Colorado aims to simplify local sales tax collection for remote sellers

Sales tax compliance in Colorado can push an out-of-state seller right over the edge. Fortunately, both the Colorado Department of Revenue (DOR) and the Colorado Municipal League (CML) are taking steps to simplify it.

All businesses with a physical presence in Colorado are required to register then collect and remit sales and use tax. Businesses with no physical presence in the state whose sales into the state during the previous year exceeded $100,000 must also register then collect and remit sales tax under the state’s economic nexus law.

The DOR serves as the single collection point for state sales tax and local tax collected from all state-administered jurisdictions. Retailers with nexus in Colorado — either a physical presence in the state or economic nexus — are required to collect and remit state and local sales tax for sales delivered into a state-collected jurisdiction. This is more complicated than it sounds because Colorado’s returns filing system needs a location code for each unique combination of local tax. There are more than 600 codes, and each requires separate reporting of sales made, so a retailer could have to file hundreds of locations every month.

And that’s just for the state-collected jurisdictions.

More than 70 home-rule jurisdictions administer local sales tax themselves, including some of the most populous cities in the state (e.g., Aurora, Boulder, and Denver). These self-collecting jurisdictions determine their own sales tax codes, administer their own sales tax, and perform their own audits. Remote retailers need to contact the local tax authority to determine whether they have an obligation to collect and to learn which transactions are exempt, which are taxable, and at what rate. Those required to collect must file a separate return with each self-collecting jurisdiction.

It’s the stuff of nightmares.

Understanding this, the Colorado Legislature established the Sales and Use Tax Simplification Task Force in 2017. Its purpose is to study Colorado’s complex sales tax system and figure out a way to make compliance less burdensome for businesses. Two solutions have emerged:

A new statewide Sales & Use Tax System
A model ordinance for self-collecting cities

Colorado’s new Sales & Use Tax System

The DOR began developing a tool to help taxpayers comply with sales and use tax requirements in the spring of 2019. An early version of the Sales & Use Tax System (SUTS) launched in May 2020. It’s a centralized online filing portal — a single point of remittance — for the following:

All state-collected state and local sales and use taxes
Local sales and use taxes for participating self-collecting municipalities
Once fully realized, the SUTS will offer:
A single point of registration
A single point of remittance with a unified remittance form
Address and rate verification
Taxability and exemption matrices
Tax rate calculation services

This is a huge improvement over the former system. It should drastically simplify compliance for sales into state-administered cities and counties, as well as self-collecting jurisdictions that decide to join (participation is optional).

Self-collecting jurisdictions wishing to participate can accept returns via the portal only after they’ve been fully onboarded. As of August 31, 2020:

38% signed the agreement and are onboarding
28% started the process of securing signatures for the agreement
32% are reviewing and evaluating the system
1% delayed reviewing the system

Though the SUTS is open to any business with a valid sales tax license, taxpayers aren’t obligated to use it and the portal isn’t automatically linked to their Colorado Department of Revenue accounts. However, return information submitted via SUTS does end up in the DOR system.

Model ordinance for self-collecting cities

Meanwhile, the Colorado Municipal League has been trying to build cohesion among the fiercely independent self-collecting jurisdictions. It worked with home-rule municipal tax professionals, businesses, and the DOR to create a Model Ordinance on Economic Nexus and Marketplace Facilitators and is encouraging all self-collecting jurisdictions to adopt it.

Under CML’s model ordinance, a remote retailer or marketplace facilitator cannot be required to collect and remit local sales tax in a self-collecting jurisdiction unless it has economic nexus with the state. Like many other states, Colorado requires marketplace facilitators to collect and remit sales tax on behalf of their third-party sellers (marketplace sellers).

Self-collecting cities that join the SUTS are encouraged to adopt the full model ordinance. However, CML doesn’t want municipalities to adopt it if they aren’t joining the SUTS. It explains: “For those municipalities who are not going to be joining the state single point of remittance portal (‘SUTS’), we ask that you not adopt the language on economic nexus and continue to move forward with voluntary compliance. The risk of a lawsuit under the United States Commerce Clause if you were to enforce economic nexus without the single point of remittance is high.”

CML further explains, “Our goal with a model ordinance and encouraging the use of the state single point of remittance is to lessen the risk of a constitutional challenge as much as possible. Everyone adopting the same language should lessen the burden on businesses, along with using the state portal.”

Other state efforts to streamline remote sales tax compliance

Colorado isn’t the first state to develop a model code for self-collecting localities and a single point of remittance for remote sellers.

Although the Last Frontier doesn’t have a state sales tax, roughly 100 cities or boroughs in Alaska have a local sales tax. More than 30 of them have adopted a uniform remote sellers sales tax code. Businesses that meet the statewide economic nexus threshold ($100,000 or more in statewide gross sales or 200 or more separate transactions in the state in the previous calendar year) register and remit through the centralized Alaska Remote Sales Tax Information Portal. Additional details are provided here.

The home-rule state of Louisiana also developed a single point of registration and remittance. As of July 1, 2020, remote sellers whose sales into the state exceed the economic nexus threshold ($100,000 in sales or 200 transactions) must register with the Louisiana Sales and Use Tax Commission for Remote Sellers and collect the tax rate in effect at the location of the sale. Prior to July 1, retailers with an obligation to collect needed to register with and remit to local tax authorities.

The 24 members of the Streamlined Sales and Use Tax Agreement (SST) have taken even more steps to streamline sales tax compliance for remote sellers. SST states have a central electronic registration system, simplified administration of exemptions, simplified state and local tax rates, simplified remittances and returns, uniform sourcing rules and tax base, and more. Furthermore, businesses that qualify as a volunteer seller and use an SST Certified Service Provider (CSP) like Avalara to handle sales tax compliance may obtain free monthly return preparation and filing services: SST states compensate the CSP for their services.

Pennsylvania, which is neither a home-rule state nor a member of SST, has developed its own CSP program. The non-SST states of Connecticut, Illinois, and New Mexico have done or are in the process of doing the same.

Automating sales tax compliance is key

Clearly, most states understand technology is critical to streamlining sales tax compliance. Handling sales tax manually — filing hundreds of returns in Colorado alone — is untenable.

Automating sales tax compliance helps businesses of any size to collect, file, and remit in one state or 45. As a CSP, Avalara meets rigorous standards for data processing and sales tax information management. Avalara helps businesses with all aspects of sales tax compliance, from determining where you have nexus to audit response.

Why automate sales tax? Why wouldn’t you?

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.