Major changes to Sales Tax Collection rules went into effect December 1, 2018. Bottom line is that the State has made it extremely difficult for me to deliver goods to your place of business. Instead of being able to deliver the goods to you, I will have to record the point of sale at my Satellite Office in Englewood or my office in Brighton. This location will be listed as the “Ship To” on your invoice. The good news is the Tax rate for my satellite office is only 4.25% so most of you should see little change in the cost of goods. I apologize for the inconvenience but you can thank governmental bureaucracy for this.

Here is some background (in a nutshell). Prior to December 1, I have been required to collect sales tax based on the taxing district we had in common between my business location in Brighton and where you took possession of the goods. If I delivered goods to someone in Brighton, I was required to collect sales tax for Brighton City, Adams County, RTD/CD (special districts) and State Tax for a Total of 8.5%. If I delivered goods to someone in Denver, I would collect RTD/CD and State for a total of 4%, if I delivered goods to Loveland, our common taxing district would be just State Tax of 2.9%. That was not too difficult to work with; it meant that customers would fall into 1 of about 5 different tax rates/groups.

After the recent ruling by the U.S. Supreme Court on Wayfair vs. SD (some call it the Amazon Tax) the State of Colorado wasted no time taking the most complex sales tax system in the US and made it a hundred and fifty times worse! As of December 1, I must collect sales tax based on the destination (the point you take possession of the goods). This means that I have to keep track and collect tax for about 762 different tax rates/locations. It is necessary to utilize a 3rd party geographical database to determine what taxing district customers are located in (a single zip code could be located in 6 different taxing districts). In addition to collecting and submitting sales tax to the State, I would have to maintain sales tax permits for every home rule city I would deliver to. For my business, this would require that I maintain a sales tax license for about 30 out of the potential 76 self-collecting home rule cities and file individual sales tax returns with each (not to mention having to pay each of these taxing entities separately)! I have estimated that it would cost my business an additional $4000/year for the additional sales tax licenses and to have my accountant file all the necessary paperwork. That is equivalent to the amount of Sales Tax I collect in a year! Bureaucracy at it’s finest!

The State provided a waiver for businesses to comply with this new law by May 1, 2019; however, delaying the compliance date does not fix the underlying problem. The problem is rooted in the State Constitution that established home rule cities – thus it will be some time before the problem is rectified. I have studied the problem, talked to tax professionals, written my state representative and they are aware of the problem – my only viable option is to require customers to pick up goods. Please call me and we can discuss this further.

In response to Colorado Department of Revenue Code of Colorado Regulations 1 CCR 201-4

Solutions To New Sales Tax Regulations – Things Colorado Department of Revenue (CDOR) should do to make it more feasible and fair for businesses to collect the tax they mandate.

The proposed sales tax rule, that requires sales taxes be collected and remitted based on the point of delivery, creates an unworkable and nearly impossible task for small businesses to comply with. In short, most businesses like mine will go from tracking 4 tax groups to having to track as many as 762. CDOR has an obligation to make the process as easy and painless as possible for reseller. This will not only reduce the burden on businesses for collecting the tax, but also help ensure the taxing districts receive the tax they mandate. Frankly, if they don’t make this process easy for the average small business owner, they will undoubtedly miss out on tax dollars that would have otherwise been collected. Not to mention that self-collecting cities and counties do not have the resources to audit every small business in the State and ensure compliance. Here are some things I would suggest CDOR implements prior to enforcing these overwhelming new regulations.

Problem: In-state reseller that have a non-physical presence will be held to different tax collecting standards than out-of-state resellers. An in-state reseller that delivers goods to a self-collected/home-rule city/county, must register and remit tax directly the self-collecting cities or counties they collect tax for. No such requirement exists for out-of-state reseller. Requiring an in-state non-physical business to register and remit payments directly to 73 self-collecting entities is HUGE burden and needless over complication.

Solution: CDOR should adopt rules that allow in-state resellers that have a non-physical location in a particular tax district to remit payment directly to CDOR and provide immunity to a reseller for not remitting directly to the self-collecting entity. CDOR’s system is already set up to track and account for the 762 potential taxing districts a reseller would be required to collect for. This would ease the burden on small businesses and allow them to make a single payment to CDOR for all taxing districts in the state.

Problem: Out-of-state resellers are only required to collect tax if their gross sales exceed $100,000 or 200 transactions. This rule holds in-state resellers that have a non-physical presence to different tax collecting standards. One of the stated purposes of the rule change was to “level the playing field” between brick-and-mortar and Internet reseller but creates an greater burden on in-state resellers with a non-physical presence.

Solution: Apply the same rules for ALL resellers.

Problem: CDOR does not provide a functional list of tax rates for the hundreds of taxing districts that need to be imported into an accounting package.

Solution: CDOR should provide a download, with tax rates for each taxing district that can be used to update accounting applications. Currently, CDOR provides a spreadsheet with Location Codes and the various Tax Type/Rates applied to each Location Code. However, the Tax Type/Rates that are listed under each Location Code are not uniquely identified making updating the individual Tax Type/Rates in an accounting package extremely difficult.  Since businesses will be required to update their accounting packages bi-annually, it is necessary to uniquely identify each individual Tax Item/Rate (e.g. State, 53 Counties, all Special Tax districts, and 63 Cities). Each individual Tax Item would need to be assigned a unique code in order to facilitate updating systems with changing tax rates. Location Codes would identify which Tax Item was applicable to each.

Problem: Currently, businesses are required to use third-party databases to do address lookups. There are approximately 60 different taxing districts that do not recognize the “hold harmless” designation CDOR grants these third-party databases and the use thereof.

Solution: issue a new rule that holds businesses harmless for use of these databases. This should apply to ALL taxing jurisdictions in the state. The current “hold harmless” law only applies to the 11 of the 73 self-collecting entities. Current law may not allow for this because of the State Constitution, but something must be done to protect small businesses from errors out of their control.

Problem: CDOR does not have a single point of reference for determining tax rates. Currently, there is no easy way for a business to find out what a tax rate is for any particular address without using a third party database.

Solution: CDOR should seek to develop their own boundary database that allows businesses to look up tax rates for their customers. Forcing small businesses to use third-party applications should only be a temporary solution while an official state-run system is developed.

Jon Kamm

The Independence Institute was kind enough to publish my article that explains the problem  on Complete Colorado Page Two.

I have some ideas how they could make this a little more palatable for small business like mine. HUGE problems have been brewing for decades that will take time to make the necessary changes to really fix the problem. More info to follow.

Jon Kamm