue, said Wednesday that the state “will vigorously defend our client against any lawsuit in this matter.”
“The county was not a party to this lawsuit and therefore is not obligated to pay this judgment.”
Garfield County Attorney