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On May 23, 2019, Colorado Governor Jared Polis signed House Bill 19-1240, which makes significant changes to the state's sales and use tax laws. Specifically, the new law expands sales and use tax nexus standards for the state and state-collected localities, dramatically remodels local sales and use tax sourcing and compliance requirements, and imposes sales tax collection requirements on marketplace facilitators.

Colorado state and local sales and use tax background

Under Colorado law, local taxes are either state-collected or self-collected. Self-collected municipalities are commonly referred to as "home rule" cities or towns because all self-collected municipalities have "home rule" status with the state. Some home rule municipalities, however, have opted into state-collection (e.g., Alamosa, Burlington).

The 70 self-collected home rule municipalities operate essentially as states-within-a-state, with each being responsible for enactment of its own tax code, administration, compliance, and audits. As a result, the tax base often differs among the state, the state-collected municipalities, and the home rule municipalities. Colorado's larger and more prominent cities (such as Denver, Colorado Springs, Fort Collins, Boulder and Aurora) are self-collected home rule jurisdictions, while the state's smaller municipalities tend to be state-collected jurisdictions.

State-collected jurisdictions (i.e., those that either do not have home rule status or have opted into state-collection) must follow the state tax laws with a few local options for adjustments to their tax base (i.e., several impose tax on food for home consumption, which might be exempt for state and other state-collected tax purposes).

For all state-collected municipalities, counties and most districts,¹ the general sales tax is state-collected, but the localities may not impose a general use tax, except on motor vehicles and/or building materials. When a vendor does not charge sales tax, the customer must remit use tax on the purchase price of the building materials or motor vehicle directly to the municipality or county.

HB 19-1240 alters this approach for the state-collected localities by making taxable numerous transactions that previously were untaxed (because they were only subject to use tax rather than sales tax). These changes only apply to state-collected taxes and do not affect self-collected home rule municipalities.

Economic nexus

HB 19-1240 rewrote C.R.S. Section 39-26-102(3)(c) to incorporate an economic threshold that a business must exceed to be subject to the state's sales tax collection requirements. Under the new law, businesses with gross retail sales greater than $100,000 in either the previous calendar year or within 90 days of exceeding $100,000 in current calendar year, must collect the state's sales tax. This requirement became effective on June 1, 2019.

Vendors not currently collecting Colorado state or local sales tax should review their sales activity for the past year (and for the current year) for each legal entity that has made any sales to Colorado customers to determine if economic nexus has been established under the new law. Also, vendors that currently hold only a Retailer's Use Tax account should determine whether they now meet the new economic nexus threshold and therefore will need to convert their account to a Retail Sales Tax account.

Full destination sourcing

HB 19-1240 also added subsection (3) to C.R.S. Section 39-26-104, which provides new sourcing rules that became effective June 1, 2019. Before HB 19-1240, vendors were only required to collect state-collected local taxes if they had a physical place of business, such as a store, within the locality. The language of subsection (3) changes this collection requirement and now requires collection of state-collected local taxes if tangible personal property is delivered to an address in the state-collected municipality.

Combined with the economic nexus provisions of the new law, the changes to the sourcing rules essentially mean that any vendor with nexus anywhere in Colorado, due to either having a physical presence or economic nexus in the state, must now collect all state-collected local taxes. This change results in a substantial increase in the number of local Colorado jurisdictions for which a vendor selling in to Colorado must collect.

Compounding this compliance burden is the fact that Colorado's return system requires a unique location ID (branches) for each unique combination of local tax (more than 600 potential branches exist) and each branch requires its own tax return. Thus, a vendor shipping goods all over Colorado will have hundreds of returns to file each month, not including the self-collected jurisdictions.

Colorado provides some relief through various e-filing options. In one instance, taxpayers can use an approved tax software vendor whose program can generate a bulk filing .xml file. If a taxpayer does not use one of the approved vendors, it can use a spreadsheet provided by the Colorado Department of Revenue (CO DOR) to a similar effect. Doing so, however, will require more manual input. In either case, the .xml or spreadsheet must be approved by CO DOR before filing the return.

Based on this new provision, all vendors with physical presence or economic nexus need to review their tax collection systems and processes to ensure all state-collected local taxes are being properly collected. Furthermore, vendors need to review their Colorado Revenue Online account to create any necessary branches in order to remit local taxes. Branch creation has been simplified in the Revenue Online system, but vendors should still allow adequate time to map current compliance reports to the branches.

Marketplace facilitators

HB 19-1240 also rewrote subsections (5.8) and (6) and added subsection (5.9) of C.R.S. Section 39-26-102 by adding new defined terms relating to "marketplace facilitators" and establishing a collection requirement for marketplace facilitators. Under these new provisions:

• A "marketplace" is defined as a physical or electronic forum where goods or services are sold.
• A "marketplace facilitator" is defined as a person or business engaging directly or indirectly between a marketplace seller and end-user.
• A "marketplace seller" is defined to be a person or business with an agreement with a facilitator to sell goods/services through its marketplace.

Marketplace facilitators are responsible for collecting and remitting Colorado sales tax, beginning on October 1, 2019.

Companies need to review their sales channels and revenue streams to determine if any of their activities qualify as "marketplace facilitator" or "marketplace seller" activities. Marketplace facilitators will need to register for a Retail Sales Tax account and establish all necessary branches for filing, while marketplace sellers will need to determine if they have nexus in any self-collected home rule municipalities. If so, the marketplace seller likely has a collection obligation separate from the marketplace facilitator and the marketplace seller's tax collection and remission may need to be handled independently of the marketplace facilitator.

Implications

The sales and use tax landscape, from a state-collected tax perspective, has been markedly altered in Colorado by enactment of this law. Vendors already collecting and remitting Colorado sales or use taxes now must collect in many more jurisdictions, while vendors that have not been collecting because they lacked physical nexus are likely now required to collect state-administered local taxes as well. As a result, vendors selling to customers in Colorado will need to quickly review their internal compliance systems and make all necessary changes as soon as possible.

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ENDNOTES

¹ The Regional Transportation District (RTD), certain regional transportation authorities and the Scientific and Cultural Facilities District (CD) all impose a general use tax.