Local v State Sales Tax – Compliance Q&A
The complexity of sales and use tax compliance creates confusion and sparks many questions. For example:
I own a store outside Denver and have been collecting state sales tax. Someone recently told me that I also have to pay sales tax to the county. Why do I have to pay sales tax twice?
Central to this question is the distinction between state and local sales taxes:
- 45 states plus the District of Columbia impose sales tax at the state level.
- 5 states have no state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
- 38 states have local sales taxes, including Alaska and Montana.
- 8 states and the capital have no local taxes: Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Rhode Island, and Washington, D.C.
Colorado has both state and local sales taxes. In most states with both, the state department of revenue acts as the administrator of all sales taxes. In other words, businesses remit both state and local taxes to the department, which in turn distributes the revenue to the appropriate state and local agencies.
A number of states, however, allow localities to adopt and administer their own local sales and use taxes. These include Alaska, Alabama, Arizona, Colorado, Kentucky, and Louisiana.
Colorado is one of the most complex states for sales and use tax compliance. There are approximately 294 taxing jurisdictions in Colorado, roughly 69 of which are home rule. Home rule cities are authorized to adopt their own sales tax laws (distinct from those imposed by the state); they administer and collect their own city sales taxes and audit businesses as they see fit. As explained by the Colorado Department of Revenue, “The Colorado Department of Revenue has no jurisdiction over sales and use taxes imposed by these cities when the State does not administer the local taxes. City taxes collected for such areas must be remitted directly to the home rule city.” The same is true for home rule counties.
The remaining +/- 225 cities are statutory cities, which base the local sales tax on rules established by the state. The Colorado Department of Revenue collects and administers local sales tax for all statutory cities.
As a result of overlapping special jurisdiction boundaries, there are 756 areas with different sales tax rates and bases in Colorado. The questioner above doesn’t specify where his shop is located, but Denver is a home rule city and Denver County is a self-collected county. Businesses located in home rule jurisdictions are required to remit state sales tax to the state and local sales tax to the local jurisdiction. So to answer the question: it isn’t that the same tax is being remitted twice, it’s that state and local sales taxes are collected by two separate entities.
Have a question of your own? Ask it here.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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