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Colorado Fails to Simplify Sales Taxes

The US Supreme Court ruling in the South Dakota v Wayfair, Inc. in July 2018 has caused chaos in the management of Sales Tax. The decision overturned more than 50 years of case law governing how and when retailers are required to collect sales taxes.

States throughout the country are capitalizing on the ruling to modify their Nexus rules governing the assessment and collection of sales tax. Only 7 states have not modified their sales tax rules in the wake of the SCOTUS decision.

Colorado had announced dramatic changes that go into effect December 1, 2018, but issued a 6-month moratorium to allow the Legislature to come up with a solution, which it largely did not do.

Dramatic Change for Colorado Retailers

Effective June 1st, Colorado will impose new rules for assessing and collecting sales tax when taxable goods are delivered to a Colorado address outside the in-state Retailer's jurisdiction. Sales tax will now be calculated based on the buyer's address when the item is delivered to them. This is called destination sourcing.

Prior to this rule change, sales tax on sales to a Colorado address were based on the common jurisdictions shared by the seller and the customer. For example, a seller based in Loveland who shipped taxable goods to a customer in Colorado Springs was responsible for collecting the State sales tax of 2.9%, since that was the only common jurisdiction shared by both the seller and the customer.

The new rule says sales taxes are now to be assessed and collected based on the sales taxes that apply at the customer's address, which will also include any local, county and special district taxes that apply to the customer. This rule will apply regardless of whether the delivery is performed by the seller or through a common carrier, such as FedEx or UPS.

What Does This Mean to Retail Businesses?

First of all, it's important to understand that Colorado, by far, has the most complicated sales tax structure of all the 50 states. In addition to the 2.9% State sales tax rate, there are hundreds of county, municipal and special district taxes assessed throughout the state. 

In addition, more than 70 municipalities operate as "Home Rule" jurisdictions with their own separate rules, including separate licensing, fees and filing requirements. Here is a current list of the jurisdictions:

List of Sales Tax Rates Throughout Colorado

If you are an in-state retailer and all your sales take place at your location, you won't see much in the way of any changes. 

If your annual sales stay below $100,000, the destination sourcing rules won't apply until the Department of Revenue develops an online look-up function for determining sales taxes at the delivery point.

On the other hand, in-state retailers with annual sales of more than $100,000 who deliver taxable goods outside their local jurisdiction will undergo an exponential increase in their sales tax complexity and compliance starting June 1st.

In all but the very simplest of situations, the days of manual computation and filing paper forms are rapidly drawing to a close. Some form of automation from a simple Excel spreadsheet all the way to a fully-outsourced efile solution will become the new normal. The State recently updated its list of approved efile vendors:

Approved Colorado Sales Tax Software Vendors - Unfortunately, the cost of these automated solutions will be out of reach for smaller retailers.

One potential, and maybe less costly, area of relief was provided by the Legislature during the past session. In addition to the temporary exemption for small businesses with annual sales of $100,000 or less, Senate Bill 12-1940 did carve out an exemption for using a Marketplace Facilitator, such as Amazon, Etsy or Ebay.

If the Marketplace Facilitator assumes the responsibility to calculate, collect and remit sales tax, the retailer is allowed to delegate this function to them. Naturally, this will come at a price that the retailer will need to pass along to their customer. The new rules take effect October 1, 2019 for Marketplace Facilitator.

How to Sell Using Amazon Marketplace

Sales tax administration in Colorado has always been a hot mess.  Wayfair, Home Rule cities and online commerce have made it even messier. At some point, Colorado will need to streamline their sales tax system so that in-state retailers remain competitive in this new environment.

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