Much has been said about the Supreme Court’s recent decision not to hear a case challenging a 2010 Colorado sales tax law.
The law will require online sellers who sell more than $100,000 in annual sales to buyers in Colorado to inform Colorado buyers of their use tax obligations. (You can read all about the so-called Colorado “Amazon Tax” and what it means for online sellers here.)
Pundits are saying that this is the first step to an internet sales tax. But is it?
Internet Sales Tax? Not so Fast
Technically, this law does not require online sellers with no nexus in Colorado to collect Colorado sales tax. Instead, it requires online sellers to inform Colorado buyers of the buyer’s “use tax” obligations. Consumer use tax is a tax a consumer is supposed to pay on items purchased for use or consumption in a state, but on which they didn’t pay a sales tax.
Educating ordinary online shoppers on the need to pay use tax is difficult, and actually getting them to comply is nearly impossible. With this law, Colorado hopes that by placing the burden on online sellers rather than Colorado consumers they can collect more sales tax revenue for the state’s coffers.
In other words, this law technically imposes a “reporting requirement” on online sellers, and not a “taxing requirement.” Why? Because compelling online sellers with no sales tax nexus in a state would be unconstitutional per the precedent set by Quill v. North Dakota back in 1992.
Of course, Colorado probably hopes that instead of instituting a whole new system of reporting, online retailers making more than $100,000 in annual sales in the state will simply start collecting sales tax instead.
Online Sellers: Why not just collect Colorado sales tax?
Many pundits and others not overly familiar with the issue or exactly how sales tax works contend that it is just as simple for an out-of-state retailer to collect Colorado sales tax as it is for in-state brick and mortar retailers.
What they don’t understand is that brick and mortar retailers only need to collect sales tax at a single rate, while online sellers need to know and collect sales tax at every rate in the state where their buyers are located. Online sellers also need to contend with collecting, reporting and filing sales tax within Home Rule cities, which aren’t governed by the Colorado Department of Revenue’s rules. These are just two of many ways it is much more difficult for remote online sellers to comply in Colorado than it is for Colorado-based companies.
Legislators and others who are currently crowing that this will soon mean a national internet sales tax aren’t taking into account the online sellers who will be tasked with actually collecting and reporting sales tax in the U.S.’s 12,000+ taxing jurisdictions.
People who don’t understand the burden of sales tax on real online sellers are currently legislating it.
Stay tuned here for more updates as internet sales tax continues to unfold. Do you have questions, or something to say about internet sales tax? Start the conversation in the comments.