01/29/2011
A client emailed a notice she received from one of her online vendors. It stated, “This notice is being sent to comply with Colorado Regulation 39-21-112.3.5 recently enacted in 2010. This regulation requires out-of-state retailers to send a summary invoice on or before January 31st to Colorado customers with more than $500 in purchases in a given calendar year.” The notice includes a summary of the purchases our client made from the vendor during 2010, including dates, dollars and descriptions of each purchase and admonishes to consult one’s tax advisor regarding the recipient’s tax reporting responsibility. Of course, the client wanted to know, in the immortal words of David Letterman, “Is this something…or is this nothing?”
It is “Something.” Colorado did enact legislation to try to wrap its arms around what it hopes are millions of dollars of lost revenue, while also leveling the playing field for brick-and-mortar retailers in Colorado. Here is the site of the actual law if you’d like to read it – it is pretty straight forward: http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251644563466&ssbinary=true
The whole state sales tax issue is starting to come to a head again as state governments face economic crises. Back in 1992, when the Internet was just a baby, the US Supreme Court ruled that states could not force businesses to collect sales tax if the business had no physical presence (nexus) in that state. Ever since, states have been trying to figure out ways around the edict. According to the Tax Foundation, at least a dozen states are fiddling with nexus laws now. In the recent past, three states (NY, NC, RI) enacted laws requiring collections, and our own Colorado chose what it hoped was a safer, less litigious back door approach.
The new Colorado law requires that out of state “non collecting retailers” (ie those selling to the final users/customers—not resellers) NOTIFY their Colorado customers of dates, dollars and descriptions of items purchased if in excess of $500. THEN current and long standing law kicks in – the Colorado consumer is required to pay “use tax” in lieu of the sales tax that was not collected. Colorado consumers rarely voluntarily remit “use tax” and the state rarely enforces. But now, with notification requirements, if the consumer does not pay, Colorado Department of Revenue probably plans to just send you a bill. And threaten penalties if you choose not to comply.
But WAIT – there is MORE. The Direct Marketing Association is challenging! Of course they are. For nearly twenty years, many online marketers (like Amazon) have been competing with the advantage of no sales tax added to the price–a substantial discount (especially is shipping is also “free”). They will not give up that goodie without a fight. On the other side, brick-and-mortar businesses in Colorado laud the new law, claiming better competition on a leveler playing field. The Denver Post reported today, January 29, 2011, that US District Court granted a temporary injunction “which prevents Colorado from enforcing” the new law. The Post article presents both sides and is a quick read: http://www.denverpost.com/business/ci_17232715.
So – are we in limbo? No. Not really. Just because the seller doesn’t collect the sales tax doesn’t mean you are truly “off the hook.” The law is pretty clear – if you buy something not exempt from sales tax, but no sales tax is collected….then, you are obligated to remit USE TAX. My client only owes around $45, and I will suggest that she pay it. Sales and use tax issues are deep and wide with a lot of unpleasant consequences, particularly for businesses (ie did you know that if you buy a business, you could owe sales tax on the personal property purchased?) – so, as a matter of course, as the notification suggested, please consult your tax advisor. And stay tuned.