Colorado eliminates sales tax vendor fee starting 2026

To compensate retailers for collecting and remitting state sales tax on time, Colorado currently allows qualifying retailers to retain a state sales tax vendor fee. This vendor fee is being eliminated effective January 1, 2026.

• Colorado is removing the state sales tax vendor fee for all retailers as of January 1, 2026. The service fee compensates retailers for collecting and remitting sales tax on behalf of the state.

• Through December 2025, the service fee is available to businesses with less than $1 million in total taxable sales during the filing period. It was available to all businesses prior to 2022. Starting January 1, 2026, no business may retain the state service fee.

• Many local jurisdictions allow retailers to retain a service fee for collecting and remitting local sales tax. The elimination of the state service fee doesn’t impact local service fees.  

Qualifying retailers may retain 4% of the state sales tax they collect as a vendor fee, also called a service fee, to help cover expenses incurred by collecting and remitting Colorado sales tax. The fee is capped at $1,000 per filing period per retailer, regardless of the number of business locations.  

A retailer with more than $1 million in total state net taxable retail sales is not eligible for the state vendor fee.

HB 1005 explains that “the vendor fee is being removed to promote fairness and equality between all retailers,” pointing out that the vendor fee is currently not available for retailers whose taxable sales during the filing period exceeded $1 million.  

The vendor fee elimination will also enhance Colorado state sales tax revenue. In 2024 alone, retailers retained $56.5 million in sales tax vendor fees — and Colorado lost $56.5 million in sales tax revenue. By eliminating the vendor fee, Colorado expects state sales tax revenue to increase by:

• $27.6 million in FY 2025-26
• $56.8 million in FY 2026-27
• $56.9 million in FY 2027-28 and subsequent years

The amounts may seem small given the current fiscal year’s $43.9 billion budget. But Colorado needs to cut about $1 billion from the budget due to federal spending cuts. Every bit helps.

HB 1005 underscores that removing the vendor fee “is not a tax policy change … because it does not in any way affect the amount of sales tax imposed on and paid by taxpayers.” This is important because Colorado’s Taxpayer’s Bill of Rights (TABOR) requires state and local governments to obtain voter approval to establish new taxes.  

Colorado has changed the rules for service fee eligibility and calculations annually over the last several years without voter approval. It capped the amount a retailer was allowed to retain beginning January 1, 2020, and eliminated the service fee for certain large retailers starting January 1, 2022.

Even if removing the vendor fee could be considered a tax policy change, notes the legislation, it would only be a “de minimis tax revenue increase.” The average fee retained by each business is $60.

If your business currently benefits from Colorado’s sales tax vendor fee, now is the time to prepare for its elimination on January 1, 2026. Planning ahead can help you reduce the impact of the service fee removal. 

Consider taking these five next steps:

1. Audit your Colorado sales tax filings. Review prior returns to understand how much your business has historically retained from the vendor fee. This can help estimate the financial impact of eliminating the sales tax vendor allowance. 
2. Reassess your sales tax budget. Factor the loss of the vendor allowance into your 2026 operating budget. Even a few hundred dollars per filing period can add up over the year, especially for smaller businesses.
3. Monitor vendor discount eligibility in other states. Check if you’re still eligible for vendor discounts elsewhere by reviewing this state-by-state guide to vendor discounts for filing sales tax on time.
4. Streamline your sales tax filing process. Automating sales tax compliance can reduce risk and save time. Solutions like our AI-powered Avalara Returns can help businesses of all sizes file and remit more accurately and efficiently.
5. Consult your accountant or tax advisor. Ask how this change might affect your broader tax strategy, especially if you do business in multiple states.