Colorado adopts South Dakota-style economic nexus starting December 2018
Update 12.10.2018: The Colorado Department of Revenue is providing a grace period through May 31, 2019. To ensure both in-state and out-of-state retailers have sufficient time to make the required systems changes, businesses will be granted a waiver from compliance with the destination-sourcing changes through that date. However, the department will continue to strictly enforce Colorado's reporting statute for non-collecting sellers.
Update 10.26.2018: The Colorado Department of Revenue has adopted new collection and reporting requirements for both in-state and out-of-state sellers.
Like New Jersey, Wisconsin, and dozens of other states, Colorado will soon require certain out-of-state sellers to collect and remit Colorado sales and use tax. The new policy is a direct result of the Supreme Court of the United States decision in South Dakota v. Wayfair, Inc.
In Wayfair, the court repealed the long-standing rule that a business must have a physical presence in a state before the state can require it to collect and remit sales and use tax. Although physical presence in a state will still trigger a tax collection obligation, the court found “economic and virtual contacts” between a business and a state to be sufficient to trigger nexus (the connection that permits a state to tax a business’s sales).
Economic nexus in South Dakota
Under South Dakota’s economic nexus law, which triggered the lawsuit that caused the eventual demise of the physical presence rule, a seller with no physical presence in the state must collect and remit South Dakota sales tax if in the current or previous calendar year it has more than $100,000 in sales or at least 200 separate sales transactions in the state.
Anticipating a South Dakota victory, several states adopted economic nexus between the spring of 2016 (when South Dakota enacted its law) and June 21, 2018 (when the Supreme Court vindicated it). Hawaii and Vermont started enforcing economic nexus on July 1, 2018, mere days after the Wayfair opinion was released. Many other states, including South Dakota, will start enforcing economic nexus this fall or early next year.
Colorado embraces economic nexus
Colorado followed South Dakota’s lead. Effective December 1, 2018, a seller with no physical presence in Colorado must collect and remit Colorado state and local sales tax if it has:
- $100,000 or more in gross sales in the state, including exempt sales; or
- 200 transactions selling tangible personal property or services delivered into the state.
Sellers meeting one of the above thresholds must apply for a Colorado sales tax license by November 30, 2018. Businesses that makes sales in Colorado but don't meet the sales or transaction threshold may have to comply with the state's use tax reporting requirement for non-collecting sellers.
Use tax reporting for non-collecting sellers in Colorado
Back in 2010, when physical presence was still the only trigger for sales tax nexus, Colorado came up with a creative work-around to tax remote sales: Use tax notification and reporting requirements for non-collecting sellers. These require non-collecting sellers to:
- Provide a transactional notice to Colorado customers at the time of sale, informing them that Colorado sales tax is not being collected and the customer may owe the state use tax.
- Provide an annual purchase summary to each customer, detailing the date of each purchase, the item type, and the amount paid.
- Provide an annual customer information report to the state containing each purchaser’s name, billing and shipping addresses, and the total amount they spent on Colorado purchases in a year.
The Direct Marketing Association reacted swiftly, challenging the policy on the grounds that it discriminated against interstate commerce and unduly burdened out-of-state businesses. The resulting legal battle lasted almost seven years (South Dakota's legal battle over economic nexus was a cake walk by comparison). Yet at the end of 2016, the Supreme Court of the United States let Colorado’s use tax reporting requirement for non-collecting sellers stand; it's been enforced since July 1, 2017.
Colorado was a trailblazer: More than a dozen states have now adopted use tax reporting for non-collecting sellers.
A complicating quirk of Colorado sales tax law
Although Colorado's economic nexus law is much like South Dakota's, there's a significant difference between the two states' sales tax systems.
In South Dakota v. Wayfair, Inc., the Supreme Court praised three aspects of South Dakota's tax system:
- The economic nexus law prohibits retroactive enforcement of economic nexus
- The economic nexus law provides an exception for small sellers
- South Dakota is a member of the Streamlined Sales and Use Tax Agreement (SSUTA), meaning it has taken steps to simplify and reduce the costs of sales tax compliance for businesses
Colorado also prohibits retroactive enforcement of economic nexus, and it provides an exception for small sellers. However, it isn’t a member of the SSUTA — and sales tax compliance in Colorado is far from simple.
The Colorado Department of Revenue administers state and some local sales and use taxes, but cities that have adopted home rule administer their own taxes. The Department doesn’t get involved. Accordingly, it advises taxpayers to contact home rule cities directly to determine which local sales taxes they need to collect. Department form DR 1002, Colorado Sales/Use Tax Rates, provides a list of home rule cities and their contact information.
States that require remote internet sellers to collect sales tax but fail to simplify their sales tax systems could be “under a cloud of legal uncertainty,” says Joseph Bishop-Henchman of the Tax Foundation. Colorado's been there before and emerged victorious. However, it's aware of this potential snag and is currently exploring sales tax simplification.
Additional information about Colorado’s new requirement for remote sellers is available from the Colorado Department of Revenue.
Want to know where you may have economic nexus? Check out Avalara’s state-by-state guide to sales tax economic nexus rules.
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