The rules for collecting sales tax on Internet-based sales is a matter of ongoing debate both in Colorado and nationwide. Consequently, if you have an online business where you sell goods or products to customers in Colorado, it’s important that you understand Colorado’s sales tax rules.
As you read, keep in mind that within the last few years Colorado has attempted to change its laws regarding collection of sales tax by online sellers, though so far without success.
The federal government is currently considering legislation that would affect how online sales taxes are collected in all states. The proposed federal law (called the Marketplace Fairness Act of 2013) would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Colorado. The new federal law is scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule on Sales Tax: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as
having a warehouse in the state
having a store in the state
having an office in the state, or
having a sales representative in the state.
For more specific statements of what may count as physical presence under Colorado law, consult Colorado Revised Statutes Section 39-26-102 and Colorado Department of Revenue Regulation 39-26-102.3.
Not unexpectedly, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Example 1: You are operating solely out of an office in Biloxi, Mississippi and make a sale to a customer in Boulder, Colorado—a state where your business has no physical presence: You are not required to collect sales tax from the Boulder customer.
Example 2: You are operating solely out of an office in Fort Collins, Colorado and make a sale to a customer in Denver, Colorado: You are required to collect sales tax from the Denver customer.
Example 3: After several years of operating solely out of a warehouse in Biloxi, Mississippi, you open a one-room satellite office just outside of Aurora, Colorado—a state where previously you had no physical presence. A day later, you make a sale to a customer in Pueblo, Colorado: You are required to collect sales tax from the Pueblo customer.
Certain items sold via the Internet to Colorado customers may be exempt from sales tax under Colorado law. Information about sales that are exempt from sales tax is available online through an index page on the state’s Department of Revenue (DOR) website.
Currently, the DOR is revising its specific guidance on Internet sales tax, presumably as a result of the recent failure of the state’s attempt to change its Internet sales tax rules. This information is usually available in the DOR’s FYI Sales Publication 79 (“Sales of Taxable Items Over the Internet”); however, this publication is under revision and not available online at this time.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” Under Colorado law, if an item would otherwise be subject to sales tax, it is generally subject to use tax. For more information, see this online publication from the Department of Revenue.
Colorado’s Failed “Amazon Law”
In 2010, Colorado passed a law intended to pressure Internet sellers and similar businesses without a physical presence in the state (“remote retailers”) to nonetheless take steps to help ensure someone pays the tax on Internet sales. This type of law, which has been attempted in various forms in various states, is sometimes referred to as an “Amazon law.” (As you may have guessed, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.)
Colorado’s 2010 law required remote retailers to post special notices on their websites notifying Colorado customers of their responsibility to pay tax on online purchases. Also, it required remote retailers with more than $100,000 in annual sales to file special information with the Department of Revenue. However, in April 2012, a federal court in Colorado found the law unconstitutional; it is effectively rescinded.
The Colorado Department of Revenue is in the process of revising its guidance on Internet sales tax. At the moment, it would seem that the physical-presence rule continues to apply; the matter should be clearer once the DOR issues its revised guidance.
Meanwhile, if you are selling on the Internet, you should keep checking in with the Colorado DOR—the law in this area is clearly in a state of flux, at both the state and federal levels.