As a company grows, it’s common to attract clients and customers from across state lines.
While this can reflect a strategic accomplishment, it’s important to be aware of the possible tax impact. When a company sells products to customers located out of state they need to determine if there is a sales or use tax nexus. Essentially, this is a series of rules which identifies when sales tax needs to be collected. Unfortunately, these rules are often comprehensive, complex and seem to change quite regularly. To help clients, prospects and others understand Colorado nexus, Hanson & Co has provided a brief summary of key points below.
What is Nexus?
Nexus is the legal term used when an out-of-state taxpayer has a “significant presence” in another state and must collect and remit sales tax for qualifying sales. For different states, this could mean temporary or physical nexus (people or property), click-through nexus (for online retailers who sell through certain websites, like Amazon), substantial nexus or economic nexus. While different states have varying definitions of what would constitute nexus, the result is the same. If a company is found to have nexus, they must register for a state tax license and collect appropriate state – and possibly local – sales taxes for all transactions.
Colorado Nexus Determination
To understand whether or not sales or use tax is owed, it’s necessary to understand what is taxable in the first place. Sales tax is imposed on the retail sale of tangible personal property (aside from a particular list of exempt items, such as farm equipment, machinery and renewable energy equipment) and is applicable whether the transaction takes place between a licensed vendor and buyer or between private parties. Only certain services are considered taxable. Use tax is imposed on the storage, use or consumption of tangible personal property purchased at retail.
Generally, Colorado law considers a seller to have sales tax nexus in the state if they have physical presence in Colorado, which may be indicated by any of the following:
An office, distribution facility, store, sales room, warehouse/storage facility or other place of business
A sales representative, independent contractor or other representative in Colorado soliciting business
At this time, if you do not have a physical presence in Colorado, you are not required to collect sales tax for an internet-based sale to someone in the state. While this may seem clear, the rules are somewhat complicated by Colorado’s expanded definition of “doing business” in the state, which also necessitates a retailer to collect sales tax.
“Doing Business” in Colorado
A person or retailer is presumed to be doing business in the state of Colorado if they conduct activities related to the sale, lease or delivery of taxable services or tangible personal property in the state. In addition, newly expanded rules state that doing business is also defined by:
Employing residents who work from Colorado home offices
Being part of a controlled group that has a component member with physical presence in the state who engages in certain defined activities
Entering into an agreement or arrangement with an in-state person who engages in certain defined activities
Soliciting by direct or indirect representatives or manufacturers’ agents (e.g., by distribution of catalogs or other advertising, communications via newspaper, radio or television, or by any other means of business from persons residing in Colorado) and consequently receiving orders from, or selling or leasing tangible personal property to, individuals for use, consumption, distribution and storage for use or consumption in Colorado
Nexus is a difficult issue for many to navigate simply because of the complexity and number of contingencies which impact collection responsibility. If you have questions about Colorado nexus and whether your company is in compliance, Hanson & Co can help. For additional information on nexus determination or other multistate tax issues, call us at (303) 388-1010 or click here to contact us. We look forward to speaking with you soon!