Colorado may simplify retail delivery fee requirements
UPDATE: SB23-143 was signed into law on May 4, 2023, waiving the Colorado retail delivery fee for qualifying new businesses and businesses with less than $500,000 in sales during the previous year. See below for details.
A new Colorado law should help all businesses, and especially small businesses, comply with the retail delivery fee (RDF) that took effect July 1, 2022.
Under SB23-143, businesses with less than $500,000 in annual retail sales in Colorado are exempt from the RDF. Businesses still subject to the fee can opt to pay the RDF themselves instead of collecting it from their customers.
Read on to learn:
What is the Colorado retail delivery fee?
The retail delivery fee applies to all deliveries containing at least one taxable item that are made by motor vehicle to a location in Colorado. Brick-and-mortar retailers, florists, grocery stores, restaurants, and online sellers and marketplaces are among the businesses subject to the RDF.
Currently set at 27 cents, the retail delivery fee will increase to 28 cents on July 1, 2023.
You can find more specifics in What you need to know about the Colorado retail delivery fee.
Retail delivery fee pros and cons
There are pros and cons to the retail delivery fee, as with most things in life. It benefits the state and causes pain for many, if not most, businesses.
Benefits to the state
The retail delivery fee benefits Colorado in a few ways. First, it helps fund transportation and road projects. As more drivers switch to electric and hybrid vehicles that consume less fuel, the motor vehicle tax revenue that funds these projects is dropping. Colorado’s retail delivery fee is helping to refill the coffers.
The RDF could also encourage businesses to bundle shipments whenever possible, rather than make multiple deliveries to fill one order. That may not be popular with consumers who’ve grown accustomed to one-day shipping, and it won’t be possible when products are shipped from different warehouses. But if it can be done, bundling shipments could help cut the number of deliveries in the state, lessening traffic congestion, delivery-related emissions, and wear and tear on the roads.
Of course, the retail delivery fee is based on each sale, not each delivery. A customer who purchases multiple items at one time is subject to only one RDF even if it takes multiple deliveries to fulfill the order. There’s no real incentive for businesses to bundle shipments, but some retailers could move in that direction anyway.
Pain points for businesses
The three biggest bugbears for businesses:
- Businesses are required to collect the RDF from customers
- Businesses are required to separately state the fee on invoices/statements
- The fee is subject to local sales tax in some jurisdictions but not others
The first two points go hand in hand. Businesses cannot pay the fee on behalf of customers; by law, they have to collect the fee from customers, and they have to separately state the fee on invoices and statements.
Unfortunately, the software used by many businesses is unable to accommodate the fee. “I have clients that cannot charge this tax,” one commenter told representatives from the Colorado Department of Revenue during a June 2022 information meeting. This was mere days before the RDF went into effect.
Furthermore, the delivery fee’s requirements don’t fit neatly into some invoicing systems. During a Senate Finance Committee hearing on the issue (February 21, 2023), the chief financial officer of a small Colorado business said his business has to use two different software systems to collect and remit the fee. Some customers have threatened to do business elsewhere, others have sent the company a quarter and two pennies by mail to express their disdain for the fee. “I’m in favor of simplifying what we can simplify for the business,” he said.
The fact that the fee itself is subject to local sales tax in some cities but exempt from local sales tax in others adds to the burden of compliance, as yet another witness testifying before the Senate Finance Committee noted.
As of March 24, 2023, municipalities that tax the retail delivery fee include Englewood, Steamboat Springs, and Winter Park. Cities that exempt the retail delivery fee include Aurora, Denver, and Loveland. That could change, of course. Colorado Springs taxed the retail delivery fee July 1 through October 23, 2022, but provided an exemption for it effective October 24, 2022.
The retail delivery fee is exempt from Colorado’s state sales tax.
Since complying with the 27-cent fee is proving to be a costly hassle for businesses, lawmakers have come up with a plan to reduce the fee’s compliance and financial burden. A separate measure seeking to eliminate the fee altogether failed to garner the necessary support.
Proposal to simplify retail delivery fee compliance
Senate Bill 23-143 would strike some of the most challenging requirements from the retail delivery fee law. “The changes being proposed in this legislation acknowledge the role that business plays in tax administration,” says Scott Peterson, VP of Government Relations at Avalara. “Nearly every tax dollar spent by a government was collected or remitted by a business.”
The proposed changes:
- Allow businesses to pay the RDF on behalf of the purchaser
- Exempt some small businesses from the tax
Businesses could handle the fee however works best for them
Basically, SB23-143 gives businesses the freedom to choose how to handle the fee: They can continue to collect it from the customer, or they can pay the fee themselves.
In short, a business subject the RDF is:
- Not required to add the RDF to the price of the retail delivery
- Not required to separately itemize the RDF
- Not required to collect the RDF from the purchaser
- Required to remit the RDF on the date it would be due had it been collected from the purchaser on the date of the retail delivery
Should a business opt to pay the fee itself, their customers would not be liable for the RDF and could not seek a refund for any retail delivery fees erroneously paid.
The Colorado Department of Revenue would waive certain processing costs
SB23-143 requires the Colorado Department of Revenue to waive any processing costs for a retailer’s electronic payment of the RDF by automated clearing house (ACH) debit transaction. However, this provision only kicks in if the charges would exceed the amount of RDF revenue being remitted.
Qualifying small businesses would be exempt from the retail delivery fee
Finally, the measure provides an exemption from the fee for retail deliveries by a business that:
- Has $500,000 or less of retail sales in the state; or
- Is new
The $500,000 threshold is based on retail sales of tangible personal property, commodities, or services in the state in the previous calendar year. Should a business selling under that threshold eventually sell more than $500,000 into Colorado, it would be required to collect or pay the retail delivery fee starting the first day of the month after the 90th day after the retailer’s sales in the state exceed the threshold. Basically, businesses have about three months to prepare to deal with the fee.
It’s interesting that the bill proposes a $500,000 threshold, as it’s much greater than Colorado’s economic nexus threshold. Colorado requires remote businesses (i.e., those with no physical presence in the state) to collect and remit Colorado sales tax if their retail sales into the state exceed $100,000 in the current or previous calendar year.
“It would be an unpleasant outcome if having two thresholds confuses a seller so much they stop collecting in Colorado,” says Peterson. “The legislation does nothing to eliminate the requirement to file an additional tax return.”
According to SB23-143, the fee’s benefits should be balanced with the potential economic impacts on the retailers. Thus, retail delivery fees “should only be imposed on retailers that are large enough to absorb these administrative costs without significant economic harm.” Exempting small businesses from the retail delivery fee stands to cost the state $307,133 in the current fiscal year, almost $1.4 million in fiscal year 2023-24, and even more in subsequent years, according to the bill’s fiscal note.
It will be interesting to see what happens with this bill, and whether there’s any ripple effect. Already, Minnesota lawmakers are considering a similar retail delivery fee for the Land of 10,000 Lakes; and the New York State Assembly included a 25-cent fee on delivery transactions in its sprawling budget bill for the 2023–24 fiscal year.
SB23-143 will take effect April 1, 2023, if enacted as written. The exemption would apply retroactively to July 1, 2022, when the retail delivery fee first took effect. However, the state won’t refund any fees paid between July 1, 2022, and April 1, 2023.
Avalara AvaTax can handle the Colorado retail delivery fee. Contact us to learn more.
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