Colorado Sales Tax Just Got Even More Complicated for Businesses
Colorado, a state already known for its difficult sales and use tax laws, just got trickier. If you’re a small or medium business selling products to Colorado consumers, it’s important to understand the recent developments in the states.
In a nutshell, Colorado’s new law, which was recently upheld as constitutional, creates a whole new world for sales and use tax reporting and enforcement. If you sell to Colorado customers but do not have nexus, which would trigger a sales tax obligation, you now may have a trio of new reporting requirements to comply with.
Last week, the Tenth Circuit Court of Appeals issued a ruling that upheld Colorado’s law, which requires businesses that do not pay sales taxes to Colorado to report information about their Colorado sales to both their customers and the Colorado Department of Revenue. The decision in Direct Marketing Association vs. Brohl sets an important precedent that will certainly cause other states to take a close look at Colorado’s law and further complicates the battle over the fairness of tax laws for purchases made online.
Seeking Workarounds to Quill
In February of 2010, Governor Bill Ritter signed into law HB 10-1193, a bill that was designed to aid the State in its ability to enforce compliance of sales and use tax requirements. Because the Quill Supreme Court decision only gives states the authority to collect from out-of-state business that have “substantial nexus” in their state, Colorado had to rely on residents to pay use taxes on purchases that they made from out-of-state businesses with no nexus. (Note: Amazon began collecting sales tax on items it sells in Colorado February 1, 2016. Previously, Colorado was one of 23 states in which sales tax wasn’t a requirement for Amazon.)
Now, in order to make the process of collecting from residents on purchases made from out-of-state business with no nexus more enforceable, the legislature passed a new law that requires businesses to do additional reporting if they sell into Colorado but are not registered to pay sales and use taxes.
Specifically, the law requires retailers that do not collect sales tax to:
- Notify all Colorado purchasers that sales or use tax is due on certain purchases made from the retailer, and that Colorado law requires the purchaser to file a sales or use tax return.
- Send a report to all Colorado consumers on an annual basis, listing the amount paid for each purchase, the date of each purchase, and category of each purchase (exempt or not exempt). This report should be sent separately by first class mail and should include the words “Important Tax Document Enclosed” on the exterior of the mailing along with the name of the retailer.
- File an annual statement for each purchase with the Colorado Department of Revenue on a form provided by the Department for purchases during the previous calendar year.
Regulations Limit the Scope and Define “De Minimis”
Colorado had previously drafted regulations that give us a little more information on how the law will be interpreted and enforced. Fortunately for out of state sellers, they define two important concepts: de minimis sales and de minimis purchasers. Sellers that make less than $100,000 in gross sales to Colorado purchasers appear to be exempt from the three reporting and notification requirements in the new law. Further, sellers are not required to send an annual report to any Colorado purchasers that purchased less than $500 in the previous calendar year.
Time to Revisit Quill
The Tenth Circuit decision caps a drawn-out legal battle that included a trip to the Supreme Court of the United States. We don’t expect an appeal to this decision, so we now await word from the Colorado Department of Revenue on the timing of implementation and design of the reporting requirements. As previously outlined by Chuck Maniace, the interesting takeaway from the SCOTUS decision was the strong suggestion by Justice Kennedy in the concurring opinion that it is time to revisit the Quill decision. Because this case did not put a sales tax requirement on out-of-state sellers, it’s probably not the right vehicle to overturn Quill, but a case challenging the laws of another state (like Alabama) will likely follow if Congress does not act first.
Other States May Follow Suit
Although votes were promised on the topic of national sales tax legislation this month, we still see it as unlikely that anything will get signed into law during this election year. In the absence of federal legislation, or a new case in front of SCOTUS, states will certainly continue to find ways to level the playing field between in-state and out-of-state sellers. For years, states have been looking for workarounds to Quill, and it now seems that Colorado has found a path that will cause other states to take a very close look.
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