Boulder Tax Dispute Summary

On October 8, 2007, Vic’s Coffee formally protested the City of Boulder’s September 20, 2007 sales and use tax assessment. The bulk of the assessment’s tax, interest, and penalty for the period July 1, 2004 through June 30, 2007 was levied on Vic’s “cost of coffee that was given away on ‘Customer Appreciation Days’ and ‘Buy 10, Get One Free’ promotions.” Vic’s objection to the City’s assessment stems from the mischaracterization of Vic’s promotion as “giving away” coffee. While Vic’s is confident that it can resolve the customer appreciation issue as well as use tax charged on certain purchases, it sees no legal foundation for Boulder assessing tax on the use of frequent customer cards through which purchasers are entitled to an 11^th cup of coffee when they purchase ten cups.

Boulder Municipal Code § 3-1-1 defines “price” and “purchase price” to exclude, among others, “ (c) Discounts from the original price if such discount and the corresponding decrease in sales tax due is actually passed on to the purchaser.” Moreover, Code § 3-2-10 deducts from the taxable gross sales of a vendor the amount of discount from the original sales price if the discount and corresponding decrease in sales tax due is actually passed on to the purchaser. Because Vic’s Coffee discounts its customers’ 11^th cup of coffee without reimbursement from a third party, it is entitled to treat the transactions the way it has, just as a grocery store or restaurant treats a “buy 1, get one free” promotional transaction.

While Boulder clearly taxes food and beverage give-a-ways, such as those offered at “happy hour” buffets, continental breakfasts, or peanuts and pretzels at a bar, Vic’s Coffee’s card promotion is not a give-a-way because the customer must purchase ten cups to receive the 11^th as part of the full package promotion. In fact, when customers come in to purchase 11 cups of coffee for a meeting or as a group, the customers are only charged for ten cups, parallel to a baker’s dozen.

Vic’s will pursue its appeal of the City’s erroneous assessment, doing so for both its customers and similarly-situated Boulder-based businesses with customer appreciation programs. The next step in the tax administrative process is to argue the case in front of the Executive Director of the Colorado Department of Revenue, having already addressed the matter before a “quasi-judicial hearing” where an appointed hearing officer heard the arguments. Through its attorneys, Joseph C. French and Adam W. Chase, will continue to pursue its various remedies, including lobbying City Council for altered Boulder regulations that make it clear that the City does not intend to tax loyalty programs that are more akin to volume discounts.