That’s 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. Now that litigation related to that move is over, it’s finally time for companies to act.
Here’s a look at Colorado’s requirements along with insight into other states that have enacted similar requirements as well as related federal legislation.
Tax notification: What is it, and who is affected?
According to the Colorado Use Tax Notification Requirements — which passed on March 1, 2010, and finally became effective on July 1, 2017 — a 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.
Retailers that make less than $100,000 in gross sales into Colorado in the prior calendar year and reasonably expect 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 two 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?
Affected retailers must serve notice to their customers in several ways.
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.
There are specific requirements for how online and offline purchasers must be notified about the tax requirement, and online purchases include those completed via online marketplaces.
Annual purchase summary
Retailers are required to notify Colorado purchases by Jan. 31 of each year showing the total amount paid by the purchaser for Colorado purchases from the retailer in the previous calendar year. Again, there are specific requirements regarding what the summary must include and how it is delivered to the purchaser. Note that annual purchase summaries are not required to be sent to purchasers with less than $500 of Colorado purchases from the retailer.
Annual customer information report
Before March 1 of each year, retailers are required to file an annual statement for each purchaser to the department of revenue showing the total amount paid for Colorado purchases during the preceding calendar 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.
What if you don’t comply?
Failure to meet these requirements will subject retailers to monetary penalties per failure — up to $25,000 for failure to send transactional notices and up to $50,000 for failure to send annual summaries and customer information reports.
Pitfalls to be aware of
If a good is purchased by one customer, who may be inside or outside Colorado, and 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.
Colorado sales include:
- Sales shipped to an address in Colorado
- Sales of property that are downloaded or otherwise delivered electronically to a Colorado customer
Colorado sales do NOT include:
- Purchases on which sales tax was collected
- Exempt sales
All corporations included in a controlled group of corporations are considered a single retailer under these rules. 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) on March 1, 2010. The Direct Marketing Association (DMA) filed lawsuits making 14 claims against the law, and the courts quickly issued an injunction barring enforcement of the law.
Late last year the Supreme Court denied DMA’s petition to revise a lower court decision. In February 2017, DMA and the state of Colorado agreed to a settlement. DMA agreed to dismiss its remaining state court claims. Colorado dissolved its injunction and agreed to waive all penalties for non-collecting retailers prior to July 1, 2017.
Kentucky, Oklahoma, Louisiana, Vermont and South Dakota have all passed legislation similar to that in Colorado. Legislation in Washington is set to take effect on Jan. 1, 2018, and Connecticut is demanding customer information from non-nexus remote sellers without enacting 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 that states have enacted. Consequently, regardless of whether the federal legislation moves forward, retailers must still decide whether to follow new notice and reporting requirements or simply collect sales tax.
Protect your business
A tax professional can help you avoid costly penalties by helping you determine whether to follow the notice and reporting requirements or voluntarily start collecting sales tax. Whichever choice you make, a pro can also help you implement the necessary processes and procedures to ensure that you are compliant with the law