Should your Company Follow NEW ‘Use Tax' Notice and Reporting Requirements or Simply Start Collecting Sales Tax?
That is the question every retailer currently not collecting sales tax must answer as more and more states adopt use tax notice and reporting requirements. Colorado was the first state to enact such requirements in 2010, and now that litigation is over, it is time for companies to finally act.
The following is a summary of Colorado’s requirements along with insight into other states who have enacted something similar, and related federal legislation.
Colorado Use Tax Notification Requirements (effective July 1, 2017)
Who Does This Apply To?
Each retailer that does not collect Colorado sales tax and has gross sales into Colorado of $100,000 or more in a calendar year is required to follow the notification and reporting requirements for that calendar year.
Who does This NOT apply to?
Retailers that make less than $100,000 in gross sales into Colorado in the prior calendar year and reasonably expects gross sales into Colorado to be less than $100,000 are not subject to the notice and reporting requirements. In addition, retailers that sell exempt goods to Colorado purchasers or sell goods to exempt Colorado purchasers are not impacted.
Before we get into the details, let’s clarify your options. If the new Colorado use tax notice and reporting requirements apply to your company, you have 2 options:
- Comply with the requirements; or
- Voluntarily collect sales tax on all sales to Colorado customers (this may be easier to implement)
What is Required?
A. Transactional Notice – Retailers are required to notify Colorado purchasers that sales or use tax is due on certain purchases made from the retailer and that Colorado requires the purchaser to file a sales or use tax return.
- Options for Online Purchases:
- The notice is required to be prominently located in close proximity to the ‘tax’ or ‘sales tax’ line at checkout. If no ‘tax’ line is available, the notice should be in close proximity to the ‘total price’ line shown at checkout.
- If it is impractical to do #1, then a prominent hyperlink in close proximity to the ‘tax’ or ‘sales tax’ line or the ‘total price’ line shown at checkout should read: “See here for information on the tax you may owe to Colorado” (must direct the purchaser to the transaction notice).
Use of Online Marketplaces:
The use of online marketplaces does not relieve the retailer from the obligation to provide notice for each transaction. However, a marketplace may provide the transaction notice to Colorado purchasers on behalf of the retailer.
Purchases Not Made Online:
- The notice for each transaction must be prominently located on any order form in close proximity to the ‘total price’ line.
- If it is impractical to do #1, then the retailer must state on the invoice near the ‘tax’ or ‘total price’ line, “See attachment for information on the tax you may owe” (must provide a supplemental document containing the notice).
B. Annual Purchase Summaries – Retailers are required to notify Colorado purchases by January 31 of each year showing the total amount paid by the purchaser for Colorado purchases from the retailer in the previous calendar year. The notification should include the dates of purchases, the amounts of each purchase and the category of the purchase and whether the purchase is exempt or not exempt from taxation. The notification must state that Colorado requires a sales or use tax return to be filed and sales or use tax paid on certain Colorado purchases from the retailer. The notification is required to be sent by first-class mail and include the words, “Important Tax Document Enclosed” on the exterior of the mailing.
Tip: Annual purchase summaries are not required to be sent to purchasers with less than $500 of Colorado purchases from the retailer.
C. Annual Customer Information Report – Retailers are required to file an annual statement for each purchaser to the department of revenue showing the total amount paid for Colorado purchases of such purchasers during the preceding calendar year before March 1 of each year. Colorado may require any retailer with more than $100,000 in total Colorado sales in a year to file the annual statement by magnetic media or another machine-readable form for that year.
What If You Don’t Comply?
A. Transactional Notice – failure to provide notice will subject the retailer to a penalty of $5 for each such failure, unless the retailer shows reasonable cause for such failure. This is $5 per transaction.
The maximum penalty in a single year for the ‘notice per transaction’ is $25,000 if the retailer had no knowledge of the requirement and began to provide notice within 60 days of demand by Colorado.
B. Annual Purchase Summaries – failure to send the notification to purchasers will subject the retailer to a penalty of $10 for each failure, unless the retailer shows reasonable cause for such failure. This is $10 for each purchaser.
- Maximum penalty if the annual purchase summaries is sent to all Colorado purchasers within 30 days after the due date is $1,000.
- Maximum penalty in a single year for the annual purchase summaries is $50,000 if the retailer had no knowledge of the requirement and sent the annual summaries to all Colorado purchasers within 60 days of demand by Colorado.
C. Annual Customer Information Report – failure to file the annual statement to Colorado will subject the retailer to a penalty of $10 for each purchaser that should have been included in the annual statement, unless the retailer shows reasonable cause for such failure.
- Maximum penalty if the annual customer information is sent to Colorado within 30 days of the due date is $1,000.
- Maximum penalty in a single year for the annual customer information report is $50,000 if the retailer had no knowledge of the requirement and filed the annual customer information report within 60 days of demand by Colorado.
A. If a good is purchased by one customer, who may be inside or outside Colorado, and it is shipped to another party in Colorado, the Colorado purchaser is the purchaser of the good, not the recipient. Thus, the sale is considered a Colorado sale. The notification should be made to the purchaser of the good, not the recipient of the good.
B. Colorado sales include:
- Sales shipped to an address in Colorado
- Sales of property that are downloaded or otherwise delivered electronically to a Colorado customer
C. Colorado sales do NOT include:
- Purchases on which sales tax was collected
- Exempt sales
D. All corporations included in a controlled group of corporations are considered a single retailer for purposes of this rule. A retailer must include total Colorado sales made by all corporations in a controlled group to determine if the retailer (group) exceeds the $100,000 threshold in Colorado sales in a calendar year.
How We Got Here
Colorado enacted Colo. Rev. Stat. § 39-21-112(3.5) which became effective March 1, 2010. The Direct Marketing Association (DMA) quickly filed lawsuits making 14 claims against the law. The Courts quickly issued an injunction barring the enforcement of the law.
On February 22, 2016, the 10th Circuit Court ruled in Colorado’s favor by reversing a U.S. District Court decision. The U.S. District court had held that the statute violated the commerce clause of the U.S. constitution. The 10th Circuit Court disagreed and said that there was no discrimination and no burden on interstate commerce. The Circuit Court also said the famous Quill case (that requires a company to have a physical presence before the company is obligated to collect sales tax) only applies to sales and use collection. According to the Circuit Court, Quill does not apply to notice and reporting requirements as enacted by Colorado.
- On August 29, 2016, DMA filed a petition to have the 10th Circuit Court decision revised by the U.S. Supreme Court.
- On December 12, 2016, the U.S. Supreme Court denied DMA’s petition.
- On February 22,2017, DMA and Colorado agreed to a settlement. DMA agreed to dismiss it’s remaining state court claims. Colorado dissolved its injunction against the statute, but agreed to waive all penalties for non-collecting retailers prior to July 1, 2017.
- On June 30, 2017, the Colorado Department of Revenue issued emergency regulations to provide additional guidance for taxpayers to follow.
- On July 25, 2017, the Colorado Department of Revenue issued proposed permanent revisions to the regulations. Specifically, Colorado is trying to determine the application of the notice and reporting requirements to marketplace sellers. Consequently, Colorado is holding a public rulemaking hearing on August 16, 2017 to reach a determination.
- Prior to 2017, Kentucky (HB 440), Oklahoma (HB 2531), and South Dakota (SB 146) enacted laws similar to Colorado.
- Effective July 1, 2017, Louisiana (HB 1121) and Vermont (H 873) also require remote sellers with no physical presence to comply with notice and reporting requirements similar to Colorado.
- Washington (HB2163) enacted a law similar to Colorado in 2017 with an even lower threshold for notice and reporting that becomes effective January 1, 2018.
- Connecticut has begun demanding customer information from non-nexus remote sellers without enacting new legislation.
Currently, there are two bills being considered that would allow states to compel non-nexus remote sellers to collect and remit sales tax. Conversely, there is a bill to make the physical presence standard the permanent threshold; meaning, a state could not compel a remote retailer to collect and remit sales tax if the retailer does not have a physical presence in the state.
The federal legislation has no impact on the new notice and reporting requirements states have enacted. Consequently, regardless of whether the federal legislation moves forward, retailers must still decide whether to follow the new notice and reporting requirements or simply collect sales tax.
LBMC Can Help
LBMC can help you avoid costly penalties by determining how Colorado’s and other states’ new notice and reporting requirements apply to your company. Specifically, we can help you determine if you should follow the requirements or voluntarily start collecting sales tax. If you decide to follow the requirements, we can help you implement the requirements into your sales system and process. If you decide to collect and remit sales tax, we can help you implement the necessary systems and procedures.