The Colorado Supreme Court ruled Monday that Lakewood’s two expansions of its tax on telephone service in the past 30 years without voter approval violated the state constitution — a ruling that may make it harder for legislators to expand other state taxes, including one on software sales.
In a unanimous decision, the court upheld the finding of a lower court that the city’s decision to grow the tax from its application only on utility companies to those companies that provide cellular service was a violation of the Taxpayer’s Bill of Rights. The decision is believed to be the high court’s first in which it found expansion of an existing tax to be a violation of the 1992 constitutional amendment.
Lakewood first established a tax in 1969 on utility companies that maintain a telephone exchange and lines within its borders and that supply local exchange telephone service to the residents of the city. City Council members expanded the tax in 1996 to include all providers, including non-utilities, that offered cell service to any business or entity as its primary local telecommunications service. And then in 2015, the council expanded it again to include providers that supply cellular service to anyone, even if it’s not the recipient’s primary telecommunications service.
After passage of the second expansion, Lakewood audited MetroPCS, a subsidiary of T-Mobile US, and determined it owed unpaid business and occupation taxes totaling more than $1.6 million. MetroPCS then sued the city, arguing that the 1996 and 2015 laws constituted new taxes that required voter approval under TABOR.
Why the tax expansion needed voter approval
Just like a district court before it, the Colorado Supreme Court found that both ordinances constituted new taxes because they expanded the scope of the business and occupation tax beyond what Lakewood defined in 1969 to include previously untaxed services. And it struck down the laws, rebuffing Lakewood’s argument that the tax always functioned as a tax on the business and occupation of providing telecommunications services by saying that the city could have drafted the 1969 law more broadly had it meant that.
“Both the 1996 Ordinance and the 2015 Ordinance thus created new tax liabilities for previously untaxed types of providers and types of services,” Justice Richard Gabriel wrote for the court. “Accordingly, each ordinance generated new revenue not only because new providers entered the market, but also because some providers were subject to the tax when they would not have been before each Ordinance’s enactment.”
The decision goes on to note that even if the new laws raised revenue, they could still fall within TABOR’s guidelines if they caused “only incidental and de minimis revenue increases,” so the court strove further to determine whether that was the case. And this is the part of the decision could have outsized impact on expected legislative deliberations in 2026 about rolling back more tax breaks and exemptions to close a budget shortfall.
Impacting the debate around “de minimus” changes
Lakewood argued in the language of the 1996 and 2015 ordinances that the laws were meant to offer tax fairness to a range of providers and did not seek to generate revenue as an express purpose. The court wrote, however, that a taxing district can’t exempt itself from TABOR’s restrictions and requirements simply by declaring that a legislative change has a purpose other than revenue generation.
Moreso, the court determined, “it was obvious when each Ordinance was enacted that it would have the effect of raising revenue.” And as long as a law adds new tax liability without removing other tax liability, any argument about the increased revenue being de minimis is moot, and the tax increase must be approved by voters, the court wrote.
“Although revenue generation may not have been the only purpose for which Lakewood enacted the Ordinances at issue, revenue generation as not merely incidental to their enactment,” the decision reads. “And because we have concluded that the Ordinances caused more than incidental increases in revenue, we need not address whether these increases were also more than de minimis.”
How this connects to a change in software tax
During the regular legislative session in April, a group of Democrats introduced House Bill 1296, which would have made several tax-code changes. Among them was elimination of a sales-and-use-tax exemption on software that is not custom-made, including cloud-computing tools, software downloaded from the internet and software installed manually on a consumer’s computer by a vendor’s representative.
Supporters argued to the House Finance Committee that such a change was allowable under TABOR because clarification of the scope of software tax exemptions represented just a de minimis change in revenue. What constituted “de minimis” became a point of contention, as a fiscal note referred to the change as generating $18.7 million, but an April 2022 auditor’s report estimated the impact at $83 million, and Gov. Jared Polis himself had said the change could boost state revenues by $100 million when he originally unveiled it in his budget plan.
Seeing that they didn’t have the support to make it through that committee, sponsors later removed the provision regarding the software tax, along with some other provisions, before passing the bill. But they also vowed to bring the proposed software tax change back in 2026 as a stand-alone bill.
“Landmark case”
It’s likely that opponents, who threatened lawsuits over the software-tax change by claiming the size of the revenue gain was not de minimis, now will point to the Supreme Court decision and note the size of the revenue gain no longer matters in that calculation.
And while no business groups or tax opponents specifically mentioned the potential software-tax debate in celebrating the court’s decision on Tuesday, some did suggest that the ruling will set an important precedent going forward.
“This landmark case draws a sharp line in the sand for the state and local jurisdictions trying to tax voters without their approval,” said Colorado Chamber of Commerce President/CEO Loren Furman, whose organization submitted an amicus curiae brief supporting MetroPCS’ lawsuit. “Businesses depend on the predictability of our laws and tax policies, and we applaud the court’s decision to prohibit taxing authorities from unilaterally imposing new taxes without the consent of voters.”