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Sales Tax Rules and South Dakota vs. Wayfair

Apr 8, 2019

The Colorado General Assembly is considering legislation to re-define how sales taxes are collected and remitted by businesses and nonprofit organizations. If HB 19-1240 passes, then in-state and out-of state businesses and nonprofits with sales of $100,000 or more from Coloradans would be required to collect sales taxes based on the location where the buyer takes possession of the good or service as of June 1, 2019. 

This change would not affect retail purchases from a store, for example, but it would affect sales where goods or services are delivered to the purchaser. In the latter situation, sales taxes typically would be based on the location of the delivery (also called destination sourcing).

This requirement will be phased in for all Colorado businesses after the state implements a new GIS system allowing retailers to determine the tax rate based on where the buyer receives the good or service.

1240 responds to the U.S,.Supreme Court's 2018 ruling in the case of South Dakota vs. Wayfair Inc. which expanded 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 has "substantial nexus" with the state to collect Colorado sales or use tax as applicable. The rules are scheduled to take effect in December 2018. Sellers would be required to come into compliance by May 31, 2019. 

For the most part, 1240 would 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. 

Information for out of state retailers

DOR held a formal rulemaking in December and we submitted a letter with comments on the proposed rule.

Letter to DOR

How the rule and bill affects Colorado's nonprofits

Although neither the rule nor the bill addresses sales tax exemption specifically, it seems that existing sales tax exemptions would still be in effect.

Also, this would not change the requirement for nonprofits to collect Colorado sales taxes on items they sell but it would change how taxes on sales are calculated when goods are shipped within Colorado. Sales taxes would be collected based on where the purchaser receives the item rather than taxing jurisdictions in common between the seller and purchaser. This means collecting not only Colorado sales taxes but also the local sales taxes where the purchaser receives the item. 

How the rule may affect nonprofits located out-of-state

Out-of-state nonprofits would be required to obtain a sales tax license in Colorado and collect sales taxes if their sales exceed $100,000. Based on the proposed rule and bill alone, we are not certain if these thresholds exclude donations or purchases where a donation is made in excess of the fair market value of the item sold. We will likely seek clarification on whether a sale that includes a donation would be considered a transaction under these rules. Nonprofits that sell a large volume of goods in Colorado, or earn more than $100,000 from services delivered in Colorado, may be required to comply with these regulations when they take effect.

Home Rule Jurisdictions

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. They do not apply to  home rule jurisdictions that could adopt similar policies taxing companies selling goods or services to their residents. More information is needed to understand how Colorado intends to handle the complexity of sellers needing to collect sales taxes from a combination of self-collected and home rule jurisdictions.

In 2019, the Colorado General Assembly will likely consider legislation to streamline sales tax collection. This includes identifying a vendor to develop an address locator for taxing jurisdictions, a single application process for licenses, a taxability or exemption matrix, and a single point of remittance for state and local sales taxes. This bill has been approved for drafting by the Sales and Use Simplification Task Force

Background on Sales Taxes

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 and 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 sales taxes, the Colorado taxpayer would be required to pay use taxes on items listed on the receipt. 

The legislation was intended to address concerns of loss 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.

The legislation was tied up in litigation for several years before the Supreme Court upheld it in 2016. The Wayfair decision occurred after the Colorado Department of Revenue finalized regulations in 2017 to ensure compliance with HB 10-1193.

Although the requirement to collect sales taxes based on the destination of goods is new, Colorado's nonprofits have 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 last twelve days or less per year, and generate less than $25,000 in net proceeds, are excluded.   

Nonprofits located in home rule jurisdictions are often required to collect sales taxes for those jurisdictions.