The Cartown Color is a location in both Putt-Putt Joins the Parade and Putt-Putt Enters the Race. In both games it serves as color change location for Putt-Putt. When he brings three coins with him, he can go in and change his color. In total there are six colors to choose from: red, orange, yellow, green, blue, and purple.
Putt-Putt doesn't need to have a color change in order to prepare for the parade, but he can do so for fun. The Cartown Color is below Smokey's fire department, but below the toy store.
If the player did change Putt-Putt's color, the dialogue between him and Smokey will be different.