Surprising Facts About Colorado Use Tax

Colorado businesses are accustomed to paying their fair share of sales taxes for routine purchases at shopping malls and convenience stores.

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However, what happens when you buy products from out-of-state retailers that have no presence in Colorado? Often times businesses are unaware that according to Colorado law, if you buy goods from somewhere out of state, the company is legally required to pay consumer use tax if sales tax is not collected at the time of transaction. This often leads to a situation where use tax doesn’t get paid because the purchaser is unaware of the requirements. This is made more complex because Colorado law requires that these transactions be reported to the Colorado Department of Revenue. In fact, a recent court ruling (brought forth by the Direct Marketing Association) upheld the law making it essential for Colorado companies to track taxes owed. To help clients, prospects and others understand the issue, Hanson & Co has provided a brief summary below.

The Facts

Colorado’s law (Colo. Rev. Stat. §39-21-112.3.5) was designed to improve the collection of use taxes on sales when out-of-state sellers with no physical presence in the state sell to customers located in Colorado.

Colorado’s law does not require use tax collection by out-of-state companies, but it does require them to:

  • Send a “transactional notice” to purchasers informing them that they may be subject to Colorado use tax
  • Send an annual purchase summary to customers who purchase more than $500 worth of goods in a year, including purchase dates, amounts, and categories along with another reminder that they may be subject to Colorado use tax
  • File an annual customer information report with the Colorado Department of Revenue

Retailers that made less than $100,000 in gross sales to Colorado customers in the previous year and that reasonably expect to make less than that amount in the current year are exempt from the law’s reporting requirement.

The Court Case

The case began in 2010 when Direct Marketing Association (DMA) filed a suit in federal district court against the state of Colorado claiming that the use tax law violated the “dormant” Commerce Clause – which has been interpreted to limit states’ interference with interstate commerce. They argued that the law discriminates against and imposes an undue burden on interstate commerce. In this case, DMA won when the district court found the law unconstitutional.

This decision was soon reversed because the lower court was deemed to lack jurisdiction based on the Tax Injunction Act, which in essence allows state courts to be the final arbiters of the meaning of their own tax statutes. However, the case took another turn when the decision was overturned by the U.S. Supreme Court, which determined that the law was not a “tax” and therefore could not be subject to the Tax Injunction Act. The case was then remanded to the Tenth Circuit for a decision based on the applicable issues.

The Decision

Ultimately, the Tenth Circuit Court upheld the Colorado use tax law based on a few decisions. First, despite a long-standing Supreme Court ruling that prohibits states from requiring companies with no physical state presence to collect and remit sales and use taxes from customers in that state (which thereby violates the Commerce Clause), the court determined that it did not apply based on the Supreme Court decision stating that the Colorado notice and reporting requirements do not constitute a form of tax collection.

Regarding the claim that the law discriminates against out-of-state retailers, the court argued that the law imposes different treatment depending on whether or not a retailer collects Colorado sales and use taxes—not based on whether the retailer is in-state or out-of-state.In addition, the court argued that the law imposing sales and use tax collection and remission is more burdensome on in-state retailers than the reporting requirements are on out-of-state companies and therefore does not unduly burden interstate commerce.

Contact Us

This court decision emphasizes the need for out-of-state companies that sell to Colorado consumers and Colorado businesses and individuals who purchase online or “over-the-phone” goods to be vigilant in their compliance with state sales and use tax laws in order to avoid unnecessary consequences. If you have questions about Colorado’s use tax laws or want to be sure that you or your company remains compliant, Hanson & Co. wants to help! Call us at (303) 388-1010 or click here to contact us. We look forward to speaking with you!

TaxStephanie Parnell