Unless you’ve been living under the proverbial sales tax rock, you know that states are always finding new ways to update their sales tax laws. Of the states, Colorado has initiated a lot of changes within the last year. Some have been met with a critical eye, others have induced confusion. In this article, we cover three main Colorado tax updates.
The Colorado Retail Delivery Fee Whirligig
Colorado’s initiation of the Retail Delivery Fee (RDF) has caused a lot of hubbub, so much so that significant adjustments have already been made to the law. At its inception July 1,2022, Colorado imposed this retail delivery fee on all deliveries to a location in the state as long as that delivery had at least one item of taxable tangible personal property aboard. The delivery fee of 27 cents per transaction would need to be applied at checkout, paid by the customer, and later remitted by the seller.
This extra bit of coin didn’t go unnoticed by consumers and businesses alike. In a nation where prices are on the rise and almost everyone has felt the effects of inflation, adding an additional fee to taxable deliveries was met with hefty criticism.
In response to this, Colorado legislators changed the way the RDF applied, as well as how it is collected.
The Small Seller Exemption
In the maze of sales tax that new age e-commerce has built, there has always been a small glimmer of solace – the small seller exemption. This exemption differs with each state’s regulations, but they all follow a similar pattern: small retailers lacking physical presence in a state and not exceeding set gross sales or transaction limits are absolved from sales tax responsibilities. In the majority of states, these limits – known as economic nexus thresholds – fall around $100,000 in sales and 200 or fewer transactions. The rationale behind this is to spare smaller vendors the headache of juggling intricate tax responsibilities across diverse states.
However, Colorado marched to the beat of its own drum when it initiated the Retail Delivery Fee by not instituting small seller exemptions. Suddenly, every entity making taxable deliveries into Colorado found themselves with extra tax responsibilities.
Following much criticism, Colorado spent the next year tweaking the bill. One of the major changes that passed legislation was the addition of, you guessed it, a small seller exemption.
Specifically, business with $500,000 or less in Colorado retail sales in the prior year, as well as startups, are now relieved from collecting the Retail Delivery Fee. Futhermore, RDF accounts beneath this sales level have been closed.
Invoices In Chaos
It may seem innocuous, a tiny delivery fee of 27 cents, but the original mandate to precisely itemize this fee on customer receipts was nightmare fuel for many businesses.
Companies were suddenly shackled with the mammoth task of tweaking their invoicing systems to accommodate this change, which is no small feat and costs significantly more than whatever revenue the fee would accrue. This financial and coding headache would especially effect contractors, resulting in software updates of $15,000 and added staffing costs.
In response, the Simplify Colorado Sales Tax Coalition, (founded in 2015 by a non-partisan and diverse group of business and community leaders to address Colorado’s challenging sales tax system), aided in addressing the hardship this invoicing method would cause Colorado businesses, and paved the way to change.
With the new Colorado Bill, businesses now have the option to either itemize the Retail Delivery Fee or track the sum of deliveries made and remit the appropriate amout to the state. Additionally, a company can choose to absorb the 27 cent fee themselves without charging the customer.
Licensing – Or Lack Thereof
Colorado’s detangling of its sales tax systems, (which, fun fact, ranks 40th out of 50 in Tax Foundation’s 2023 State Business Tax Climate Index), doesn’t stop at RDF adjustments.
Since 2019, businesses with physical and economic nexus in Colorado have needed to keep an eye out for economic nexus standards not only with the state, but in any of its 70 taxing jurisdictions. We’re talking cities, counties, and assorted municipalities that bear the title of Home-Rule Cities – giving them the power to blaze their own sales tax trail. Many states allow jurisdictions to make their own tax laws in addition to the state requirements, but Colorado locals took this concept to the next level.
Local Controversy: Unfair Sales Tax Imposition
Many of these home-rule jurisdictions – reluctant to surrender licenses and fees rooted in the yesteryears of brick-and-mortar retail – opted to extend licensing requirements to remote retailers that exceeded nexus thresholds. For a business that primarily sells online to multiple states, being required to register and pay for a CO state license while also registering in, say, Denver and Boulder, is understandably demanding.
This allowance of local licensing seemed in direct defiance of the reason why the South Dakota v. Wayfair case voted in favor of the states in the first place: to level the sales tax playing field.
Post much debating, Colorado legislators finally recognized the undue hardship it was causing remote retailers.
A Tectonic Shift in the Colorado Sales Tax Landscape
With the introduction of bill SB22-032, Colorado is better adapting to the presence of cyber sellers.
“To enable the streamlining of the imposition, collection, and administration of sales and use taxes imposed by local taxing jurisdictions on retail sales made by retailers that have a state standard retail license and either do not have a physical presence within a local taxing jurisdiction or have only incidental physical presence within a local taxing jurisdiction … (these retailers) can make retail sales within the local taxing jurisdiction without having to obtain a general business license from the local taxing jurisdiction.”
SB22-032 Bill summary
With the advent of this bill, local jurisdictions have been required to make a lot of changes. From July 1st, 2022, these authorities are restricted from charging fees for local general business licenses from non-or-incidentally-present retailers. Fast forward to July 1st, 2023, and these jurisdictions are disallowed from even requiring a license.
Corresponding to the new bill, several local taxing jurisdictions have adopted a policy of automatically granting licenses to retailers who sell goods within their boundaries. Meanwhile, others are a bit slow in adapting. However, if you ever find yourself faced with a Colorado jurisdiction demanding licensing, rest assured; they no longer have the power to enforce this.
Tampon Tax Begone
Just a year ago, Colorado made a milestone decision by exempting certain hygiene products, specifically incontinence, diapers, and menstrual products, from its statewide 2.9% sales tax. This initiative led by Gov. Jared Polis and the legislature was launched as financial relief for Coloradans on essential hygiene items. Putting an end to sales tax on necessities that have often been categorized a luxury goods – also referred to as Tampox Tax – is an iniative that several states have taken in recent years, Colorado among them.
The introduction of this tax exemption is a way of easing the financial burden on Coloradans purchasing these essential hygiene products, while also addressing the impact of Tampon Tax on marginalized or low-income persons. However, this transition isn’t universal across the board.
When State Encouragement Doesn’t Land
The hope in eliminating the state sales tax rate on these hygiene products was that Colorado’s local tax municipalities would follow suit. But due to being a home-rule state, Colorado State cannot force its local governments to repeal their independent sales tax rates on these products.
Some municipalities, such as Denver, Fort Colins, Aurora, Pueblo, and Boulder had proactively exempted menstrual products and diapers from their municipal sales taxes even before the bill became law. Numerous others like Colorado Springs have yet to join this fiscal advancement. The main reason for resistance lies in the tax structural complications and extensive education and communication with retailers needed to facilitate this change. Other cause for pushback: revenue loss. Yet, it’s critical to note that the expected loss due to this exemption would only be around $13 million for the fiscal year 2023-24 – small change for a state that gains billions of dollars in tax revenue every year.
While this reform will take time for other Colorado jurisdictions to implement, many states in the U.S. are beginning to follow suit. Missouri passed a bill in April 2023 to exempt diapers and feminine hygiene products from sales tax, while a similar bill in Texas was recently passed and is expected to go into effect in September 2023.
If you would like to learn more about what states have and are eliminating sales tax on menstrual and hygiene products, you can view this map at Alliance for Period Supplies.
