Colorado and the Problem with Sales and Use Tax ‘Simplifications’
For retailers doing business in Colorado, the words “sales tax”, probably make you cringe. If they don’t, it is likely because you aren’t acquainted with the absurdly complex sales and use tax structure in the state.
In addition to the typical state sales tax and the hundreds of state-collected cities, counties, and districts, Colorado has approximately 70 home-rule cities that self-collect and administer their own sales tax individually. Those home-rule cities require separate registrations and tax returns, and have their own sales tax bases, exemptions, and procedures. As a result, it is common for a single transaction to be taxed differently for state (and state-collected jurisdiction) purposes than for a home-rule city. In addition, there could be a necessity for a vendor to collect two separate resale or exemption certificates for the State and the city in a transaction. If you think this is confusing… read on; it gets worse.
A Brief History
In 2017, recognizing the need for sales tax simplification and conformity, effected by statute, a sales and use tax simplification task force (Task Force) was created. The Task Force is comprised of a number of appointees representing all stakeholder groups, including members of the House of Representatives and the Senate, the Colorado Department of Revenue, the Colorado Municipal League, the Colorado counties, a state-wide small business association working to simplify sales tax, a state-wide chamber of commerce, a sales and use tax law practitioner, a sales and use tax accountant, and home-rule city governments of varying population sizes. The members are tasked with analyzing the feasibility of specific simplification measures and providing revenue-neutral recommendations for achieving simplification that do not require constitutional changes or voter approval.
The Colorado State Legislature has recently passed a couple notable bills concerning sales and use tax administration with the intent to simplify the complicated sales tax system.
Sales Tax Simplification Software
Senate Bill 19-006 was drafted to reflect the recommendations of the Task Force to procure a sales tax simplification software system, and was recently signed into law by Gov. Jared Polis on April 12, 2019. The online sales tax software will ideally provide a single point to accept tax returns and payment for all statutory and home-rule city sales and use taxes. The intent is that a minimum of three home-rule cities will voluntarily implement use of the system initially, and gradually all home-rule cities will follow suit within three years.
Implementation of the simplified sales tax software system will provide a great relief to Colorado taxpayers. It may reduce the potential requirement to visit 70 separate jurisdictions’ websites to file sales tax returns in the State, to just one single website. This is the good news.
Here comes the bad news. As you may suspect, the procurement, development and implementation of the simplified sales tax system will not be immediate. In fact, it will likely take a minimum of one to two years to complete.
This is bad news because in the meantime Colorado has simultaneously enacted a number of new sales tax directives that not only complicate the sourcing and collection procedures, but also require more vendors (remote vendors) to collect and remit tax in Colorado. While the Department of Revenue is working within its means to modify its current online sales tax system and forms to accommodate the new sourcing requirements, it currently creates a huge additional filing burden on taxpayers.
The Impact of Wayfair
House Bill 19-1240, signed by the governor on May 23, 2019, has hugely impacted Colorado sales tax by implementing three substantial changes.
First, Colorado has joined the Wayfair bandwagon and adopted an economic nexus standard. Effective June 1, 2019, remote vendors are now deemed to be doing business in the state, and thus responsible for collecting and remitting Colorado Department of Revenue administered sales taxes if the receipts earned from Colorado sales exceed $100,000 in the previous or current calendar year.
Second, effective Oct. 1, 2019, the burden of sales tax collection and remittance shifts from marketplace sellers to marketplace facilitators. Marketplace sellers are relieved of sales tax collection and remittance assuming the marketplace facilitator has exceeded the aforementioned economic nexus thresholds or is otherwise deemed to be doing business in state.
Lastly, and most notably, the bill codifies destination-based sourcing, effective June 1, 2019. (Note, Colorado Revised Statutes §39-26-104(3)(c) provides an exception for small businesses with less than $100,000 of Colorado sales in the previous or current year. Those vendors source sales to the location of the seller, and are not required to abide by the destination sourcing rules until 90 days from the date the Department of Revenue provides notification of the release of an online GIS to identify the location of a sale). On its surface, this probably does not sound alarming. Most states utilize destination-based sourcing. Unfortunately, this publicized “simplification” arguably complicates the sales tax sourcing rules due to the volume of local city, county, and district taxes, the combinations of those taxes, and the added complexity of distinguishing between state-collected cities and home-rule cities. There are nearly 700 different combinations of tax jurisdictions in Colorado.
Additionally, significant changes to the application of the vendor or service fee have been passed this legislative session per House Bill 19-1245. Starting Jan. 1, 2020, the state vendor fee will increase from 3.33% to 4.0%; however, the vendor fee will now be capped at $1,000 per retailer, per filing period. This will create a benefit for smaller retailers, providing more reimbursement for the cost incurred to collect tax on behalf of the Department of Revenue; however, it will create a sizeable increase to expenses for larger taxpayers by limiting the total vendor fee to $1,000 per month. Note that local cities, counties and other districts still have discretion when adopting a vendor fee; therefore, the vendor fees will continue to vary by location of sale.
Here’s Why Sales & Use Tax Is So Complicated to Report
Let’s start with the most obvious issue. Retailers must be able to accurately identify the location of their purchasers and the corresponding tax rates (recall there are roughly 700 combinations of jurisdictions and associated rates) in a state where zip codes often do not correlate with the city, county or district boundaries. Once the retailer has properly identified the location and rate, it must parse out any home-rule city taxes and report those separately to the appropriate municipality and report the rest to the Department of Revenue. As if that is not complicated enough, the Colorado Department of Revenue requires taxpayers to register (on one license) for every delivery location, and file a return for each. If a retailer delivers products into 50 different locations in a month, it will have 50 returns with the Colorado Department of Revenue, plus any additional home-rule city returns. Both the sales tax rates and the vendor fees vary and are reported by location. Vendors may elect to upload a spreadsheet containing the sales tax data by location to the Colorado Department of Revenue rather than paging through each return online.
Until the sales tax simplification online software system is operational, taxpayers are still tasked with filing several returns with the Colorado Department of Revenue by location, but also with contacting all home-rule cities separately to register and report taxes. It is still unknown whether there will be any forthcoming simplifications to Colorado’s current sales tax reporting system before the new sales tax software is implemented. As the days get longer this summer, so will the amount of time needed to complete the Colorado sales tax returns.
For More Information
If you have any comments, questions, or concerns about the changes to Colorado sales and use tax, please contact the author of this article, Mary Jo Zuelsdorf.
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