Colorado sales tax guide

Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. Colorado first adopted a general state sales tax in 1935, and since that time, the rate has risen to 2.9 percent. On top of the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0 percent and 8.3 percent. Currently, combined sales tax rates in Colorado range from 2.9 percent to 11.2 percent, depending on the location of the sale.

As a business owner selling taxable goods or services, you act as an agent of the state of Colorado by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in Colorado is administered by the Colorado Department of Revenue (DOR).

Any sales tax collected from customers belongs to the state of Colorado, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.

When you need to collect Colorado sales tax

In Colorado, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.

To help you determine whether you need to collect sales tax in Colorado, start by answering these three questions:

1. Do you have nexus in Colorado?
2. Are you selling taxable goods or services to Colorado residents?
3. Are your buyers required to pay sales tax?

If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.

Failure to collect Colorado sales tax

If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.

It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.

The need to collect sales tax in Colorado is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.

Nexus triggers

Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.

In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.

While physical presence still triggers a sales tax collection obligation in Colorado, it’s now possible for out-of-state sellers to have sales tax nexus with Colorado.

Out-of-state sellers

Out-of-state sellers with no physical presence in Colorado may establish sales tax nexus in the following ways:

Affiliate nexus: Having ties to businesses or affiliates in Colorado. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.

However, Colorado’s affiliate nexus law allows an exception for remote sellers whose gross receipts to Colorado customers was less than $50,000 in the prior calendar year.

Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after December 1, 2018, a remote seller must register with the state then collect and remit Colorado sales tax if the remote seller meets either of the following criteria (the economic thresholds) in the previous or current calendar year:

• $100,000 or more of gross sales or services delivered in Colorado (including exempt sales except wholesales); or
• 200 or more transactions selling tangible personal property or services delivered in Colorado

The DOR is offering a grace period through May 31, 2019, to ensure remote retailers have sufficient time to make the required systems changes.

Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Colorado in a warehouse owned or operated by Amazon.

Trade shows: Attending conventions or trade shows in Colorado. You may be liable for collecting and remitting Colorado use tax on orders taken or sales made during Colorado conventions or trade shows, even if only in the state for trade show activity for one day. 

If you have sales tax nexus in Colorado, you’re required to register with the DOR and to charge, collect, and remit the appropriate tax to the state. Local tax jurisdictions may impose additional collection or reporting requirements on remote vendors.

Non-collecting seller use tax reporting: As of July 2017, every retailer that has at least $100,000 in total gross sales in Colorado in the prior calendar year (and reasonably expects the same in the current calendar year) that doesn’t collect Colorado state sales tax must comply with notification and reporting requirements for non-collecting sellers.

Such non-collecting retailers must:

• Provide a transactional notice to all Colorado purchasers;
• Provide an annual purchase summary to all Colorado purchasers by January 31 of each year; and
• Provide an annual customer information report to the DOR by March 1 of each year.

For more information, see House Bill 14-1269 and the DOR’s Information for out-of-state retailers; and Use tax notice and reporting requirements.

Trailing nexus

Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of April 2019, Colorado does not have an explicitly defined trailing nexus policy.

Fulfillment by Amazon (FBA)

If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Colorado.

If you sell taxable goods to Colorado residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.

Sourcing sales tax in Colorado: which rate to collect

In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).

As of April 2019, Colorado is in the process of changing its sales tax sourcing rules for in-state sellers. Prior to December 1, 2018, Colorado retailers were only required to collect the taxes they had in common with Colorado consumers. Effective December 1, 2018, with a grace period through May 31, 2019, the state is switching to destination sourcing. Colorado businesses must collect and remit the full sales tax rate in effect at the location of the consumer — the destination of the sale — when taxable goods are delivered to a Colorado address. Destination sourcing also applies to out-of-state sellers.

For additional information, see Information for in-state retailers; Information for out-of-state retailers; and Colorado adopts new sales tax collection requirements for in-state sellers in the wake of Wayfair.

After determining you have sales tax nexus in Colorado, you need to register with the proper state authority and collect, file, and remit sales tax to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome.Avalara Licensing can help you obtain your Colorado business license and sales tax registration.

How to register for a Colorado seller's permit

You can register for a Colorado sales tax license online through the DOR. To apply, you’ll need to provide the DOR with certain information about your business, including but not limited to:

• Business name, address, and contact information
• Federal EIN number
• Date business activities began or will begin
• Projected monthly sales
• Projected monthly taxable sales
• Products to be sold

There may be additional licensing requirements in home rule cities.

Cost of registering for a Colorado seller's permit

There is currently no cost to register for a sales tax license in Colorado.

Acquiring a registered business

You must register with the Colorado Department of Revenue if you acquire an existing business in Colorado. The state requires all registered businesses to have the current business owner’s name and contact information on file.

Streamlined Sales Tax (SST)

The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).

As of April 2019, Colorado is not an SST member state.

Once you've successfully registered to collect Colorado sales tax, you'll need to apply the correct rate to all taxable sales, remit sales tax, file timely returns with the DOR and keep excellent records. Additional local filing requirements may apply in home rule jurisdictions. Here’s what you need to know to keep everything organized and in check.

How you collect Colorado sales tax is influenced by how you sell your goods:

Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.

Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Colorado sales tax collection can be managed.

Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.

Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.

Colorado sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.

Tax-exempt goods

Some goods are exempt from sales tax under Colorado law. Examples include beetle wood products, food for home consumption, and farm equipment. In Colorado, state-level exemptions may differ from local-level exemptions.

We recommend businesses review the laws and rules put forth by the DOR to stay up to date on which goods are taxable and which are exempt, and under what conditions.

Some customers are exempt from paying sales tax under Colorado law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.

Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.

Misplacing a sales tax exemption/resale certificate

Colorado sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the DOR may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.

Sales tax holidays

Sales tax holidays exempt specific products from sales and use tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.

As of April 2019, however, there are no sales tax holidays in Colorado.

You're registered with the Colorado Department of Revenue and you've begun collecting sales tax. Remember, those tax dollars don't belong to you. As an agent of the state of Colorado, your role is that of intermediary to transfer tax dollars from consumers to the tax authorities.

How to file

Once you’ve collected sales tax, you’re required to remit it to the DOR by a certain date. The DOR will then distribute it appropriately. Since Colorado allows home rule, it may be necessary to file returns and remit taxes directly to local tax jurisdictions. Twice annually, the DOR publishes a list of state-collected jurisdictions and jurisdictions for which the state does not collect sales tax.

Filing a Colorado sales tax return is a two-step process comprised of submitting the required sales data (filing a return) and remitting the collected tax dollars (if any) to the DOR (and applicable home rule jurisdictions). The filing process forces you to detail your total sales in the state (and applicable home rule jurisdictions), the amount of sales tax collected, and the location of each sale.

Form DR 0100 is no longer mailed to taxpayers. Filing online via the Revenue Online portal is recommended. Anyone in need of a paper version of the DR 0100 form can download a PDF version on the Colorado DOR forms page.

Electronic filing/payment is required for businesses paying more than $75,000 per year in state sales tax. Separate returns must be filed for each business location.

Filing frequency

The DOR will assign you a filing frequency. Typically, this is determined by the size or sales volume of your business. State governments generally ask larger businesses to file more frequently. See the filing due dates section for more information.

Colorado sales tax returns and payments must be remitted at the same time; both have the same due date.

Online filing

You may file directly with the DOR by visiting Revenue Online and entering your transaction data manually. This is a free service, but preparing Colorado sales tax returns can be time-consuming — especially for larger sellers.

Using a third party to file returns

To save time and avoid costly errors, many businesses outsource their sales and use tax filing to an accountant, bookkeeper, or sales tax automation company like Avalara. This is a normal business practice that can save business owners time and help them steer clear of costly mistakes due to inexperience and a lack of deep knowledge about Colorado sales tax code.

Filing when there are no sales

Once you have a Colorado sales tax license, you’re required to file returns at the completion of each assigned collection period regardless of whether any sales tax was collected. When no sales tax was collected, you must file a "zero return.”

Failure to submit a zero return can result in penalties and interest charges.

Closing a business

The DOR requires all businesses to "close their books" by filing a final sales tax return. This also holds true for business owners selling or otherwise transferring ownership of their business.

Timely filing discount

Many states encourage the timely or early filing of sales and use tax returns with a timely filing discount.

As of April 2019, the DOR offers a timely filing discount (or Vendor’s Fee) of 3.33 percent for state sales tax, and between 0 percent and 3.33 percent for local sales tax (depending on the locality).

For additional information, see DR1002.

It's important to know the due dates associated with the filing frequency assigned to your business by the Colorado Department of Revenue. This way you'll be prepared and can plan accordingly. Failure to file by the assigned date can lead to late fines and interest charges.

All sales tax filing must be completed by the 20th of the month following the end of your assigned collection period. Below, we've grouped Colorado sales tax filing due dates by filing frequency for your convenience. Due dates falling on a weekend or holiday are adjusted to the following business day.

Source: Colorado Department of Revenue

Filing a Colorado sales tax return late may result in a late filing penalty as well as interest on any outstanding tax due. For more information, refer to our section on penalties and interest.

In the event a Colorado sales tax filing deadline was missed due to circumstances beyond your control (e.g., weather, accident), the DOR may grant you an extension. However, you may be asked to provide evidence supporting your claim.

Hopefully you don't need to worry about this section because you're filing and remitting Colorado sales tax on time and without incident. However, in the real world, mistakes happen.

If you miss a sales tax filing deadline, follow the saying, “better late than never,” and file your return as soon as possible. Failure to file returns and remit collected tax on time may result in penalties and interest charges, and the longer you wait to file, the greater the penalty and the greater the interest.

Failure to file or pay Colorado sales tax by the applicable due date may result in a penalty of the greater of $15 or a percentage of the unpaid, unaccounted, or incorrectly accounted tax (10 percent plus ½ percent for each month the tax remains unpaid, not to exceed a total of 18 percent); late filing and/or payment of tax will also result in a disallowance of the timely filing discount (Vendor’s Fee).

If you’re in the process of acquiring a business, it’s strongly recommended that you contact the DOR and inquire about the current status of the potential acquisition. Once you've purchased the business, you’ll be held responsible for all outstanding Colorado sales and use tax liability.

For additional information, see Colorado Civil Tax Penalties and Interest.

If you’re collecting sales tax from Colorado residents, you’ll need to consider how to handle taxes on shipping and handling charges.

Taxable and exempt shipping charges

Colorado sales tax may apply to charges for shipping, delivery, freight, handling, and postage.

Delivery and freight charges are generally exempt from Colorado sales tax so long as they’re both separable from the purchase and separately stated on the customer invoice. Charges are considered separable from the purchase if they’re for service performed after the property is offered for sale, and the seller allows the buyer to use alternative transportation service, including but not limited to the buyer picking up or taking the property from the seller's location.

Taxable delivery and freight charges related to tax exempt sales (tax exempt item, sales to tax exempt charity, shipping out of state, etc.) are not subject to sales tax because the delivery charges are considered part of the exempt sales.

There are exceptions to almost every rule with sales tax, and the same is true for shipping and handling charges. Specific questions on shipping in Colorado and sales tax should be taken directly to a tax professional familiar with Colorado tax laws.

For additional information, see the DOR’s Sales Tax Quick Answers.