Colorado simplifies sales tax requirements for out-of-state sellers in 2024

Colorado’s sales tax simplification efforts kicked off in earnest in 2017 with the creation of the Colorado Sales and Use Tax Simplification Task Force. This was before the U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. (June 21, 2018), which gave states the right to tax remote sales. At the time, the Legislature was concerned the lack of uniformity between state, state-administered local, and home-rule jurisdictions could be “especially cumbersome for businesses operating in multiple jurisdictions in Colorado.”

In 2018, Colorado enacted economic nexus and started requiring out-of-state sellers to collect and remit sales tax — spreading the trials and tribulations of the state’s onerous sales tax system to businesses located in other states. The need for sales tax simplification became even more urgent.

Since then, Colorado has made some good headway. For instance, it: 

• Eliminated the 200-transactions threshold from its economic nexus law, freeing all remote businesses with less than $100,000 in sales in the state from the requirement to obtain a Colorado sales tax permit
• Implemented destination sourcing for in-state businesses
• Created a model ordinance on economic nexus and marketplace facilitators for home-rule jurisdictions
• Established the sales and use tax simplification system (SUTS), a single point of electronic remittance for state sales taxes, state-collected local sales taxes, and participating home-rule sales taxes
• Eliminated local business licensing requirements for businesses with no physical presence in a jurisdiction

The Legislature is already building on these initial steps. In 2023, it passed a law that will simplify SUTS by January 1, 2025. New updates include developing a simplified user interface; populating a local account number on all returns and summary reports (if the retailer provides the number); providing retailers with a bulk testing option for address files; and including additional use taxes, more information about deductions, filtering options, and certain tabs.

Still more Colorado sales tax simplification measures were enacted during the 2024 legislative session:

• HB24-1041 streamlines the process for filing sales and use tax returns
• SB24-025 harmonizes state and local sales tax administration
• SB24-023 holds taxpayers harmless if their errors stem from state information
• SB24-024 aligns home-rule reporting requirements for lodging marketplaces

Under current law, taxpayers who collect less than $300 in sales tax monthly may qualify to file sales and use tax returns quarterly. The enactment of HB24-1041 doubles that threshold.

On and after January 1, 2025, Colorado taxpayers can file and remit sales tax returns quarterly rather than monthly when they collect less than $600 in a month. And the threshold could jump again: The new law allows the Colorado Department of Revenue to increase the threshold amount for monthly sales tax filers for returns due on or after January 1, 2026.

The bill also sets certain limitations on home-rule jurisdictions that don’t use SUTS, the state sales and use tax simplification system. Such home-rule jurisdictions can no longer require businesses with no physical presence in the state to collect and remit local sales tax.

However, out-of-state retailers with no obligation to register in a home-rule jurisdiction may voluntarily elect to collect and remit local sales tax in a jurisdiction that’s prohibited from requiring them to.

HB24-1041 was recommended by the Sales and Use Tax Simplification Task Force.

SB24-025 harmonizes the state administration of local taxes. In a nutshell, it makes clear that the Colorado Department of Revenue “collects, administers, and enforces a local government sales or use tax in the same manner as it collects, administers, and enforces the state sales tax.”

Among other provisions, the bill:

• Clarifies that a local government, special district, or requesting home-rule jurisdiction may allow a vendor to retain a percentage of the sales tax collected to cover the vendor’s expenses in collecting and remitting the local sales tax; it also specifies that the local district may not impose a limit on the amount retained (the state of Colorado sets the vendor discounts)
• Establishes a dispute resolution process for when the state erroneously pays a state-administered local sales tax to the wrong local government, special district, or home-rule jurisdiction
• Requires a local government, special district, and requesting home-rule jurisdiction to give the department written notice within a certain time frame when it 1) imposes a new sales or use tax, 2) changes an existing sales or use tax, or 3) changes the geographical boundaries of a sales and use tax jurisdiction

This bill will take effect July 1, 2025.

SB24-023 requires local tax authorities to hold taxpayers harmless if they rely on erroneous sales and use tax information in the state’s geographic information system (GIS), which is maintained by the Colorado Department of Revenue. The bill took effect immediately upon becoming law on April 19, 2024.

The GIS database is a big deal: It helps businesses determine the proper sales and use tax rate for every address in the state, as well as the jurisdictions to which the tax is owed, saving businesses time and resources while increasing accuracy. It launched in April 2021 as part of SUTS.

Under the 2024 law, any vendor that “properly uses and reasonably relies” on the information in the GIS database to determine the correct tax rate and local taxing jurisdiction shall be held harmless in an audit by a local taxing jurisdiction for an underpayment of tax, charge, or fee liability resulting “solely from an error or omission in the GIS database data.”

The bill also requires the Colorado Department of Revenue to:

• Ensure the data in the GIS database, including jurisdictional boundaries and tax rates, is at least 95% accurate

• Provide a reasonably convenient method for a local taxing jurisdiction to report an error in the GIS database data

• Update the GIS database within 30 days of receiving updated or corrected information from a local taxing jurisdiction

The Colorado Legislature expects this will decrease filing complexity, make sales and use tax audits more uniform for state and local jurisdictions, streamline and reduce administrative burdens, and encourage more businesses to operate (or continue operating) across multiple jurisdictions in Colorado.

Fun fact: Colorado is leveraging Avalara Tax Research to provide the state’s tax rates and rules to its more than 300 sales tax jurisdictions.

Finally, SB24-024 simplifies local lodging tax compliance for lodging marketplaces. Specifically, it requires jurisdictions that administer their own local lodging tax to apply the same reporting requirements or standards to an accommodations intermediary as to a marketplace facilitator that’s obligated to collect and remit local lodging tax.

“Accommodations intermediary” is a marketplace facilitator that facilitates sales of transient lodging or a short-term rental.

Local lodging taxes in Colorado vary widely, as do local lodging tax reporting requirements. “Such variation across local taxing jurisdictions is exceedingly burdensome on local lodging operators and accommodation intermediaries,” according to the Legislature.

So, this bill prohibits local taxing authorities from imposing additional reporting requirements on accommodation intermediaries “that are not similarly applied to all marketplace facilitators” obligated to collect and remit locally administered taxes.

The bill also prohibits a local taxing jurisdiction with an applicable marketplace facilitator law from auditing marketplace sellers, multichannel sellers, or lodging suppliers for sales facilitated by the marketplace. For such transactions, local taxing jurisdictions must only audit the marketplace facilitators, though they may request information related to local lodging tax from an accommodation intermediary in connection with an audit.

However, local taxing jurisdictions that haven’t passed an applicable marketplace facilitator law aren’t prohibited from auditing or otherwise issuing tax assessments against marketplace sellers, multichannel sellers, or lodging suppliers. The same is true when a marketplace facilitator fails to confirm that it remits the tax on behalf of third-party sellers or suppliers.

SB24-024 takes effect January 1, 2025.

The Centennial State should be commended for the steps it has taken to simplify state, local, and home-rule sales and use tax requirements, even though it makes coming up with new headlines more challenging. Completely unraveling the knot that is Colorado’s sales and use tax system will take time. When more developments arise, we’ll let you know at the Avalara Tax Desk.

In the meantime, don’t let sales tax compliance get you down. Learn how automating sales tax collection, remittance, and the filing of returns can ease the burden of compliance in all states.