Colorado simplifies sales tax for sellers

Updated 9.21.2020.

Colorado has one of the most complex and cumbersome sales and use tax systems in the country. It’s so complicated the Colorado Department of Revenue (DOR) had to delay enforcement of new collection requirements for in-state and out-of-state sellers. Now, at last, the time for simplification has come.

Sales tax simplification was largely driven by South Dakota v. Wayfair, Inc. (June 2018), in which the Supreme Court of the United States ruled physical presence is no longer the only requisite for sales tax. Thus, in addition to taxing sales by businesses with a physical presence in the state, states can now impose a sales tax collection obligation on out-of-state businesses with economic activity in the state (economic nexus).

Shortly after the Supreme Court ruling, Colorado imposed a sales and use tax collection obligation on out-of-state sellers with more than $100,000 in sales or at least 200 separate sales transactions in Colorado in the current or previous calendar year. It also changed sales and use tax collection requirements (i.e., sourcing rules) for in-state sellers.

These changes took effect December 1, 2018. However, due to the complex nature of Colorado sales and use tax and the scope of the changes, the DOR granted a grace period through May 31, 2019.

Transaction threshold eliminated

In April, the DOR eliminated the 200 transactions threshold; thus, an out-of-state retailer must obtain a sales tax license and collect Colorado sales tax if, in the previous or current calendar year, it has $100,000 or more of gross sales or services delivered in Colorado (including exempt sales).

Additional changes to the requirement are forthcoming due to the enactment of HB 1240. The Department of Revenue describes what to expect here.

Economic nexus postponed

Although the DOR gave retailers until the end of May to comply with the new sourcing rules and collection requirements that officially took effect December 1, 2018, it encouraged “businesses with the sophistication and capability to collect and remit sales tax … as quickly as possible in advance of the May 31, 2019 enforcement deadline.”

It's important to note that this grace period doesn’t bar the Colorado Department of Revenue from collecting taxes lawfully due effective December 1, 2018.

Destination sourcing rules codified

The measure also codifies destination sourcing rules adopted last fall by the Colorado DOR. Under the old system, Colorado retailers were only required to collect the taxes they had in common with the customer; this could be all applicable sales taxes, some of them, or only the state sales tax.

Under the new sourcing rules, Colorado businesses must collect and remit the full sales tax rate in effect at the location of a Colorado consumer — the destination of the sale.

However, HB 1240 provides a temporary exception for small sellers: A retailer with $100,000 or less in Colorado sales in the preceding year may source its sales to the business’s location “regardless of where the purchaser receives the tangible personal property or service until a geographic information system provided by the state is online and available for the retailer to determine the taxing jurisdiction in which an address resides.”

To that end, recently enacted SB 006 requires the development of an electronic sales and use tax simplification system to facilitate the DOR’s collection and administration of state and local sales tax. The legislature is appropriating more than $800,000 to implement the act.

SB 006 doesn’t require home rule jurisdictions to use the electronic simplification system. However, it expects all home rule local governments to voluntarily use the system to accept returns and process payments of local sales and use tax within three years. 

New requirements for marketplaces

Starting October 1, 2019, a marketplace facilitator is required to collect and remit sales tax on sales made through the marketplace on behalf of a third-party seller that enters into a contract with the facilitator to facilitate the sale of the seller’s tangible personal property, commodities, or services through the marketplace.

Additionally:

• The marketplace is permitted to retain the vendor fee for the collection and remittance of sales tax made on behalf of sellers through the marketplace.
• Audit relief is granted to a marketplace facilitator that can satisfactorily demonstrate it made a reasonable effort to obtain accurate information regarding the collection of sales tax from the seller.
• A marketplace seller does not have the liabilities, obligations, or rights of a retailer (e.g., it doesn’t have to obtain a sales tax permit or file returns) if the facilitator is required to collect sales tax on its behalf.

More than 25 states have adopted a similar sales tax collection obligation for marketplace facilitators. Learn more.