For online retailers, the holiday season is the busiest time of year. That’s great for businesses who look forward to end-of-year sales to bring them into the black. But this December, a barrage of customers won’t be the only thing keeping companies busy. If your online business sells to customers in Colorado, you’ll have to contend with Colorado’s new online sales tax rule. This new policy is fairly complicated, so let’s look at a few frequently asked questions from online businesses.
Beginning December 1, 2018, the Colorado Department of Revenue will require all businesses who sell goods to customers in their state to assess sales tax based on the customer’s address, not the location of the business.
Colorado has a general sales tax rate of 2.9 percent. But cities in Colorado are allowed to set their own sales tax rates at anywhere from 0 to 7 percent. In fact, there are 344 taxing jurisdictions in all. So with this new rule, any online retailer--whether it’s a home-based business in Boulder selling handmade crafts through their website or a national retail giant like Amazon--will have to assess and collect sales tax from Colorado customers based on the specific rates for the local jurisdictions in which they live.
According to the Colorado Department of Revenue, their aim with the new rules was two-fold. First, the Department is reacting to a June Supreme Court ruling that allows states to collect sales taxes from out of state businesses who sell goods to people in their states. Previously, the rules for collecting sales tax mandated that a business had to have a physical presence in a state in order to pay taxes there. This is no longer the case. So national corporations like Amazon may now have to pay sales tax in every state to which they ship products.
CDR says that their 1935 sales tax law has always stated that local sales taxes should be applied based on the destination of the goods.
Second, CDR says that their 1935 sales tax law has always stated that local sales taxes should be applied based on the destination of the goods. Therefore, they have decided to rewrite their rules, not only for out-of-state online retailers, but for in-state businesses as well. “We viewed this as an opportunity to bring in-state retailers more in line with statutory requirements,” said Mike Hartman, Executive Director for the Colorado Department of Revenue, speaking with the Denver Post.
Local retailers with only a handful of employees are worried that the new rules could put them out of business because they are far too complicated for a one- or two-person operation to iron out. Colorado has 344 taxing jurisdictions made up of cities, counties, and special taxing entities. One person’s home could be subject to sales tax rates for several of these jurisdictions if it is located within a city, county, and special taxing entity.
For example, the City of Denver is located within Denver County. Denver County has a tax rate of zero percent. But the City of Denver assesses a city sales tax rate of 3.65 percent. In addition, the Denver Metropolitan area is divided into two special taxing areas. There’s the the Regional Transportation District (RTD) and the Scientific and Cultural Facilities District (CD). RTD imposes a sales tax of 1 percent. But in CD, the special tax rate is 0.1 percent. When you include the state tax rate of 2.9 percent, a person living in Denver could end up paying a combined sales tax rate of 7.65 percent.
There are also certain goods that are exempt from sales tax. Food for home consumption, school-related sales, beetlewood products, and farm equipment are not subject to sales tax, to name a few. When you consider all of the 344 taxing jurisdictions, exemptions, and rules, there are 683 possible sales tax combinations in Colorado. It’s no wonder that small businesses are worried about all that red tape when it comes to Colorado’s new online sales tax rule.
There’s no doubt about it. This is a complicated rule to comply with, even for national retailers. For a small business that doesn’t employ an accountant, it can seem overwhelming, or even impossible. But before you decide that you have to go out of business, try one of these ideas:
If it’s in your budget, a part-time accountant with strong sales tax experience might be a good idea. You might also consider contracting with an outside accountant to file your paperwork on your behalf to ensure you're complying with Colorado’s new online sales tax rule.
There are also certain goods that are exempt from sales tax. Food for home consumption, school-related sales, beetlewood products, and farm equipment (to name a few) are not subject to sales tax.
There are a number of software options available for automated sales tax compliance. Many software products will calculate the sales tax for you in any state and remit to the state on your behalf, and they will guarantee statutory compliance. Here are a few options:
If you choose to navigate Colorado's new online sales tax rule alone, you can get a little help from the government. The CDR is advertising free live webinars for in-state retailers to explain the new rules and how to comply with them. They have also compiled a list of three tax databases that will match up your customers’ addresses with the appropriate tax rate.
In addition, though the rules take effect on December 1, there will be an enforcement grace period through March 31, 2019.
If you think Colorado’s new online sales tax rule is too onerous on small businesses, you’re not alone. Many other small business owners in Colorado have expressed concerns, saying that the rules could very well put them out of business.
So why not talk to the people at CDR who are responsible for these rules? They will hold a hearing on these changes at 2 pm, November 30, at 1313 Sherman St. in Denver, Room 220.
The new Colorado online sales tax rule is complicated, and it could mean some serious changes for small businesses. We hope you’ve learned the basics from this article. If you still have questions, contact the CDR. They have a website dedicated to the new rule, including contact information for further questions.