Out-of-state retailers who sell online in Colorado will soon have to pay state sales taxes and state-collected local sales taxes.
Retailers with at least $100,000 in annual sales or 200 annual transactions within the state will be required to obtain a state business license by Nov. 30 and begin collecting and remitting sales taxes Dec. 1.
Colorado’s new policy, instituted by the state Department of Revenue, comes as a result of a June 21 U.S. Supreme Court decision. In a case titled South Dakota v. Wayfair, the court overturned a 26-year-old precedent that prevented states from requiring an online seller to collect sales taxes unless the seller had a physical presence, such as a warehouse, in the state.
That decision also has spurred other states to begin requiring remote sellers to collect sales tax. Many local municipalities, counties and special taxing districts also want to get in on the action.
While Colorado’s policy is based upon and in line with the Wayfair decision, policies in other states vary widely — a situation that has online sellers concerned about how and when to implement sales tax collections.
“While Wayfair eliminated the physical presence requirement, the court’s failure to provide bright-line rules leaves many questions unanswered,” the National Retail Federation stated in an article on its website.
Colorado made it clear, in a release issued Sept. 11, that out-of-state online sellers now must collect and remit sales taxes. Colorado’s policy aligns with the court decision, which exempts smaller businesses with less than $100,000 in sales or fewer than 200 annual transactions.
But other states have not yet enacted laws or policies to guide sellers in what they’re required to do. In those that have, dates on which sellers must start collecting taxes vary, and litigation is ongoing in a few states that must be resolved before sales tax collection and remittance can be required.
And as yet, there is no single source of information about sales tax collection policies and legislation for all states and local counties, municipalities and special taxing districts. The retail federation has posted on its website a chart compiled by Ernst & Young that shows the status of each state’s collection laws and/or policies, but changes are ongoing and policies are still being worked out.
The Colorado landscape
While retailers wring their hands over how to comply with the wide variety of tax collection regulations, cities, counties and states are eager to supplement their budgets with online tax revenue.
“This will be a major positive change for all communities and states that rely heavily on sales tax,” said Tom Binnings, senior partner at Summit Economics.
Many municipalities have been experiencing 4.5 percent to 5 percent growth in sales tax revenue in the past few years, Binnings said, but there are a couple of major, long-term threats to public entities reliant on sales tax.
As people age, their consumption patterns shift from buying goods to spending more on services like health care.
“Even if we did not have online sales, all things being equal, you would have the Baby Boomers paying less sales tax,” Binnings said.
At the same time, Millennials, who buy more online, are more burdened with debt and have fewer consumption dollars.
“Seeing their sales tax dry up, municipalities would be forced increasingly to find other ways to generate revenue and/or cut back services,” Binnings said.
Colorado Springs and the Front Range “are somewhat insulated because of population growth and a growing economy,” he said. “For other communities with steady, aging populations and moderate-income populations that are not growing, this is a real storm brewing for their fiscal well-being. Wayfair is a huge decision that can help mitigate that problem.”
Larger online retailers like Amazon, which has a substantial presence in the state, have already started collecting and remitting Colorado’s 2.9 percent sales tax, said Daniel Carr, taxation communications manager for the Colorado Department of Revenue.
“Wayfair, Overstock and other medium-sized retailers were sending letters out to their customers in the state saying they had to remit sales taxes,” Carr said. “The onus now will shift to retailers to collect and remit at the point of sale.”
Carr said the state anticipates collecting an additional $44 million in sales tax revenue from online retailers in the 2018-19 fiscal year that runs through June 30.
Colorado’s Department of Revenue also collects sales taxes for some local jurisdictions in the state, but other municipalities are home-rule, self-collecting jurisdictions.
“We are offering to collect sales taxes for them,” Carr said, “though we don’t have control over what they could do.”
Colorado Springs collects its own 3.12 percent sales tax rather than having the state collect it.
“Businesses would need to have a sales tax license with the state and another one with the city,” Colorado Springs Chief Financial Officer Charae McDaniel said. “We want to make it as business-friendly as we can but still have a system in place to collect taxes.”
The city is working with a group of self-collecting cities through the Colorado Municipal League to develop a plan and implement sales tax collections.
“We want to have a uniform methodology for rolling this out, but it will take time to get there,” McDaniel said.
The city does not break out online sales separately, but McDaniel said additional online sales revenue would be “probably north of $1 million” annually.
The state does collect and remit revenue from Manitou Springs’ 3.9 percent sales tax.
“I’ve already started seeing Amazon pop up there,” Manitou Finance Director Rebecca Davis said. “I haven’t increased the sales tax forecast for 2019, because I don’t know how much more we’ll be getting. It might turn out to be pretty good for us.”
Leveling the playing field
One of the reasons why there is so much movement toward collection of online sales taxes is that it is thought to level the playing field for brick-and-mortar businesses.
But online business owner Susan Wolbrueck thinks it’s too late for that, because so many small retail stores have already closed.
According to the website practicalecommerce.com, U.S. online sales grew 15.8 percent to an estimated $452.8 billion in 2017. At the same time, 6,700 U.S. stores closed in 2017 — more than in any other year on record.
“How many stores now are going to make sales they weren’t making before?” said Wolbrueck, who owns Café Race, a company that makes custom products for the automotive and motorcycle market.
Wolbrueck, who is also a Manitou Springs councilor, sees the issue from both sides.
“There may be an opportunity for cities,” she said, “but we’d become the target of every city, county and state. The thing that is scary is that states have already started requesting records from us. I’m one of those small online businesses that if I have to do that kind of reporting, I’ll have to close.”
Wolbrueck said she is concerned about the impact of online tax collecting on businesses that sell small items. They may not be making enough money to meet the $100,000 threshold but could easily rack up 200 sales transactions in a state.
Amazon collects and submits sales taxes for Café Race, keeping a percentage of sales to pay for that service.
“They might start taking more from me to do that,” Wolbrueck said. “This hasn’t caused me to change the way I do business yet, but it has given me some indigestion.”
Both government jurisdictions and online retailers are hoping that state and/or federal legislation will be enacted to clarify rules and regulations concerning taxation of online sales.
According to a Sept. 25 email to Davis from Kevin Bommer, deputy director of the Colorado Municipal League, a draft bill that could be introduced in the Legislature in 2019 would require the Department of Revenue to issue an RFP for a third-party vendor that would be a single point of remittance for sales taxes.
“This is only one opening step to the legislative process that will kick off on Jan. 4,” Bommer wrote.
The committee was scheduled to meet Sept. 27, after the Business Journal had gone to press, to consider the draft and discuss the implications of the Wayfair decision.
Retailers such as eBay also are going to bat on behalf of online sellers.
In an article posted on its Main Street website, eBay said it supports a bipartisan measure that aims to provide a clear framework and a national online sales tax standard.
The Online Sales Simplicity and Small Business Relief Act, introduced Sept. 14, calls for a ban on retroactive collection of sales taxes on sales prior to June 21, a phased approach for states to impose sales tax collection and remittance requirements and a small-business exemption that would apply to remote sellers with gross annual receipts of less than $10 million.
An organization called the Streamlined Sales Tax Project is attempting to provide an efficient way for online sellers to register and collect sales taxes in the 24 states (not including Colorado) that are participants.
Besides information and resources, the Streamlined Sales Tax Project’s website provides the ability to register simultaneously for tax collection in each of the member states. It has contracted with several certified service providers to provide tax collection services for remote sellers in those states at no cost to the seller.
Sellers can engage certified service providers and other third-party companies to provide tax collection services in states that aren’t members of the Streamlined Sales Tax Project, but they will have to pay fees for those services.
Carr said he recently reached out to the Streamlined Sales Tax Project.
“There are some roadblocks statutorily to us becoming part of that organization unless there is a change in state law,” Carr said. “But we will keep an eye on it.”
Binnings said he expects additional services to be developed to help small businesses with the accounting required to remit online sales taxes to jurisdictions across the country.
“If all retail sales went into a database with the ZIP code where the payer lived, that service could automatically allocate and cut checks for small businesses,” Binnings said. “Quicken and QuickBooks have been following this and developing software. I suspect these services will come into being within the next six months.”