If you are selling goods or products online and some of your customers are located in Colorado, you need to be aware of the state’s Internet sales tax. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
Example 1: You are an online retailer located in Biloxi, Mississippi and make a sale through your website to a customer in Boulder, Colorado—a state where your business has no physical presence: You are not required to collect sales tax from the Boulder customer.
Example 2: You are an online retailer located in Fort Collins, Colorado and make a sale through your website to a customer in Denver, Colorado: You are required to collect sales tax from the Denver customer.
Example 3: After several years of operating solely out of a warehouse in Biloxi, Mississippi, you open a one-room satellite office just outside of Aurora, Colorado—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Pueblo, Colorado: You are required to collect sales tax from the Pueblo customer.
While the physical presence rule may seem clear, this is not necessarily the case. InQuill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Colorado, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
For specific statements of what may count as physical presence under Colorado law, consult Colorado Revised Statutes Section 39-26-102 and Colorado Department of Revenue Regulation 39-26-102.3. Both of the latter sections provide a definition for “Doing business in this state.” You may also find it helpful to review the DOR’s case-by-case rulingsregarding nexus.
Several years ago, the DOR was in the process of revising its specific guidance on Internet sales tax. This may have been a result of a failed attempt to change its Internet sales tax rules at that time. The information is usually available in the DOR’s FYI Sales Publication 79 (“Sales of Taxable Items Over the Internet”). However, this publication, last updated in 2010, has been and remains officially unavailable online.
Certain items sold via the Internet to Colorado customers may be exempt from sales tax under Colorado law. Information about sales that are exempt from sales tax is available online through a webpage on the state’s Department of Revenue (DOR) website.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. Under Colorado law, if an item would otherwise be subject to sales tax, it is generally subject to use tax. For more information, see the Consumer Use Tax Return and Instructions.
At the federal level Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
In Colorado, the physical presence rule applies for Internet sales. However, because the issue has been contentious in many places around the country, you should consider checking in periodically with the Colorado Department of Revenue to see if the rules have changed.
Updated: April 14, 2016