Companies Should Prepare for Increased Use Tax Reporting Requirements

On July 1, 2017, Colorado will enforce use tax reporting requirements for purchasers and remote sellers. Companies should be prepared for increased reporting requirements that could have far-reaching consequences. 

The US Supreme Court’s denial to weigh in on Colorado reporting issues has led states to become more aggressive by imposing enhanced reporting obligations similar to those in Colorado as well as economic nexus for sales tax. In response, a national solution, again, was recently proposed in April 2017 that would replace the mishmash of laws at the state level and define sales and use tax collection and reporting requirements for remote sellers and purchasers.

New Colorado Reporting Requirement

Effective July 1, 2017, an unregistered out-of-state business that sells tangible personal property to Colorado customers—but isn’t required to collect and remit retail sales tax—will be required to report specific information to customers and the Colorado Department of Revenue (DOR).

Each out-of-state retailer that isn’t required to collect Colorado sales tax must:

  • Notify Colorado customers they’re obligated to self-remit use tax to the Colorado DOR. Notifications must begin July 1, 2017.
  • Send an annual summary to each Colorado customer who spends more than $500 with the retailer. It should include details of the purchases, a statement that the customer should self-remit use tax, and a statement that notifies the customer that the retailer is obligated to report the customer’s name and purchase information to the Colorado DOR. The first customer annual summary should be provided to customers by January 31, 2018.
  • Provide an annual report to the Colorado DOR detailing customer names and total amount of purchases from the retailer. This requirement is limited to retailers that aren’t required to collect sales tax and have $100,000 or more in gross sales revenue from Colorado customers. The first Colorado DOR annual report is due by March 1, 2018.

Out-of-state retailers that don’t comply with the reporting requirements could potentially be subject to multiple penalties:

  • $5 for each failure to notify the customer
  • $10 for each failure to notify the Colorado DOR
  • $10 for every customer excluded from the report filed with the Colorado DOR

Penalties for the customer notification requirement won’t be imposed prior to July 1, 2017. 

A Contentious Law

In 2010, Colorado passed a law making it easier for the state to collect use taxes on internet purchases from out-of-state vendors lacking physical presence in the state. The law was originally introduced with the intent to require online retailers to collect Colorado sales tax if the retailer had affiliates in Colorado. However, large online retailers objected to the original bill language. 

Enforcement of the law was also delayed when the Direct Marketing Association (DMA) sued the Colorado DOR on behalf of out-of-state remote sellers on August 13, 2010, based on the argument that the notice and the reporting requirements were unconstitutional.  Due to questions of law regarding the tax injunction act and appropriate venue to hear this case, the case bounced between courts on the state and federal levels.

The Colorado DOR and the DMA entered into a settlement agreement delaying enforcement of the reporting requirements until July 1, 2017. A bill was introduced into the Colorado legislature in early 2017 that would have scaled back the provisions of the law; however, that bill failed to get out of committee in May. Therefore, the July 1, 2017, effective date remains in effect.

Background on Court Decisions

The DMA argued in District Court against the DOR that the new notice and reporting requirements violated the US and Colorado constitutions by discriminating against and imposing an undue burden on interstate commerce. On March 30, 2012, the District Court found for the association on those two issues and permanently stopped the notice and reporting requirements.

The 10th Circuit Court of Appeals reversed that decision on the grounds that the District Court lacked jurisdiction over the case because of the Tax Injunction Act. In March 2015, the US Supreme Court ruled that the Tax Injunction Act doesn’t stop the out-of-state retailer, in this case the association, from challenging the law in federal court and sent the case back to the 10th Circuit.

On remand, the 10th Circuit held that the Colorado law doesn’t discriminate against out-of-state sellers and doesn’t unduly burden interstate commerce. The DMA filed a petition on August 29, 2016, for the Supreme Court to hear the case on the notice and reporting issues. Meanwhile, the Department filed a petition on October 3, 2016, for the Supreme Court to hear and reframe the question to address whether the physical presence test in the Quill Corp. v. North Dakota case should be overturned.

US Supreme Court Declined to Review

On December 12, 2016, the US Supreme Court denied both petitions, which leaves the 10th Circuit ruling in effect—that the Colorado law doesn’t discriminate or unduly burden interstate commerce. At the time of the decision, there was still an injunction in the Colorado State Court forbidding enforcement of the new reporting obligations. However, that injunction was lifted as a result of a settlement between DMA and the Colorado DOR on February 22, 2017.

Nationwide Impact

States are beginning to impose economic nexus for sales tax or other enhanced reporting or notification obligations similar to those in Colorado. Alabama, Minnesota (effective July 2019), South Dakota, and Wyoming have already imposed economic nexus that will continue to be challenged in the courts. Read our Insight on Alabama’s standard for sales tax for more details.

In addition, several states including Alabama (effective July 2017), Hawaii, Kentucky, Louisiana (effective July 2017), Oklahoma (effective November 2016), Pennsylvania, South Dakota, Tennessee, Vermont (enacted effective July 2017), Washington, and Wyoming, have passed or introduced proposed legislation that requires similar reporting by remote sellers or challenges the long-standing physical presence nexus standard established in Quill Corp v. North Dakota

Additionally, a Marketplace Fairness Act was introduced in April 2017 at the federal level by four senators. As with prior proposed federal sales and use tax legislation, this bill is intended to impose a national solution to the issue of sales and use tax collection and eliminate the patchwork of laws at the state level that attempt to force sales and use tax collection upon remote sellers.

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