The Colorado Department of Revenue (Department) has adopted emergency rules,¹ effective December 1, 2018, that will require out-of-state retailers to collect sales and use tax for the state and all applicable state-collected localities if the out-of-state retailer has more than $100,000 of gross sales or engages in 200 or more transactions in the previous or current calendar year in the state. In addition, the emergency rules change Colorado's long-standing requirements for when both in-state and out-of-state retailers must collect state-collected local taxes. Under the emergency rules, retailers will now be required to collect all state-collected local taxes when the vendor has physical or economic presence in the state.

Until enactment of these emergency rules, the Department has historically taken the position that a vendor is only required to collect the state-collected local sales tax for the jurisdictions where the vendor has a "business presence" (e.g., a retail store, warehouse) in the local jurisdiction. This position was premised on the previous sourcing rules and the lack of a fully complementing use tax for most state-collected local taxing jurisdictions. Even before Wayfair,² the Department was evaluating options for changing the sourcing rules to take the position that any physical presence in the state would trigger a sales tax collection obligation for all state-collected local taxes. The Department's adoption of the sourcing-rule changes, in conjunction with the adoption of the economic-nexus rules, means that the new requirements will apply to both in-state and out-of-state sellers.

To complicate matters, a number of Colorado home-rule cities impose their own local sales and use taxes. For these home rule cities, nexus will continue to be determined based on the physical presence standard set forth in the Quill³ decision, which was explicitly overturned by Wayfair. A number of these home rule cities, however, are currently evaluating options for adopting economic nexus provisions. The Department and localities' will continue with their on-going efforts to coordinate the nexus policies of the home-rule cities in order to create a more uniform system. Some home-rule cities have contemplated implementing lower sales thresholds than those set forth in the South Dakota law at issue in the Wayfair case, and recently adopted by a number of states. Some have argued that the Wayfair decision only applies at the state level and not to home-rule cities. Regardless, much uncertainty exists as to how Colorado's home-rule cities might adopt economic nexus without concessions to simplify the system.

Implications

The emergency regulations adopted by the Department in September 2018 leave a number of issues unaddressed, including the proper classification of taxes (i.e., sales tax or use tax) when the retailer does not have a business presence. These issues should be settled during permanent rule-making meetings to be held in late October.

Furthermore, the Department has begun sending out notices to existing sales tax registrants about the new sales tax nexus rules but has not otherwise not publicized these new requirements. The shift in the sourcing rules, which essentially makes all Colorado transactions subject to sales tax, means that the majority of transactions will now require local tax collection as well. This change will heavily affect virtually every business selling to Colorado customers, including those that collect retailer's use tax. As a result, every business should review and/or reconfigure its internal sales and use tax compliance systems to be comply with these new Colorado rules.

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ENDNOTES

¹ Emergency Rules 39-26-102(1.3), 39-26-102.3, 39-26-102(9), 39-26-103.5, 39-26-104(1)(b)(I), 39-26-105, 39-26-105(1)(A), 39-26-204(2), and 39-26-704(2).

² South Dakota v. Wayfair, No. 17-494 (U.S. S.Ct. June 21, 2018).

³ Quill Corp. v. North Dakota, 504 U.S. 298 (1992).