United States: Colorado Enacts Remote Seller Legislation To Simplify Sales Tax Under Proposed Federal Marketplace Fairness Act

On May 28, Colorado Governor John Hickenlooper signed legislation1 to implement the minimum sales and use tax simplification requirements of the proposed federal Marketplace Fairness Act of 2013 (MFA).2 Under the MFA, the federal government would authorize states to require remote (out-of-state) sellers to collect sales tax on taxable sales made within the state if certain simplification measures are taken. If the MFA is enacted into law by the federal government with the same simplification requirements that currently are provided in the proposed legislation, Colorado intends to compel out-of-state retailers to collect and remit sales tax. The Colorado legislation generally is effective July 1, 2014, but some of the provisions are contingent on the enactment of the MFA.3

Background

Historically, remote sellers were afforded federal protections from collecting sales and use tax if they did not exceed nexus thresholds in the state and local jurisdictions.4 While this protection does not exempt purchasers from the duty to pay use tax, for practical purposes, individual consumers frequently do not comply.

Recently, many states, including Colorado, have passed legislation that allows for the collection of the lost use tax revenue. In February 2010, Colorado enacted legislation imposing three notice and reporting requirements on out-of-state retailers that sell products to customers in Colorado.5 Two years later, the U.S. District Court ruled that the law was unconstitutional because it violated the Commerce Clause.6 The Court permanently enjoined Colorado's enforcement of the notice and reporting requirements against remote sellers.

On May 6, 2013, the U.S. Senate passed the MFA, which would allow states to require remote sellers to collect and remit sales and use tax on sales to in-state residents even if the retailer has no physical presence in the state.7 Under the MFA, a member state of the Streamlined Sales and Use Tax Agreement (SSUTA) would be able to require the collection of tax beginning 180 days after it publishes notice of its intent to exercise its authority.8 In order for states (such as Colorado) that are not members of the SSUTA to secure collection and remittance authorization, such states would need to adopt and implement several minimum sales tax simplification requirements. A non-member state could begin exercising its authority no earlier than the first day of the calendar quarter that is at least six months after the date of its enactment of legislation adopting the simplification requirements. The MFA would exempt remote sellers with $1 million or less in annual remote sales, and would require that an adopting state provide free software to remote sellers to calculate and file sales and use tax returns. The MFA is currently under consideration in the U.S. House of Representatives, where amendments to the bill appear likely.

Simplification Provisions

Colorado is the first state to enact legislation designed to satisfy the minimum simplification requirements contained in the MFA.

The new law provides the following:

  1. An option for local taxing jurisdictions governed by a home rule charter to elect to participate by passing a local ordinance or resolution;9
  2. For those local taxing jurisdictions that so elect, authority for the Colorado Department of Revenue to be the sole administrator, collector and enforcer of a remote seller's10 sales and use tax requirements, including the establishment of a single form for returns, and audits for remote sales;11
  3. A requirement that remote sellers electronically report and remit payments on a monthly basis to the Department;12
  4. A requirement that the Department provide information regarding taxability of products and services and those products and services that are exempt;13
  5. A requirement that the Department provide a database of taxability by product/service and sales tax rates, along with a database of local taxing jurisdiction boundaries to remote sellers;14
  6. A requirement that the Department provide remote sellers and certified software providers with a 90-day notice of any tax rate change;15
  7. A requirement that the Department provide free software for calculating and filing sales tax returns as well as any necessary updates;16
  8. "Hold harmless" provisions to remote sellers and other retailers for penalties and interest related to software errors;17 and
  9. An exemption for sales tax collection on direct mail advertising, candy, soft drinks, non-essential articles and non-essential containers or bags.18

The legislation also adopts the MFA's sourcing provisions for remote sales.19 These sourcing provisions are added to the definition of "retail sale."20

Under existing law, to cover its expenses in collecting and remitting tax, a vendor is allowed to retain 2.22 percent of all sales tax reported on any return made on or after July 1, 2011, but prior to July 1, 2014.21 The legislation increases the vendor allowance to 3 1/3 percent (although for 12 months beginning on the first day of the third month following the MFA's effective date the allowance is reduced by 0.105 percent).22 However, the vendor allowance is paid over to the certified software provider with respect to sales tax collected by users of the "free" software.23

Commentary

The estimated lost sales and use tax revenue from Internet sales for all states was approximately $11.4 billion in 2012.24 Based on these estimates, cash-strapped states are searching for avenues to collect these lost revenues. Now that the U.S. Senate has passed the MFA, proponents of the MFA place their hopes with the U.S. House of Representatives, which as noted above, may substantively change the contents of the bill.

Note that the Colorado legislation adopts the simplification provisions contained in the version of the MFA that was passed by the U.S. Senate in early May 2013. Presumably, if the enacted version of the MFA contains different simplification requirements, the Colorado law will need to be revised accordingly. Most likely, the Colorado General Assembly decided to approve this legislation prior to the final enactment of the MFA because the General Assembly was scheduled to adjourn on May 8, 2013. Otherwise, if the MFA is enacted later this year, the Colorado General Assembly would need to schedule a special session or wait until next year to enact legislation to conform to the final version of the MFA.

Champions of the MFA and the Colorado legislation argue the necessity of the tax bills to "level the playing field" between remote sellers and the traditional brick-and-mortar retailers. Remote sellers who are not required to collect sales tax are able to offer consumers a lower overall transaction price on online purchases. In addition to being able to omit sales tax, remote sellers currently enjoy lower administrative costs than in-state retailers who are forced to comply with both the state and home rule city sales and use tax requirements.

Opponents of the MFA contend the legislation would place too high of an administrative burden on Internet retailers. Notwithstanding the U.S. Supreme Court's ruling in Quill, with over 9,600 jurisdictions that impose sales tax requirements nationally and no uniformity in tax base or tax rates, many businesses believe that the collection requirement would still be too burdensome even if the MFA were enacted. Others feel that states compete to attract businesses and customers through lower tax rates and that under an MFA regime, this free market competition will be eliminated.

It should be noted that Colorado does not have the explicit authority to collect tax from remote sellers until the MFA is enacted by Congress.As noted above, states currently are not allowed to impose a sales tax collection requirement on remote sellers that do not have nexus with the state. Also, the U.S. District Court permanently enjoined Colorado's notice and reporting requirements for remote sellers because they violated the Constitution.25

The MFA provides states with a potential opportunity to collect a significant portion of lost use tax revenue from online purchases. But in comparison to other states, Colorado is uniquely ill-positioned to qualify for participation in the MFA due to the fact that approximately 70 local jurisdictions, including all major metropolitan areas, enjoy significant sovereignty over tax matters. Sales and use tax at the local level in Colorado is administered with complete autonomy and with no effective synchronization with the state. This often results in significant deviations from the state sales and use tax, including the governing law and regulations, administration, and the appeal forum and process. As a result, sales and use tax compliance within Colorado is a complex undertaking, particularly when compared to other states.

Provided that the MFA is enacted, the Colorado legislation potentially offers a light at the end of the tunnel for many businesses. Colorado differs from most states because of its state/home rule tax dichotomy.26 Businesses can expect different sales tax rates depending on the home rule city, but varying from the state determination of what is or is not taxable can lead to unexpected surprises. The legislation not only provides a single point of contact but also a uniform tax base definition.

The monumental task of implementing the measures of the law lay ahead. In order to collect sales tax from remote sellers, these home rule jurisdictions must give up their autonomy and allow the Department to administer and collect on their behalf. At this point, however, it is uncertain whether local jurisdictions will pass ordinances or resolutions conveying their sales tax authority to the state.

Other Concerns

The MFA provides a small seller exemption for remote sellers. As required, the Colorado legislation adopts this provision exempting remote sellers with $1 million or less in nationwide remote sales from the sales tax collection requirements in states where they do not have a physical presence.27 The annual revenue calculation is an aggregate amount from all states. This requirement could result in small businesses exclusively engaging in online sales having to file in several states with relatively small sales in each state. Opponents of the MFA worry that the administrative costs to these businesses will negate the benefit.

Finally, there is a bit of irony built into the Colorado legislation and the MFA. If online retailers continue to remain "remote sellers" with respect to Colorado, they would be required to file only a single tax return each month. In contrast, companies with nexus would still be required to separately register and file tax returns with Colorado and each home rule jurisdiction. For some companies, this means up to 70 tax filings with separate jurisdictions each month. Thus, the Colorado legislation and the MFA may actually serve to discourage remote sellers from developing a nexus-creating presence in Colorado, considering that a seller with Colorado nexus is subject to much more complicated sales tax compliance requirements.

Footnotes

1 H.B. 13-1295, Laws 2013.

2 S. 743, as approved by the U.S. Senate on May 6, 2013. For a detailed discussion of the MFA, see GT SALT Alert: U.S. Senate Approves Marketplace Fairness Act that Would Allow States to Impose Sales Tax Collection Requirements on Remote Sellers.

3 H.B. 13-1295, § 16.

4 Quill v. North Dakota, 504 U.S. 298 (1992). See FYI Sales 5, Colorado Department of Revenue, April 2013.

5 COLO. REV. STAT. § 39-21-112(3.5).

6 Direct Marketing Association v. Huber, U.S. District Court, D. Colorado, No. 10-cv-01546-REB-CBS, March 30, 2012; appealed to 10th Cir., No. 12-1175.

7 S. 743, as passed by the U.S. Senate on May 6, 2013.

8 A member state could not exercise its authority under the MFA earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the MFA.

9 H.B. 13-1295, § 1(b). A "local taxing jurisdiction" is a city, town, municipality, county, special district or authority authorized to levy a sales tax, and any municipality governed by a home rule charter that passes an ordinance, resolution or charter provision accepting the state's administration and distribution of its local sales tax on remote sales that is collected and remitted by remote sellers in conformance with the provisions of this legislation. COLO. REV. STAT. § 39-26-102(5.7). In light of the significance of home rule issues in Colorado, it is uncertain to what extent local taxing jurisdictions will surrender their sales tax authority.

10 A "remote seller" is a person who makes a remote sale, but does not include a small seller as defined under federal law. A "remote sale" means a sale into the state in which the retailer would not legally be required to pay, collect or remit state or local sales taxes unless provided by an act of Congress. COLO. REV. STAT. § 39-26-102(7.6), (7.7).

11 COLO. REV. STAT. § 39-26-122.7(2)(a). Note that the Department and local taxing jurisdictions are directed to develop a "central audit bureau" and share in the costs and the staffing of the bureau. The central audit bureau will be the sole entity within the state responsible for auditing remote sellers. COLO. REV. STAT. § 39-26-122.7(2)(b).

12 COLO. REV. STAT. § 39-26-122.7(1).

13 COLO. REV. STAT. § 39-26-105.3(7).

14 Id.

15 Id.

16 COLO. REV. STAT. § 39-26-105.3(8).

17 COLO. REV. STAT. § 39-26-105.3(9).

18 COLO. REV. STAT. § 39-26-104(2)(e).

19 COLO. REV. STAT. § 39-26-102(9).

20 Id.

21 COLO. REV. STAT. § 39-26-105(1)(g)(I)(A). This is commonly called a service fee or vendor's fee. Note that some local jurisdictions allow a larger service fee. See Colorado Sales/Use Tax Rates, Publication DR 1002, Colorado Department of Revenue, Feb. 26, 2013.

22 COLO. REV. STAT. § 39-26-105(1)(c)(II)(A), (B), (g)(I)(B).

23 COLO. REV. STAT. § 39-26-105.3(8)(b)(III).

24 Steven Maguire, State Taxation of Internet Transactions, Congressional Research Service Report for Congress, May 7, 2013.

25 Direct Marketing Association v. Huber, U.S. District Court, D. Colorado, No. 10-cv-01546-REBCBS, March 30, 2012. This case, renamed Direct Marketing Association v. Brohl, has been appealed to the 10th Circuit of Appeals, No. 12-1175, and was argued on November 7, 2012, but the decision has not yet been released.

26 COLO. REV. STAT. § 30-35-103; Colorado Sales/Use Tax Rates, Publication DR 1002, Colorado Department of Revenue, Feb. 26, 2013.

27 COLO. REV. STAT. § 39-26-102(7.7). The definition of "remote seller" does not include a small seller as defined under federal law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions