In response to the U.S. Supreme Court’s June 2018 ruling in South Dakota v. Wayfair that upheld South Dakota’s ability to impose sales tax registration and collection obligations on out-of-state retailers, Colorado has been in the process of modifying its sales and use tax collection procedures.   Prior to this modification, an in-state Colorado retailer only reported in-state delivery sales to the State of Colorado, but it did not collect the sales tax that would apply if the product were sold where it was delivered, which often includes a county or city tax.  The customer was supposed to pay that portion of the tax as a use tax.

Colorado adopted emergency rules to address this issue, and the pertinent tax collection portions went into effect on Dec. 1, 2018. After receiving feedback at a public hearing one day before the emergency rule took effect and, in light of the recognized difficulty of coming into compliance, the department instituted an automatic grace period through May 31, 2019 for both in-state and out-of-state retailers to execute system changes.  Compliance is waived until after that date.

Colorado argues this rule will bring them in line with other states that have streamlined tax collection in conformance with Wayfair. Many problems still exist that make this solution an undue burden on businesses and fail to adequately address cohesive tax collection. A bill, the Electronic Sales and Use Tax Simplification System, has been introduced in the General Assembly to attempt a statutory fix. Any permanent rule will likely have to account for statutory changes or require modification immediately upon adoption.   Many businesses are unaware of these changes, and many that are aware do not know of the grace period.

Under the emergency rule, that went into effect on December 1, 2018, sales tax collection is now required in the state for each special district, unincorporated county, home rule jurisdiction, city, or other geographical unit at the applicable tax rate where the item is delivered and taken possession by the consumer.  Possession is not defined within the rule, which is especially difficult for companies that sell or rent products that transfer across jurisdictions (think rental of construction equipment that may be used in different areas before the completion of the rental term).

The Colorado Constitution and statute system permit home rule by many jurisdictions, which allows many cities, counties, or other home-rule entities to require separate sales tax licensing and remittance.  The state collects for some, but not all, home-rule tax jurisdictions and all other remaining areas.  Only one sales tax license is required for areas that the state collects, but each “nonphysical location”—a destination for a product that is not a store sales point—must be registered with the state separately. Due to separate tax rates and exemptions, that creates approximately 680 different possible tax or use combinations. Under the emergency rule, separate tax filings with the state and each home-rule jurisdiction that does not allow state remittance are also required.

The state provides tax rate information for jurisdictions collected by the state on its website, including home rule jurisdictions that have state collection.  A business that relies on this website is held harmless if they incorrectly collect and remit sales or use tax at that rate. Colorado also lists software providers that, if used, a party will be held harmless for incorrect calculations or filings. Many retailers have run into difficulties with using the rate finder or hiring the software providers, another dilemma for the state.

Comments provided to the Department of Revenue Taxation Division, the body that has promulgated the emergency rule, have been largely negative.  Small and large businesses, and those that operate within the state or only mail products to it, all provided comments stating that this will increase their workload, accounting costs, difficulties in compliance, and potentially cause them to shut down or discontinue sales to the state.  Many questions remain surrounding implementation of the rule and its impact on business sales and use tax collection and remittance practices.

This is an ongoing issue, and one that we will continue to follow for our clients to keep them apprised of developments.

What is written here is intended as general information and is not to be construed as legal advice.  If legal advice is needed, you should consult an attorney.