Several important developments in Colorado tax law have already occurred in 2010. From new information-reporting requirements to the loss of deductions and exemptions, these changes have wide-reaching implications for both Colorado businesses and out-of-state businesses making sales to customers in the state.

Extensive Information-Reporting Requirements Imposed on Out-Of State Retailers

Arguably the most far-reaching of the Colorado tax developments this year has been the enactment of the so-called "Amazon law." In recent years, many states have grappled with how to combat the shrinking sales-tax revenues that have resulted from the growth and prominence of Internet retailers who do not collect tax on sales made to customers in their states. The most well-known of these Internet retailers has historically been Amazon.com, which makes significant sales around the country but collects and remits sales tax in only a handful of states.

Colorado "Amazon Law" Different Than Other States' Nexus-Based Approaches

Amazon.com and similar Internet retailers have claimed protection from state taxation based upon a 1992 Supreme Court decision that prohibited states from collecting sales or use tax from businesses that do not have a physical presence in their state. Recently, however, states have begun considering (and enacting) aggressive nexus statutes that attempt to impose tax-collection duties on those out-of-state retailers based upon their relationships with in-state affiliates. Those statutes are generally referred to as "Amazon laws" because the deliberation surrounding their enactment is primarily directed at, and their impact is presumed to fall most heavily on, Amazon.com. Colorado's "Amazon law," which became effective on March 1, is different than other states' nexus-based approaches and may actually be more burdensome on out-of-state retailers.

Colorado's Amazon law stops short of imposing a duty on out-of-state retailers to collect Colorado tax. Unfortunately, however, the law subjects such retailers to extensive information-reporting requirements. Under the new law, retailers who do not collect Colorado sales tax are required to notify their Colorado purchasers that sales or use tax is due on their purchases and that the State of Colorado requires the purchaser to file a sales or use tax return to report and pay the tax. There is no de minimis exception to this new law, and the failure to provide the required notice is punishable by a $5 penalty for each such failure (unless reasonable cause is shown). The Colorado Department of Revenue has issued emergency regulations that provide the substance of the required notice.

Law Imposes Reporting Requirements on Retailers Who Do Not Collect Sales or Use Tax

Perhaps the most controversial aspect of the new law is the annual information-reporting requirement that it imposes on retailers who do not collect sales or use tax. Under the new law, such retailers are required to send their purchasers an annual notification by January 31 showing, if available, (1) the dates of the customer's purchases, (2) the amounts of each purchase, and (3) the category of the purchase, including (if known by the retailer) whether the purchase is exempt or not exempt from taxation. The notification must also state that the State of Colorado requires a sales or use tax return to be filed and sales or use tax to be paid on certain purchases from the retailer. The Department of Revenue may require other information to be shown in the notification by administrative regulations.

In what can only be described as an additional punitive measure, the new law also requires that the annual notifications be sent to customers by first-class mail and prohibits retailers from including them with any other shipments. In addition, the exterior of the mailing must include the words "Important Tax Document Enclosed." The retailer must also file an annual statement for each purchaser with the Department of Revenue on or before March 1 of each year. The failure to provide either the annual statements to purchasers or the Department of Revenue will subject the retailer to penalties of $10 for each failure, unless the retailer shows reasonable cause for such failure.

As indicated above, the extensive reporting requirements imposed under this new law may be more onerous on out-of-state retailers than collecting sales tax from their Colorado purchasers. In fact, the new provisions appear to be structured in just that way in order to "encourage" out-of-state retailers to voluntarily collect the Colorado tax. Affected companies need to carefully review these new requirements to insure compliance and to determine how to respond.

It is anticipated that this new law will be challenged in court on constitutional grounds. Other states will likely pay close attention to the status of such challenges as this unique approach to shoring up an eroding tax base unfolds.

New Statute Creates Nexus Presumption for Certain Retailers

In the same bill as the Amazon law discussed above, Colorado enacted a new statute that creates a presumption of nexus for certain retailers who do not collect sales tax in the state. Under this new law, commencing March 1, any retailer that does not collect Colorado sales tax and that is part of a controlled group of corporations that has a component member that acts as a retailer in the state will be presumed to be doing business in the state. That presumption may be rebutted by proof that the component member that is a retailer with a physical presence in Colorado did not engage in any "constitutionally significant solicitation" in Colorado on behalf of the retailer that does not collect Colorado sales tax.

This provision is aimed at corporations or corporate groups that attempt to shield certain activities from state taxation by isolating those activities in separate chains of subsidiaries. This provision is closer to the nexus-based Amazon laws discussed above, but is more limited in scope. Corporate groups that have created corporate structures to minimize their state-tax exposure will want to carefully review their activities and the impact of this new presumption.

Limitation Imposed on Corporate Net Operating Loss Deduction

Colorado has also enacted a temporary limitation on the ability of corporations to deduct net operating losses (NOLs). Generally, Colorado follows the federal treatment of NOLs. However, under the new law, the NOL deduction will be limited to $250,000 a year for years beginning on or after January 1, 2011, but prior to January 1, 2014.

NOLs that are prohibited under this new rule may be carried forward for an additional year. In addition, an affected corporation's NOLs are increased by an amount equal to 3.25 percent of the prohibited NOLs for the period during which such NOLs were prohibited. Despite this additional NOL allowance, the new law may have a short-term negative impact on corporations with Colorado-source NOLs.

Software Sales Tax Limitation Repealed

The Colorado Legislature has repealed an administrative regulation that previously limited the sales tax on software to software that was sold on a tangible medium. Under the prior regulation, software that was delivered electronically (i.e., through an application service provider, delivered by electronic software delivery, or transferred by load and leave software delivery) was exempt from Colorado sales and use tax. Under the new law, which became effective March 1, the method of delivery no longer has an impact on the applicability of the tax. Colorado businesses selling software in the state need to review their sales-tax collection procedures to account for this change.

Sales Tax Exemptions Repealed in Other Areas

In addition to the tax provisions discussed above, Colorado also repealed several sales tax exemptions earlier this year. These include the sales tax exemptions for:

  • Direct-mail advertising materials
  • Energy used in manufacturing
  • Candy and soft drinks
  • Food wrappers and condiments
  • Agricultural inputs

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