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


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


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.


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.

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