After the U.S. Supreme Court handed down its landmark 2018 South Dakota v. WayfairSouth Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions. decision, many states quickly adopted laws like South Dakota’s to establish good legal standing for remote sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collection. For some states, this process was as simple as adopting a de minimis exemption to protect small retailers conducting only limited business in a state. For other states, this task remains ongoing—and the process has been anything but simple.
Colorado, notorious for having one of the most complex sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. systems in the country, is one of the states still grappling with this challenge. On July 1, 2017 (prior to the Wayfair decision), Colorado began enforcing a notice-and-reporting law, requiring remote sellers with in-state sales of at least $100,000 a year to provide notice to customers and report to the Colorado Department of Revenue when customers owe use tax on transactions for which the retailer was not legally required to collect sales tax. In 2018, Colorado issued regulations requiring remote sellers with $100,000 in sales or 200 transactions in Colorado to collect and remit state sales taxes, as well as state-administered local sales taxes. The 200 transactions threshold has since been dropped, so retailers only have “substantial nexus” in Colorado if they make at least $100,000 in sales into the state. These collection requirements took effect December 1, 2018, but a grace period is in effect through May 31, 2019, although notice and reporting regulations are still being enforced.
In recent weeks, legislators in the Centennial State have been hard at work considering legislation to incorporate several South Dakota-style features into their own sales tax laws. These policy changes will put the state in better legal standing to require out-of-state retailers to collect state sales taxes and state-administered local sales taxes, but further simplification options ought to be considered.
By way of background, Colorado has a longstanding tradition of strong local governance. Article XX of the Colorado State Constitution gives municipalities the right to adopt a “home rule” charter, giving cities and towns broad authority to enact local laws that go beyond the scope of state-enabling laws, so long as those local laws are not in conflict with the State Constitution. This authority extends even to sales tax administration; Colorado’s home rule jurisdictions have broad authority to create their own sales tax systems, with very little in the way of guidance, intervention, or limitation. Many Coloradoans take pride in the home rule tradition, but when it comes to taxation, the complexity that ensues is enough to cause some home rule jurisdictions to opt for a more streamlined alternative.
Currently, nearly 100 of Colorado’s 271 municipalities have a home rule charter. Dozens of home rule municipalities have voluntarily handed over local sales tax collection authority to the state. But 72 home rule cities and towns and two counties continue to self-administer their sales tax, with broad authority not only to collect and auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. and set their own rates, but also to establish their own sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s, require municipality-specific sales tax licenses and fees, and establish unique collection procedures. Roughly 68 percent of Colorado’s population resides within home rule municipalities for which the local sales tax is administered by the local government.
While this broad authority contributes to much of Colorado’s sales tax complexity, even Dillon’s rule (or statutory) municipalities–or those deriving their local authority from state-enabling statutes–have authority not only to set their own rates but also to tax up to 15 different goods that are currently exempt from the state sales tax. For example, state-administered local tax jurisdictions can choose to tax groceries, residential energy, and other specified goods for personal consumption, as well as machinery, farm equipment, pesticides, and other business inputs, even though all these goods are exempt from the state sales tax.
With so many different sales tax administration authorities, as well as variations in state, local, and special district rates, bases, and definitions, sales tax compliance is complex, with retailers having to navigate five different databases to determine sales taxes owed. Even the state Department of Revenue has a history of accidentally registering businesses in the wrong taxing jurisdiction.
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In an effort to address these concerns, Colorado legislators have convened a Sales and Use Tax Simplification Task Force to study state and local sales and use tax simplification options. Recently, Senate Bill 19-006, recommended by the Task Force, was signed into law. This new law, known as the Retail Sales Tax Simplification Act, requires the Colorado Department of Revenue and Office of Information and Technology to work together to develop an electronic sales and use tax simplification system to calculate the appropriate sales and use tax for any Colorado address. This new law builds upon a 2018 law soliciting information related to the development of software that provides a single application process for sales tax licenses, a single remittance form and point of remittance, and a taxability or exemption matrix.
Access to such software, assuming it operates as intended, holds great potential to make remote sales tax compliance easier in the future than it is today. However, further legislative action will be needed to provide certain audit protections to retailers who will rely on the forthcoming software. Until such software becomes available, retailers are left to their own devices to either purchase their own sales tax compliance software or consult the state’s five sales tax databases for guidance. Currently, a hold harmless provision exists for retailers who rely on the state’s databases; in light of the Wayfair decision, this protection should be extended to the state-provided software.
While software development is an important step, it is not a cure-all for Colorado. While Colorado’s software will aim to consolidate sales tax remittance by providing a single state-level administration, a single point of remittance, and a single sales tax licensing process for remote sellers, Colorado legislators have not yet addressed the issue of variations in state and local sales tax bases. The forthcoming software purportedly aims to make the base variations a non-issue by allowing the software, rather than taxpayers, to handle this complexity, but some legal uncertainties exist given the favor shown by the U.S. Supreme Court toward South Dakota’s uniformity of state and local sales tax bases and its use of software. While Colorado’s state-administered local sales tax jurisdictions share common definitions, policymakers could further simplify the system by achieving uniformity among the 15 sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. s for which variation is currently allowed. Further, the Wayfair decision favors a simplified tax rate structure, but Colorado’s state-administered local sales taxes vary widely in rate.
It is also important to keep in mind that the Retail Sales Tax Simplification Act is narrow in scope, as home rule jurisdictions would be encouraged, but not required, to use the state-provided software. While this software can be expected to improve collection of the state sales tax, state-administered local sales taxes, and special district sales taxes (which are all administered by the state), the state’s remote sales tax regulations do not (and should not) extend to locally-administered local sales taxes, as this would very likely violate the dormant Commerce Clause. State policymakers ought to consider expressly prohibiting self-collecting jurisdictions from attempting to impose local sales tax collection requirements on remote sellers and should add clarifying language to provide more explicit guidance for remote sellers who will likely end up collecting state sales taxes, but not local sales taxes, from residents of self-collecting jurisdictions.
When sales taxes are not collected by retailers, use tax compliance is low, which is one of the reasons states were so eager to require remote sellers to collect in the first place. From a revenue standpoint, it is therefore in the best interest of home rule localities to consider the benefits of allowing the state to collect their local sales tax, as this would be expected to result in an influx in previously under-collected sales tax revenue for those jurisdictions. It remains to be seen whether more self-collecting home rule municipalities will agree to certain uniformity and simplification requirements for the sake of this potential influx in revenue.
Another bill, House Bill 19-1240, recently passed the Colorado House of Representatives and awaits consideration by the Senate. This bill would establish economic nexus, starting June 1, 2019, for retailers with $100,000 worth of sales into Colorado. In addition, this legislation would codify existing destination-sourcing requirements while allowing small in-state retailers to continue using origin-sourcing until 90 days after state-provided geographic information system becomes available. Finally, this bill would require marketplace facilitators to collect sales taxes on behalf of marketplace sellers, and it would provide audit protections for marketplace facilitators who can demonstrate they “made a reasonable effort to obtain accurate information regarding the obligation to collect tax from the marketplace seller.” In codifying a $100,000 de minimis exemption and barring retroactive collection, this bill takes important steps toward Wayfair compliance.
All in all, Colorado’s Sales and Use Tax Simplification Task Force has made important progress toward improving Colorado’s readiness for remote collection of state-administered sales taxes. However, until state-provided software is readily available, hold harmless protections are extended to those who rely on the software, a de minimis exemption is codified, and sufficient measures are taken to streamline state-administered sales tax bases, enforcement of remote sales tax collection regulations remains on shaky legal ground.Share