The holiday shopping season is nigh and Colorado’s online retailers have much to do. It’s time to double-check inventory, alert mailing list subscribers about deals and discount offers, and make sure they are prepared to collect and pay sales taxes for each of the state’s more than 340 taxing jurisdictions.
That’s right. Starting Dec. 1, the Colorado Department of Revenue will require all retailers who ship goods to a buyer in Colorado to assess, collect and remit sales taxes based on the buyer’s address, not where the business is located or the taxing jurisdictions the buyer and seller share in common. The rules are the same if the retailer is Amazon trucking a book into the state or an independent screen-printing business mailing a T-shirt from Aurora to Pagosa Springs.
And some business owners are worried that the looming wave of red tape could be so burdensome that it will put them out of business.
When all of Colorado’s 344 cities, counties and special taxing entities like RTD are layered over one another, there are 683 possible sales tax combinations in the state. That is a complex web to untangle for one- or two-person shops.
Frank Banta, who runs Aurora-based Banta Promotions, said his promotional clothing and products company got a letter detailing the rule changes Oct. 1. Since then, he has been scrambling to find an accountant and software system that can get him ready to comply.
“There were a lot of feelings,” Banta said of the letter, which is dated Sept. 26. “Going out of business was possibly one of them. So far in October, since the letter has come out, I have pretty much stopped selling stuff and have been working on how to get the problem solved.”
Supreme Court ruling opened door for change
The path to Colorado’s sales tax overhaul was paved by a Supreme Court ruling in June that did away with a standard dictating a business had to have a physical presence in a place to be required to pay sales tax there. That case, South Dakota vs. Wayfair, was aimed at getting out-of-state retailers (see: Amazon) to collect and remit local sales tax, but Colorado is coupling new rules for out-of-state sellers with a mandate for in-state retailers do the same.
“We viewed this as an opportunity to bring in-state retailers more in line with statutory requirements,” said Mike Hartman, executive director for the Colorado Department of Revenue, adding the state’s 1935 sales tax law calls for “a destination-based application of local sales taxes.”
There is a threshold that triggers compliance for out-of-state sellers. Only companies that have processed more than 200 transactions or done $100,000 in sales in Colorado during the current or prior tax year have to collect. No such threshold exists for in-state sellers, Hartman said. They have to comply whether they make 10,000 sales a year or one sale.
Taxing entities have an obvious interest in seeing destination-based collections enforced: gobs of additional revenue. The state’s net sales tax collection for the 2016-2017 fiscal year was $2.72 billion, Department of Revenue officials say. The Colorado Office of State Planning & Budgeting forecasts the new rules could boost general fund income by $44 million in 2018-2019 and $82 million the following fiscal year.
The Department of Revenue is touting benefits of the new system for in-state retailers. For one, it levels the pricing playing field. Out-of-state companies and in-state competitors will no longer have an advantage over local companies when selling similar products because they will all be adding the same taxes.
The state is also offering an incentive. Companies that collect and remit taxes are entitled to 3.33 percent of the money as a collector’s fee, funds that could help businesses offset the costs of collection.
“It costs a company a lot of money”
But small-business manager Banta said the resources the state has presented online are tailored to large companies with ample accounting staffs and resources, not his operation, which includes just himself, his wife and a pair of contractors.
The core of the problem is the state’s hodgepodge system of taxing entities and rates. The Department of Revenue handles collections for most cities, counties and special districts, but 73 cities and two counties do their own collections, audits and set their own rules for what is taxable and what isn’t.
These “home-rule” jurisdictions create a major headache for businesses like Banta’s, which had transactions in 14 jurisdictions in September alone. The lowest cost he has found for an accountant to file a single remittance sheet on his behalf starts at $60. He believes filing monthly returns will be his third-largest business expense next year, behind raw materials and contractors. He has already informed his online and social media contractor he won’t be able to afford her services after Jan. 1.
In Longmont, Cindy Jones, the owner of herbal self-care products business Colorado Aromatics Cultivated Skin Care, is fretting over the new rules. She’s also concerned about the cost of compliance and said the state’s information has been confusing.
“I’m not real clear about it. I contacted our bookkeeper and he’s a little unclear, too, but he thought we would have to buy sales tax licenses for every jurisdiction that we sell to,” Jones said. “I have been putting money into advertising to try and increase online sales. Now it looks like we could be losing money on our online sales. That would definitely put us out of business.”
Keith Crichton, a Centennial-based certified public accountant and consultant with more than 30 years’ experience navigating corporate tax law, said the rules will be an “administrative burden” on local businesses, and a financial one, too.
“It costs a company a lot of money to comply with all of this stuff,” he said. “They have to hire someone to do it or find someone else to do this for them.”
Douglas County entrepreneur Kynsi Saye thought about hiring an accountant but is planning to navigate the new rules on her own — for now. The 26-year-old founded Kompass Apparel three years ago. The business sells custom clothing inspired by the outdoors and the Colorado lifestyle. The business of one has done a few hundred sales this year, about 50 percent of which came through its website, Saye said.
“I’m not necessarily concerned, but it’s definitely going to take a lot more time and a lot more diligence to look at really every place and every county and every city that I am getting sales in,” she said.
A grace period and online help
State officials see the hurdles that lie ahead. The rules start Dec. 1 but an enforcement grace period will run through March 31. A website dedicated to the rule change is advertising free live webinars. That same site directs business owners to a trio of free tax-by-address databases. If a retailer uses the site but collects the wrong tax they are free of liability, officials say.
“We certainly recognize that is a change from what people have been doing before, and we always want to encourage voluntary compliance with the tax laws of Colorado,” Hartman said.
A rule-making hearing covering the changes will be held at 2 p.m. Nov. 30 in Room 220 of the building at 1313 Sherman St. in Denver.
Even some home-rule cities are taking a wait-and-see approach. Arvada revenue manager Ezequiel Vasquezsaid that, as of now, his city is not requiring online retailers who have never had a city sales tax license to get one. If the city does require it at some point, the licenses will be free.
Possible legal challenge?
The Wayfair decision may have opened the door for Colorado’s rule change, but the narrow ruling could also lay the groundwork for a legal challenge, say observers with the Tax Foundation, a Washington, D.C.-based think tank.
In his majority opinion, Justice Anthony Kennedy wrote South Dakota’s system, with a single collection point and a uniform set of taxable goods, appeared designed to “prevent discrimination against or undue burdens upon interstate commerce.” Meanwhile, the Tax Foundation counts Colorado’s sales tax system among the most complex in the country.
“What South Dakota has is a much easier system compared to Colorado in that you just remit in one place,” said foundation spokesman John Buhl. “There is no issue of having to remit to many different localities. There is no issue with different tax amounts.”
Colorado officials have been trying for years to simplify the state’s rules. State Rep. Tracy Kraft-Tharp chairs the bipartisan Sales and Use Tax Simplification Task Force, which first convened in 2017.
The task force previously supported a bill that put out a request for information from software companies that might offer a one-stop sales tax portal for the state. In the 2019 legislative session, Kraft-Tharp said the group is planning a bill that will authorize the Department of Revenue to put out a request to companies that could provide a system like that.
The Arvada Democrat said creating a unified tax rate in Colorado is nearly impossible. Raising sales taxes in jurisdictions without a vote of the people is illegal under state law, and lowering it in others could hurt local budgets, services and jobs.
“The professional words we use are complicated and convoluted, but it’s a nightmare,” Kraft-Tharp said. “Are we the definition of burdensome? My mission in life is to simply our system.”
Updated Nov. 5, 2018, at 12:25 p.m. Because of an error by a source, the percentage of sales tax revenue the state will allow businesses to keep as a collector’s fee was originally misreported in this story. The fee is 3.33 percent.
