CEO of Metco Landscape in Aurora, Colorado
In 2008, Mark Tomko was working with the City and County of Denver on a first-time sales and use tax audit of his company, Metco Landscape. While the audit was in progress, the City and County of Denver Treasury Division decided it wanted to change how landscape companies like Metco Landscape collect sales and use tax on the materials they use for their business. So, the City used its newly devised method of calculating sales tax and gave Metco Landscape a $500,000 assessment for three years of uncollected sales tax.
Tomko was shocked. How could a seemingly routine audit by the City and County of Denver turn into a huge assessment for sales tax he previously had no reason to collect?
In the State of Colorado, landscape firms are typically treated as contractors who pay use tax on materials used in the business (e.g., plumbing supplies, mulch, trees, sprinkler heads, hoses). Contractors do not charge sales tax to the end-user, since the end-user is purchasing real property (i.e., land or buildings) or providing a service not subject to sales tax. At the time, the bulk of Metco’s business was with new homebuilders. Metco performed pre-sale landscaping services such as installing sprinkler systems, spreading mulch, and planting trees. The developer would then sell the home to customers complete with landscaping. In Colorado, the purchase of real property – such as a new home—is not subject to sales tax.
But now Denver was telling Tomko that he should collect sales tax like a retailer instead of a contractor, and that he should have been collecting sales tax directly from the consumer (in this case, the homebuilder) for labor and for materials he laid down such as mulch and sprinkler systems.
Tomko and his CPA, Judy Vorndran of EideBailly, were puzzled at how the City could legally justify this new interpretation of their sales tax code. They knew the City had little legal ground for the arbitrary change. After two years of working with the city auditor to no avail, Tomko was forced to hire a litigator, when he quickly realized he couldn’t appeal directly to district court because he would have had to first pay the full $500,000 assessment or secure a bond for double that amount.
This pre-payment barrier to the district court was particularly frustrating because the calculations the auditors used to determine the amount owed weren’t even based on Metco’s actual receipts and records! In their calculations, the City inflated the assessment through an additional markup on Metco’s time and material billing, even though Metco provided bid sheets and detailed statements of work for every project within the audit period. When asked about the basis for the markup, the City responded that it was at an industry standard level for landscape companies. Since Tomko had been in the industry for over 30 years, he was perplexed that the City would come up with a “standard” unbeknownst to him.
Without the option of independent court, Tomko’s team got creative. They hired a communications firm to get the attention of the Denver City Council, citing the absurdity of the auditor’s charges. And they engaged the landscaping and contractor’s industry groups through a grassroots campaign targeting City Council officials. Over time, this effort worked: More than two years after the audit began, Denver City Council urged the auditors to back down on the assessment.
In the end, after legal, accounting and PR fees, plus countless hours of work and uncertainty, Tomko received an astounding settlement offer from the auditors: a mere $7,000. Tomko and his team saw this lowball settlement as a clear sign that the City knew it had no legal case for its assessment.
Tomko and his team know that while their PR tactics worked, that is not the way the legal system should function. He wishes they could have had equal access to the district court to address the fundamental issues at hand and negotiate a fair resolution. Then they could have avoided the legal uncertainty and the disruption it caused to his company’s day-to-day business operations.
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