Colorado adopts new sales tax collection requirements for in-state sellers in the wake of Wayfair

Updated 4.29.2019. Prior to December 1, 2018, Colorado sellers were required to collect only the sales tax they had in common with the buyer. As of December 1, 2018, Colorado retailers are required to collect the full rate of tax in effect at the destination of the sale. Also, the transaction threshold was eliminated effective April 1, 2019.

Significant sales and use tax reporting and registration changes will take effect in Colorado on December 1, 2018. Colorado will impose new collection and filing obligations on in-state businesses that sell to customers in other jurisdictions in the state. Additionally, the state will enforce economic nexus, imposing new collection obligations on a host of out-of-state sellers with no physical presence in Colorado. It’s hard to say which is the bigger deal.

New requirements for in-state sellers

New sale tax sourcing rules for state-collected sales tax will affect Colorado sellers that ship to destinations throughout the state.

Currently, Colorado retailers are only required to collect the taxes that the customer and the seller have in common. This will only be the state sales tax rate if the buyer and seller live in areas with no overlapping local sales tax jurisdictions.

Starting December 1, 2018, for state-collected sales taxes, Colorado businesses must collect and remit the full sales tax rate in effect at the location of the consumer — the destination of the sale — when taxable goods are delivered to a Colorado address. (Some sellers already collect sales tax instead of retailer’s use tax as a courtesy to customers who would otherwise be required to report and remit the equivalent consumer use tax.) Sales occurring at the retailer’s place of business will not be affected by this change.

The Colorado Department of Revenue explains: "Sales tax is now  calculated based on the buyer’s address when the taxable product or service is delivered to the consumer. This is called destination sourcing." 

What this means for in-state sellers. Colorado businesses must add non-physical location(s) to their Revenue Online account for each Colorado jurisdiction in which they make deliveries. They’ll have to remit sales taxes whenever they deliver taxable goods to any of these locations. This is extremely unusual. Most states don’t require in-state sellers to remit taxes for multiple local jurisdictions. A “non-physical location,” which is how the state of Colorado identifies these sales, is not typically used in other states.

The Department of Revenue offers this FAQ:

“What if I deliver taxable goods to a hundred different tax jurisdictions, would I need a non-physical location for each of those jurisdictions?

Yes, you would need to create a non-physical location for every location to which you deliver a taxable good.”

Colorado retailers won’t need to file zero returns in non-physical jurisdictions, as they’re required to do in jurisdictions where they have a physical presence. Returns for non-physical locations only have to be filed when sales are made in that jurisdiction during that tax period. This is either a silver lining or an added complexity, as retailers will have to remember that they aren’t required to file returns in some jurisdictions during some filing periods. Fortunately, they won't be penalized for filing a zero return should they do so.

Another possible silver lining … or dark cloud: The new obligations apply to jurisdictions for which the state collects and administers sales tax, but not the two counties and 72 municipalities in Colorado that currently self-collect. Self-administered home rule jurisdictions make their own rules, and could follow the state’s lead and impose collection requirements on vendors located in other parts of the state, or not.

One final note: Colorado businesses that are currently registered to collect and remit Colorado retailer's use tax on behalf of consumers who live in remote Colorado jurisdictions must close those accounts and register to collect Colorado sales tax instead. The Colorado Department of Revenue recommends retailers keep their retailer's use tax account open until they’ve remitted all outstanding retailer’s use tax collections. However, they should also open a sales tax account and collect sales tax on in-state, remote transactions starting December 1, 2018. Retailer's use tax accounts should be closed after the final retailer’s use tax return has been remitted.

Confused? You’re not alone. We work with many tax experts and SALT CPAs who would be happy to work with you and provide nexus studies. Go here for a list of our CPA partners: Sales Tax Expert Directory.

New requirements for out-of-state sellers

The new requirements for remote sellers are equally complex. Under the state’s new economic nexus policy, remote sellers must collect and remit Colorado sales tax if, in the previous or current calendar year, they have:

• $100,000 or more of gross sales or services delivered in Colorado, including exempt sales; or
• 200 or more transactions selling tangible personal property or services delivered in Colorado

What this means for out-of-state sellers. Affected out-of-state retailers must apply for a Colorado sales tax license by November 30, 2018, and commence collecting Colorado state sales tax starting December 1. Out-of-state sellers will also need to collect and remit applicable local and special district sales taxes that are state-collected.

Like in-state retailers, out-of-state retailers that are required to collect will need to add non-physical locations to their Colorado sales tax accounts. The Department of Revenue recommends doing this sooner rather than later: "Do not wait until the last minute to add non-physical locations. Processing of new sites may take longer than usual to process during peak hours."

Out-of-state retailers whose sales into Colorado are below the threshold may elect to collect and remit Colorado sales tax or they may continue to collect and remit the retailer's use tax. However, those whose sales surpass the threshold must obtain a sales tax license and begin collecting sales tax. If they already have an account with the state, they should add sales tax to their existing account and close their retailer's use tax accounts.

Home rule jurisdictions

The Colorado Department of Revenue administers sales tax on behalf of many local jurisdictions, counties, and special districts, but not for self-collecting home rule jurisdictions (some home rule jurisdictions have the state collect on their behalf).

Department Form DR 1002 lists the city, county, and special district sales taxes collected by the Colorado Department of Revenue, as well as contact information for self-collecting home rule jurisdictions. As with in-state sellers that make sales into self-collecting home rule jurisdictions, out-of-state sellers are encouraged to contact home rule jurisdictions directly to determine if they have collection obligations in those jurisdictions.

The sales tax rate for each transaction is based on the destination of the purchase, or the ship-to address, and finding the correct sales tax rate for each address can be challenging. Sales tax automation software provides accurate rates down to the rooftop.