Colorado and Connecticut to tax remote sales starting December 1
- Nov 30, 2018 | Gail Cole
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.
New sales tax collection, filing, and reporting requirements for out-of-state sellers take effect in Colorado and Connecticut on December 1, 2018. Changes to sales tax sourcing rules in Colorado will also affect sales tax compliance for in-state sellers. If you do business in Colorado and/or Connecticut, these new policies will likely affect you.
Two changes are taking effect in Colorado on December 1, 2018. The state is changing the way sales are sourced, which will alter the way in-state businesses file and report sales tax. In addition, it will start enforcing economic nexus, imposing a sales tax collection obligation on out-of-state businesses that have significant sales but no physical presence in the state.
The Supreme Court of the United States overruled a physical presence rule preventing states from taxing remote sales in its decision in South Dakota v. Wayfair, Inc. (June 2018). In the wake of Wayfair, close to 30 states have adopted economic nexus, including Colorado.
Effective December 1, 2018, out-of-state sellers must register with Colorado and commence sales tax collection and remittance if they have more than $100,000 in annual gross sales of products or services in the state, or 200 or more separate transactions delivered into the state.
Once registered, retailers must collect the state sales tax and all state-collected local and special district sales taxes in effect at the destination of the sale — the location where the consumer takes possession of the property or receives the service.
The Colorado Department of Revenue (DOR) doesn’t collect local sales tax on behalf of the more than 70 self-collecting jurisdictions in Colorado that have adopted Home Rule. However, sellers may be required to collect sales tax in these jurisdictions. To determine whether self-collected sales tax is due, taxpayers should contact those jurisdictions directly; Form DR 1002 provides contact information for all self-collecting jurisdictions.
What needs to be done. Out-of-state sellers that meet the economic nexus thresholds are required to register with the Colorado DOR no later than November 30 to begin collecting sales tax by the December 1 start date. Those that currently have a Retailer’s Use Tax account can add sales tax to their existing account, but should close their existing Retailer’s Use Tax account once all outstanding use tax has been remitted. According to the DOR: “Out-of-state retailers that are required to begin collecting sales tax, or those who elect to do so, must close their existing Retailer’s Use Tax account.”
Once registered, collecting out-of-state sellers should add non-physical locations to their sales tax account; you do not need a separate license for each non-physical location. A non-physical location is a jurisdiction in which sales are made (or are expected to be made) during the reporting period. The DOR advises sellers to register only in jurisdictions where sales are anticipated. After registration, adding additional locations as needed is simple and free.
Most Colorado sales tax licenses are good for two years and expire at the end of each odd-numbered year. The fee for a Colorado license is $16, plus a $50 deposit, and the fee is prorated.
The sourcing changes being implemented by the Colorado DOR will be felt primarily by in-state sellers that ship to locations throughout the state. Prior to December 1, out-of-state sellers with no physical connection to Colorado generally aren’t required to collect sales tax on their Colorado sales, though Colorado did encourage voluntary collection of retailer’s use tax.
The old way: Prior to December 1, 2018, sellers only collect the sales tax the seller and purchaser have in common. For brick-and-mortar transactions, this is the rate in effect at the place of business. For internet, mail, phone, or other sales for delivery, it may only be the state sales tax; the seller collects the county, city, and applicable special district taxes only if the seller and purchaser are both located in the same county, city, and special district.
Example: A business in Morrison County makes a sale to a consumer in Salida (Chaffee County). The seller only collects the state sales tax because it’s the one tax the seller and consumer have in common.
The new way: Starting December 1, 2018, sellers required to collect Colorado sales tax must collect the full sales tax rate in effect at the point of delivery — the location where the consumer takes possession of the goods or receives the service. That could be a brick-and-mortar store, the consumer’s home, or another location. In-state and collecting out-of-state sellers must collect all state-collected sales taxes in effect where the purchaser takes possession: State, special district, state-collected city, and state-collected county sales taxes.
The state doesn’t have the legal authority to change how tax is collected in self-collected jurisdictions. Sellers are advised to contact those jurisdictions directly to determine if they have a local sales tax collection obligation.
To properly report sales tax for state-collected jurisdictions, in-state and collecting out-of-state sellers must add non-physical locations in their Revenue Online Sales Tax Account for each non-physical location in which they make sales.
The DOR recommends sellers only register in non-physical locations where sales are anticipated. They don’t recommend sellers “select all shown,” as there are more than 600 locations. Moving forward, sellers must add additional locations as needed.
Example 1: A business in Morrison County makes a sale to a consumer in Salida (Chaffee County), which is a state-collected jurisdiction. The seller must collect all applicable sales taxes: the state sales tax, city of Salida sales tax, and the Chaffee County tax (there is no special district tax in this scenario).
Example 2: A business that’s based in Illinois and has economic nexus in Colorado makes a sale to a consumer in Salida, which is a state-collected jurisdiction. The seller must collect all applicable sales taxes: the state sales tax, city of Salida sales tax, and the Chaffee County tax (there is no special district tax in this scenario).
Connecticut is also requiring out-of-state sellers to collect and remit sales tax starting December 1, 2018. The changes affect retailers, marketplace facilitators, and marketplace sellers with at least $250,000 in gross receipts from annual sales into the state, and 200 or more retail sales delivered into Connecticut annually. There are different reporting requirements for marketplace facilitators and retailers selling through marketplaces and their own channels.
Connecticut considers the marketplace to be the seller for all marketplace transactions. Thus, the marketplace is required to register with the state and collect and remit tax on all marketplace sales. Marketplaces that sell their own products in addition to facilitating third-party sales must also report those sales. They may opt to obtain two registration numbers: one for the marketplace itself and one for marketplaces sales.
However, that doesn’t mean there are no reporting requirements for retailers that make sales through a marketplace. All out-of-state sellers with at least $250,000 in annual gross receipts and 200 or more annual retail sales in Connecticut are required to register with the state. If they only make sales through marketplaces, they should report their sales as gross receipts and deduct the sales made through the facilitator. Such sellers need only file annual returns.
Remote retailers that make sales through other channels, either uniquely or in addition to selling through marketplaces, should report all sales as gross receipts and deduct any sales made through marketplaces. See Regarding Marketplace Facilitators and Marketplace Sellers for an example and more details.
Colorado and Connecticut are the only two states imposing new sales tax obligations on remote sellers as of December 1, 2018, but they’re far from the only states going after remote sales tax revenue. Check out this state-by-state guide to sales tax economic nexus rules for more state-specific information.