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Sales Tax Reform: Colorado Expands Tax Sourcing Rules

In September, the Colorado Department  of Revenue issued emergency temporary regulations that radically changed the sourcing rules for sales tax purposes. These new regulations became effective Dec. 1, 2018 – however enforcement will not begin until May 31, 2019. The new sourcing regulations require Colorado vendors to collect sales tax based on the destination of a sale. Retailers will now be required to collect all state-collected taxes, including city, county and special district taxes, based on the delivery location of a transaction, which differs from the previous rules, where a vendor was only required to collect state-collected taxes for jurisdictions it shared with the customer.

How It Works
For example, a vendor is located in the state-collected jurisdictions of Colorado state (2.9 percent), Mesa County (2 percent) and Mesa County Public Safety Improvement District (.37 percent). Under the previous rules, if the vendor delivered a product to a customer in the city of Littleton, located in Jefferson County, the vendor would have only collected Colorado state tax of 2.9 percent because the vendor did not have a physical location in the other state-collected jurisdictions in which the customer is located, namely Jefferson County, or the Regional Transportation District or Scientific and Cultural Facilities District. The vendor also would not collect Littleton city tax, because it does not have nexus in the home-rule city of Littleton. However, if the vendor sold to a customer located in the city of Fruita, located in Mesa County, Colorado, the vendor would have collected Colorado state, Mesa County and Mesa County Public Safety Improvement District tax, as shared tax jurisdictions with the customer. But, because the vendor does not share a physical location in the city of Fruita, the vendor would not have collected Fruita city tax.

Under the new sourcing rules, the requirement to collect sales tax has been greatly expanded. The vendor is now required to collect sales taxes for all Colorado state-collected tax jurisdictions, even those in which the vendor does not share with a customer. But, the vendor still will not have to collect a city tax for a non-shared customer location, because the new sourcing rules do not impact homerule cities. The effect of this change in sourcing will greatly expand the administrative costs and responsibilities, particularly for smaller vendors.

Sales Tax Sourcing Rules

Destination sourcing is not unique to Colorado. In fact, most states have similar sourcing rules; however, Colorado has a far more complicated sales-and-use tax structure than most states. It has approximately 700 different combinations of sales tax rates that may apply to sales transactions in the state. In addition to the many state-collected city, county and district taxes, in Colorado there are 96 home-rule cities, 70 of which administer and collect their own sales taxes. While the new sourcing rules do not apply to home-rule city taxes, home-rule cities tend to take an aggressive approach when asserting nexus on vendors doing business in these cities.

What Happens Next
A vendor who may have previously only had a filing requirement in three Colorado tax jurisdictions now has the potential obligation to collect sales tax in a few hundred Colorado tax jurisdictions. Most vendors, particularly small to mid-size retailers, are not equipped with the tools or administrative resources to comply with the new sourcing sales tax collection requirements in Colorado. Fortunately, the Department of Revenue has provided a grace period through May 31 to allow Colorado retailers to analyze, understand and comply with these new sourcing requirements.

The Colorado Department of Revenue has also been accepting comments from the business community on the new tax sourcing temporary regulations before they are finalized. Contact your tax professional with questions, or if you need assistance in preparing for the new tax sourcing regulations in Colorado, assistance in making a comment to the Colorado Department of Revenue on the new tax sourcing regulations or assistance with complying with the various new state sales tax obligations following the U. S. Supreme Court decision in South Dakota v. Wayfair. The changes described above remind us that sales tax reform is our new reality; learn more here.

Mary Jo Zuelsdorf is the manager of state and local tax for Eide Bailly