Colorado is already testing the limits of the Wayfair decision

October 22, 2018
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Ski season has begun here in Colorado. We know that not only because Wolf Creek opened last week, but also because the Colorado Department of Revenue (DOR) appears to be out over their skis when it comes to interpreting the Wayfair Supreme Court case on sales and use tax regulations.

The DOR sent out a press release as well as a letter to existing permittees to announce the emergency rule change related to economic nexus requirements for out-of-state sellers. This is confusing to most businesses that sell into Colorado, so we put together a Frequently Asked Questions format here to help you understand.

FAQ:

What is the change?
What is the difference between sales and use tax permits?
Do I need to start collecting local taxes now?
Is this change constitutional?
What should I do?
If I want to register for sales tax, what’s the process?
Which other states have economic nexus requirements for wineries?
Will eCompli be updated to support these changes?

What is the change?

Prior to the September 11 press release, wineries (and any business) that sold over $100,000 or 200 or more transactions into Colorado had two different options. The first option was to not register for taxes but to comply with a series of onerous reporting requirements. The alternative, for those that did not wish to deal with the reporting requirements, was to register for a Retailer’s Use tax permit and collect and remit state taxes on behalf of customers.
The new system still provides an exception for those selling less than the $100,000 and 200 transaction threshold, but takes away the two options above for those that meet the threshold. Instead, DOR is now requiring out-of-state sellers that exceed the threshold to register for a Sales Tax license prior to December 1st, 2018.

What is the difference between sales and use tax permits?

There are small differences in the fees and registration process for Sales Tax compared to Retailer’s Use Tax permits. For example, whereas the Retailer’s Use permit did not carry any registration costs, the Sales Tax permit requires a $50 deposit and $16 renewal fee.
The big difference, however, is that Retailer’s Use Tax permits require remittance of only the base state amount and the special district taxes in Colorado. Although the DOR is not providing perfectly clear guidance on this topic (see below), Sales Tax permits include a requirement to also pay the “state-collected” local jurisdiction taxes.

Do I need to start collecting local taxes now?

Colorado has a crazy system known as Home Rule where every jurisdiction (city or county) has the option to either collect sales taxes themselves (“home rule”) or have the state collect on their behalf (“state-collected”). Although it is slightly unclear at this point whether DOR will require local taxes for out-of-state sellers with no physical presence, they are asking you to register to pay taxes to the “non-physical”, state-collected jurisdictions to which you are shipping. It’s also unclear whether any home-rule jurisdictions will attempt to require sales tax registration from out-of-state sellers. To get a sense of the insanity of the Home Rule system in Colorado, take a glimpse at DOR’s Sales/Use Tax Rates sheet.

Is this change constitutional?

Possibly not. According to the Tax Foundation, Colorado is one of two (also Louisiana) states that are entirely not ready to implement economic nexus requirements that are compliant with the Wayfair ruling. The Tax Foundation shows Colorado as “bloodred” on their Wayfair tracking map because of the complexity of the Home Rule system, taxability rules and cumbersome filing process.
We’ve heard that a legal challenge against the new rules has already been filed, but haven’t been able to independently confirm that. It seems very likely that a challenge will emerge in Colorado as the first real test of the limits of the Wayfair decision.

What should I do?

Because of the complexity and lack of clarity with the situation in Colorado, we recommend you consult with a sales tax attorney prior to taking any action if you are over the threshold or currently hold a Retailer’s Use Tax permit.
If you’re under the threshold, you fall under the exception for “de minimis” sellers and therefore are not required to register. Technically, if you’re under the threshold you should either follow the notice and reporting requirements or register for Retailer’s Use Tax. However, under the rules no penalties will apply for those under the threshold that choose not to follow the reporting requirements.
We will monitor the developments here and keep our clients up to date on any further changes. The DOR is telling everyone to not wait until the last minute to register for sales tax, but they also are not making the online system available until November 1st. Hopefully we get more clarity prior to that time.

If I want to register for sales tax, what’s the process?

The DOR provides decent instructions on a web page they created specifically for this issue. If you already have a Retailer’s Use Tax permit, they provide instructions for closing your Retailer’s Use account and adding a Sales Tax account using their Revenue Online system. If you do not have a Retailer’s Use permit, you have to first create a Revenue Online logon before adding the Sales Tax account.

Which other states have economic nexus requirements for wineries?

Although you can see on the Tax Foundation map that a majority of states are in the process of implementing economic nexus laws, wineries are in a unique position because they are already required to register for sales taxes in most states to which they can ship. Minnesota, Colorado, and Iowa are three of the states where wineries were not otherwise required to pay sales tax but will now require some wineries to register because of economic nexus implementations. We detailed those changes for Minnesota and Iowa here.

Will eCompli be updated to support these changes?

Yes. We’re monitoring the developments closely and are prepared to support our clients with the changes in Colorado (as well as Minnesota and Iowa). We will be prepared to help any clients that want to register for Sales Tax in Colorado. Please contact us whenever you’re ready to register. We will also have the sales tax return available for filing in eCompli and will support collection of state, special district and state-collected local jurisdictions in your eCommerce, Point of Sale, or Wine Club management system if you are registered for sales tax effective December 1st through our new sales tax feed.


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