A federal court has ruled that the state of Colorado will be allowed to require out-of-state sellers to notify Colorado buyers of their use tax liability. What does it all mean for you, as an eCommerce seller?
First, this does not mean that eCommmerce sellers with no sales tax nexus in Colorado are required to begin collecting sales tax from buyers in Colorado.
And this is only indirectly related to the fact that Amazon began collecting sales tax from Colorado residents in February.
It does mean that some eCommerce sellers will be hit with new reporting requirements regarding Colorado customers.
And more importantly, it sets the stage for states to challenge the concept of sales tax nexus as we know it today.
Let’s dig in.
A Quick History Lesson
First off, unless a state has no sales tax, tax is due on the vast majority of purchases of tangible items. When the retailer collects that tax, it’s called sales tax. But when the retailer isn’t obligated to collect sales tax (because they have no sales tax nexus in the state) then the tax is called consumer use tax and the consumer is supposed to pay it on any items they intend to possess and use in the state.
I say supposed to pay use tax because use tax is notoriously difficult to enforce. When’s the last time you, as a consumer, made a note of the fact that you didn’t pay sales tax on an internet purchase and then remitted that amount back to your state? If you answered “never,” then you’re in good company with most of of the population.
But states, as we know, are broke. They want the revenue they would have received from either sales tax collected and remitted by merchants or use tax remitted by consumers who live in the state. After all, sales tax is often seen as a “fair” tax and, as taxes go, it’s more politically popular than a move like raising state income tax. At this point, states are trying strategies both to require retailers to collect more sales tax and to require residents to remit more use tax.
Long story short: States just want the money.
Back in 2010, Colorado came up with a clever way to collect use tax from consumers. They passed HB-10-1193 that, in it’s final form, would require out-of-state retailers who had no legal obligation to collect sales tax in Colorado to notify Colorado buyers that they owed use tax on those purchases. (You might recall that this was the same climate in which the form 1099-K reporting electronic payments from 3rd party providers was introduced. This was an attempt by the federal government to ensure that online sellers were paying income tax.)
But a retailer trade association, the Direct Marketing Association sued the state in the Direct Marketing Association v. Brohl case, citing that this requirement was unconstitutional based on the precedent set by the Supreme Court ruling in the Quill v. North Dakota case. The case made the rounds in court, eventually going before the Supreme Court, who remanded it back to the 10th Circuit Court of appeals for a final decision.
Last week, we found out that the court upheld Colorado’s law. This affects retailers day-to-day but also sets the stage for a much bigger showdown when it comes to internet sales tax.
How This Law Will Affect Your Online Business
The Colorado law applies to any retailer who makes more than $100,000 in annual sales to customers in Colorado and does not charge those customers sales tax.
One of the ways the state got around the constitutionality issue in this law was to state that this is a “reporting” requirement for out-of-state sellers, not a “sales tax” requirement. Think of it as similar to sending a 1099-MISC to contractors and to the IRS.
Under this law, the retailer would be required to notify any Colorado customers to whom they made a sale and did not charge sales tax that that customer is on the hook for Colorado use tax. Should the retailer fail to send this notification to the consumer, the penalty will be $5 per customer.
This notification should be sent to the customer by January 31 of the following year and include the date, amount and category of the purchase and whether or not it’s tax exempt (if known by the retailer).
They retailer is also then required to file the names, addresses of their Colorado customers, along with the same purchase information, to the state of Colorado by March 1.
This law puts a reporting burden on retailers.
One of our accounting partners, Andrew Johnson of Peisner Johnson & Company, LLP, commented that “This decision is troubling on many fronts because it imposes yet another potential cost and burden on out-of-state sellers that they shouldn’t have to bear. But it also points out that states are getting ready to go after individual consumers if they can get their hands on this type of data.”
I suspect that the underlying purpose of this law is to convince retailers to start collecting sales tax from buyers in Colorado and avoid implementing a brand new process of Colorado use tax reporting. This could be one reason why Amazon.com began collecting sales tax from Colorado buyers on February 1, 2016 – they would rather charge sales tax than face another mandatory reporting requirement. You’ll notice that Amazon similarly started collecting sales tax from South Carolina buyers – another state that requires large retailers to report use tax due.
The Bigger Picture
The bigger picture is that states want tax revenue and they are willing to go to great lengths to get it.
Our stance at TaxJar regarding any type of internet sales tax – if it should exist at all – should be fair and not place an undue burden on eCommerce sellers. After all, if an internet sales tax begins financially stress online companies, they go out of business, the economy slows and states don’t get the revenue they were trying so hard to obtain. Everybody loses.
What appears to be happening here is that states are slowly eroding the precedent set by the Quill v. North Dakota case that only sellers with nexus in a state must charge sales tax to buyers in that state. In fact, when Quill was decided back in 1992, legislators were practically invited to challenge it with new legislation. It’s only now that that new legislation is finally being floated in front of the courts. More recently, when hearing the DMA v. Brohl case, Supreme Court Justice Anthony Kennedy all but issued a written invitation for legislators to challenge the Quill ruling.
We live in the Wild West of internet sales tax law right now. You can be sure that we’ll see more changes to sales tax laws and maybe even a federal internet sales tax. Our goal here at TaxJar is to call out legislation that is unduly burdensome on eCommerce sellers and help you completely manage your sales tax obligations, no matter how the laws end up shaking out.
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