Colorado’s new rules requiring online retailers who sell to customers in the state to collect and remit sales taxes officially went into effect Dec. 1.
The state Department of Revenue is giving online retailers a grace period through March 31 to comply with the changes, but many local businesses are saying that’s not long enough.
“We’ve gotten a lot of calls from members who say this is going to be detrimental,” said Rachel Beck, vice president of government affairs for the Colorado Springs Chamber and EDC. Beck was among a number of advocates and businesses who testified before state regulators at a Nov. 30 hearing.
“There’s really a lot of consensus that this is premature,” Beck said. “We support the principle … of fair and comprehensive taxation [of online sales]. The problem is the timing. We are halfway through the [fourth] quarter and in the middle of the peak shopping season.”
Beck said the chamber is hearing from businesses that the new rules will have drastic effects in terms of costs and administrative burdens, and that they don’t know how to comply because the system is so complicated. Beck shared emails the chamber has received, with senders’ names redacted.
“As a manager of a very small business, I find its implementation strangling,” one business person wrote in an email to the Department of Revenue, with a copy to the chamber. “… My immediate reaction was to cease all sales to Colorado residents for our company.”
“We can’t even seem to gain a clear picture from the Colorado Department of Revenue on what jurisdictions this will all affect, i.e., city and county taxes, home rule cities, etc.,” another small business owner wrote in an email to the chamber. “We are a distributor that could theoretically direct ship … into every state in the nation. … We could work with a third-party vendor through our software company to collect the data, which would essentially render our distribution business unprofitable. However, even then, it is unclear how the taxes would be reported or remitted.”
Beck said the Colorado Springs Chamber and EDC, Colorado Chamber of Commerce and other businesses and organizations are asking the Department of Revenue to postpone implementation of the new rules until July 1.
“The Legislature this summer had a sales and implementation task force that recognized Colorado’s [sales tax] system was one of the more complicated in the nation and was working on remedying that,” Beck said. “We’d like for the Legislature to have time to finish that work before adding more regulations.”
A June Supreme Court decision in a case titled South Dakota v. Wayfair opened the door to new tax revenue sources for states, municipalities and other taxing jurisdictions.
In that decision, the court overturned at 26-year-old precedent and ruled that states can require online retailers to collect and remit sales taxes regardless of whether they have a physical presence such as a warehouse in the state.
The justices said states can’t put an excessive burden on interstate businesses but did not specify what constitutes an excessive burden.
“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.
Many states, including Colorado, immediately began crafting regulations requiring payment of online sales taxes.
In September, the Colorado Department of Revenue announced a new state policy on online sales. In a release issued Sept. 11, the department said out-of-state online sellers would be required to obtain a state business license by Nov. 30 and begin collecting and remitting the states 2.9 percent sales tax as of Dec. 1 when they deliver products to Colorado. Retailers that sell less than $100,000 worth of products or conduct fewer than 200 transactions a year in the state are exempt.
Furthermore, out-of-state retailers that do not collect state sales taxes during the grace period still have to comply with Colorado’s reporting statute, which requires retailers to provide notices to individual Colorado customers and the Department of Revenue about purchases on which taxes are not collected.
Retailers with state licenses are not required to register separately in local jurisdictions in which the state already collects local sales taxes. An example is Manitou Springs.
But there are 71 home rule cities in Colorado with varying regulations, for which the state does not collect local taxes, and Colorado business owners also must navigate similar regulations in other states to which they ship.
The state department has provided a list of five certified databases businesses can use to find information on local regulations in Colorado.
There is as yet no database that provides information on regulations that other states have enacted. But an organization called the Streamlined Sales Tax Project is attempting to provide an efficient way for online sellers to register and collect sales taxes. Only 24 states are participating in the project at this time, however. Colorado is not a participant.
“There are some roadblocks statutorily to us becoming part of that organization unless there is a change in state law,” said Daniel Carr, taxation communications manager for the Colorado Department of Revenue. “But we will keep an eye on it.” Carr was quoted in a previous story in The Business Journal published Sept. 28.
Besides information and resources, the Streamlined Sales Tax Project’s website allows businesses 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, such as Shopify, to provide tax collection services in states that aren’t members of the Streamlined Sales Tax Project, and other companies are developing software, but businesses will have to pay for those services.
Editor’s Note: This is a developing story. The Department of Revenue is still reviewing the sales tax changes, and the story will be updated as further information becomes available.