On July 1, 2021, all retailers (including nonprofits) that sell taxable goods and services in Colorado will be required to collect sales taxes based on where the buyer receives the good or service.
With the passage of HB 19-1240, Colorado is moving away from a system where sales taxes are calculated based on the location of the seller (origin sourcing) to one where the good or service is delivered to the consumer (destination sourcing).
This change will not significantly alter sales tax collection in retail stores because the buyer takes possession of the good or service at the seller's location.
However, if a seller ships or delivers a good to a residential or business address, then sales taxes are based on the location of the residence or business.
To help retailers transition from origin sourcing to destination sourcing, the Colorado Department of Revenue has developed resources to simplify collecting and remitting sales taxes to the appropriate taxing jurisdictions.
This includes the following:
- The Sales and Use Tax System (SUTS) - allows retailers to remit sales taxes for multiple jurisdictions and view a taxability and exemption matrix
- Geographic Information System - calculates sales tax rates based on a Colorado address.
- Destination sourcing guidance - includes helpful FAQs and videos
In 2010, Colorado passed HB 10-1193 requiring online retailers with a physical presence to either collect Colorado sales taxes on more than $100,000 of annual purchases. The retailer had to either remit those taxes to the state or send Colorado residents a receipt of items purchased during the year if they spent more than $500. If the retailer did not collect Colorado sales taxes, the Colorado taxpayer would be required to pay use taxes on items listed on the receipt.
The legislation addressed concerns of losses of tax revenues from online retailers that did not collect state sales taxes. Also, the intent was to level the playing field between online retailers and "brick and mortar" stores required to collect sales taxes. The bill passed despite opposition from online retailers with facilities and affiliates in Colorado. Litigation tied up HB 10-1193 for several years before the Supreme Court upheld it in 2016.
After the Colorado Department of Revenue finalized regulations to ensure compliance with HB 10-1193, the U.S. Supreme Court ruled in the case of South Dakota vs. Wayfair Inc, expanding the ability of states to collect sales taxes on online purchases. Previously, it was necessary for retailers to have a clear physical presence for a state to require collection of sales tax on purchases made by residents.
On September 11, 2018, the Colorado Department of Revenue (DOR) adopted temporary emergency rules to require any retailer "doing business in Colorado" and having "substantial nexus" with the state to collect Colorado sales or use tax as applicable. These rules took effect in December 2018. Sellers were required to come into compliance by May 31, 2019.
For the most part, HB 19-1240 put DOR's rule into the statute with some significant changes. DOR required that all Colorado retailers, and out-of-state retailers with annual sales over $100.000, would have to collect state sales taxes and comply with the destination sourcing rule.
Unlike DOR's destination sourcing rule, having 200 or more transactions with Coloradans would no longer trigger the requirement to collect Colorado sales taxes under 1240. Colorado Nonprofit Association submitted a Letter to DOR with comments on the proposed rule in December of 2019..
DOR's rule and 1240 apply only to state-collected sales taxes. This means Colorado sales taxes and any sales taxes for a city, county, or special district that are collected by the state. These policies do not necessarily affect requirements for nonprofits to collect and remit sales taxes to home rule jurisdictions.
Although the requirement to collect sales taxes based on the destination of goods is new, Colorado's nonprofits have long been required to obtain sales tax licenses and collect state sales taxes on items they sell (see Regulation 39-26-718) with some exceptions:
- Donations, as defined by federal income tax regulations, are excluded from the calculation of sales.
- Purchases where the donor knowingly paid an amount exceeding the fair market value of the item in order to make a donation. Nonprofits often provide information on the fair market value of an item so that it can be excluded from the value of the donation.
- Occasional sales that generate less than $45,000 per year. This exemption applies to the state sales tax rate and sales tax rates of cities that have an occasional sales exemption. It does not apply to home rule jurisdictions.
- Goods and services that are exempted from taxation by the state and/or local taxing jurisdictions.