On June 6, Colorado Governor John Hickenlooper signed into law the "Marketplace Fairness and Small Business Protection Act" which includes a rebuttable presumption of sales and use tax nexus for remote retailers and codifies controlled business group and other activities creating nexus.1 The provisions are effective July 1, 2014.

Remote Retailers

The legislation expands the definition of "doing business" in Colorado for sales and use tax purposes.2 Specifically, remote sellers with Colorado sales3 and companies maintaining a distribution facility, storage place, or other similar place of business (including the employment of a resident of Colorado who works from a home office)4 are considered to be "doing business" in Colorado and are responsible for collecting Colorado sales and use tax.

Other Nexus-Creating Activities

The legislation also clearly lists other activities which presumably create nexus. An entity is presumed to be doing business in Colorado if: (i) the entity is part of a controlled group of corporations,5 and that controlled group has a component member with a physical presence in Colorado;6 or (ii) the entity enters into an agreement or arrangement with a person who has a physical presence in Colorado to perform certain activities on its behalf.7 Component members acting in the capacity of common carriers are excluded from this rebuttable nexus presumption.8

Specifically, the following activities will create nexus for an entity with no physical presence in Colorado if engaged in by a component member or by a person with Colorado nexus with whom an agreement exists:

  • Selling under the same or a similar business name tangible personal property or taxable services similar to that sold by the entity in question;9
  • Maintaining an office, distribution facility, salesroom, warehouse, storage place, or other similar place of business in Colorado to facilitate the delivery of tangible personal property or taxable services sold by the entity in question to that entity's Colorado customers;10
  • Delivering, installing, or assembling tangible personal property in Colorado or performing maintenance or repair services on tangible personal property in Colorado, which was sold to Colorado customers by the entity in question;11 or
  • Facilitating the delivery of tangible personal property to Colorado customers of the entity in question by allowing the customers to pick up tangible personal property sold by that entity at an office, distribution facility, salesroom, warehouse, storage place, or other similar place of business in Colorado.12

Additionally, physical presence is presumed when a component member uses trademarks, service marks, or tradenames in Colorado which are the same or similar to those used by the entity against whom the presumption is asserted.13

The presumption of nexus may be rebutted by proof that, during the calendar year in question, the person with physical presence in Colorado did not engage in any activities in Colorado that are sufficient to establish nexus for the entity in question under U.S. Constitutional standards.14 With respect to the presumption of nexus arising from an agreement or arrangement with a person with physical presence in Colorado, such presumption is inapplicable to the following types of transactions:

  • Agreements for advertising to be delivered in Colorado via television, radio, newspapers, magazines, the Internet, or any other mass-market medium that are purchased by a person without direct in-state physical presence;15
  • Affiliate marketing agreements between a person without direct in-state physical presence and a Colorado independent contractor or other representative, where the Colorado business refers potential customers through Internet promotional methods for a cost per action (i.e. commission) to the person without direct instate physical presence;16 and
  • Remote businesses with less than $50,000 of annual gross receipts to Colorado customers in the prior calendar year.17

Commentary

Enactment of this legislation unequivocally expanding nexus is a noteworthy development in Colorado's continued effort to ensure that all retailers selling tangible personal property or taxable services in the state appropriately collect and remit sales tax. Colorado's earlier attempt to ensure proper collection of these taxes by enacting controversial and expansive notice and reporting requirements18 has to date failed to produce the desired result of increased tax revenue. Specifically, the original legislation required remote retailers to clearly indicate to Colorado purchasers the incidence of use tax due, as well as provide an annual purchase summary and customer information report to Colorado. Following protracted litigation in the federal and state courts, the Denver District Court recently granted a preliminary injunction19 against enforcement of the reporting provisions, providing at least a temporary reprieve to non-collecting retailers.

Enactment of this new measure puts the ball squarely back in the remote retailers' court. Whether big-box remote retailers with the available resources to rebut the new nexus presumption will register to collect and remit sales and use tax to Colorado remains to be seen. Some opponents of the bill expressed concern that remote retailers lacking the resources to rebut the presumption of nexus (i.e., small businesses) would be adversely affected. However, the bill's sponsors clearly expect that the newly enacted nexus provisions will help level the playing field for local retailers by requiring sales tax collection by their remote retailer competitors. It will be interesting to watch whether Colorado's sales tax revenue increases as anticipated due to this legislation. Additionally, the statutory language inviting one to rebut the presumption of physical presence is, in truth, a practical impossibility for most. Remote retailers and component members will have difficulty in producing proof that they are not engaged in the listed activities beyond making representations to that effect.

Footnotes

1 H.B. 14-1269, Laws 2014. The bill is so named for the similar proposed federal legislation (Marketplace Fairness Act of 2013, S. 743, H.R 684) purportedly aimed at leveling the playing field between small, local retailers currently collecting sales tax and large, online retailers currently eluding sales tax collection on remote sales in jurisdictions in which they lack nexus.

2 COLO. REV. STAT. § 39-26-102(3).

3 COLO. REV. STAT. § 39-26-102(3)(c).

4 COLO. REV. STAT. § 39-26-102(3)(a).

5 COLO. REV. STAT. § 39-26-102(3)(d)(II). "Controlled group" and "component member" are defined as in the Internal Revenue Code of 1986, as amended, § 1563(a) and (b). The terms also include any entity, regardless of corporate form, that would meet these definition based on ownership relationship alone.

6 COLO. REV. STAT. § 39-26-102(3)(d).

7 COLO. REV. STAT. § 39-26-102(3)(e).

8 COLO. REV. STAT. § 39-26-102(3)(d)(I).

9 COLO. REV. STAT. § 39-26-102(3)(d)(I)(A), (e)(I)(A).

10 COLO. REV. STAT. § 39-26-102(3)(d)(I)(B), (e)(I)(B).

11 COLO. REV. STAT. § 39-26-102(3)(d)(I)(D), (e)(I)(C).

12 COLO. REV. STAT. § 39-26-102(3)(d)(I)(E), (e)(I)(D).

13 COLO. REV. STAT. § 39-26-102(3)(d)(I)(C).

14 COLO. REV. STAT. § 39-26-102(3)(d)(III), (e)(II).

15 COLO. REV. STAT. § 39-26-102(3)(e)(III)(A).

16 COLO. REV. STAT. § 39-26-102(3)(e)(III)(B).

17 COLO. REV. STAT. § 39-26-102(3)(e)(III)(C).

18 H.B. 10-1193, Laws 2010, which is now codified at COLO. REV. STAT. § 39-21-112(3.5).

19 Direct Marketing Association v. Department of Revenue, District Court, City and County of Denver, No. 13CV34855, Feb. 18, 2014 (Order Granting Motion for Preliminary Injunction). For further discussion of this case, see GT SALT Alert: State Court Grants Injunction Against Colorado's Sales and Use Tax Notice and Reporting Requirements .

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