Complying With Colorado’s Sales and Use Tax Poses Challenges

Five years after states began adopting economic nexus laws, businesses face more compliance requirements for sales, use, and other transactional taxes and fees than ever before.

Just as tax revenue related to sales and use tax economic nexus expansion has begun to stabilize, many state and local governments are anticipating a decline in revenue due to economic conditions. In response, lawmakers are seeking to implement new and creative taxes and fees. At the same time, tax administrators are striving to modernize tax collection systems to handle the surging volume and complexity of returns.

Colorado is often viewed as one of the most complex states for sales and use tax compliance, and recent developments highlight the need for practitioners to stay current as the environment continues to change.

Colorado Sales and Use Tax System

In June 2020, Colorado launched SUTS, a single point of remittance portal for all state-collected sales taxes and local sales taxes for home rule self-collected municipalities, or home rule cities. Fifty-nine of the state’s 68 home rule cities were participating as of July 2023.

The system initially used a “minimum viable product” approach that limited functionality. Many businesses and practitioners have struggled to use SUTS for tax remittance effectively, leaving them to file separate returns with the state and for each of the 68 home rule cities. The home rule cities also have expressed concerns about inadequate reporting data and functionality.

Colorado enacted House Bill 23-1017 in June 2023 to address concerns of both the business community and home rule cities. The new law provides funding to develop a simplified user interface, create a bulk testing option for address validations, and refine certain reporting functions.

While these enhancements are a positive step forward, additional functionality gaps will need to be filled for businesses to use SUTS effectively. For example, SUTS has no state consumer use tax and has limited local use tax reporting abilities. It also doesn’t have capability for reporting local lodging taxes and other locally collected taxes and fees, and it doesn’t have functionality to amend returns.

Due to these gaps, in the near term, many businesses and practitioners likely will continue to struggle with using SUTS to file local returns versus filing separate returns manually in all jurisdictions.

Changing Local Registration Requirements

Historically, most of Colorado’s home rule cities required local business licenses for retailers operating in the municipality. As of July 2023, 58 of the 68 home rule cities have adopted economic nexus laws requiring retailers to collect municipal taxes if the retailer has more than $100,000 in annual retail sales into the state (regardless of volume sales into the municipality).

This has forced retailers without physical presence in the municipality to obtain local business licenses. With each municipality having separate forms, fees, and renewal schedules, the management of local licensing compliance can be cumbersome and costly for retailers.

However, with Senate Bill 22-032 having taken effect on July 1, 2023, local taxing jurisdictions can no longer require retailers with a state standard retail license and either no physical presence or only incidental physical presence in the local taxing jurisdiction to obtain a general business license.

Other Taxes and Fees

In addition to sales and use taxes, Colorado has several state and locally collected taxes and fees that affect a wide array of businesses that make in-state sales.

In July 2022, Colorado was the first state to implement a retail delivery fee, followed by Minnesota earlier this year. The Colorado fee, indexed at 28 cents per order, is imposed on every retail sale of tangible personal property that’s delivered by motor vehicle in Colorado for orders that include at least one taxable item and are remitted to the state.

Originally enacted with a $100,000 annual small seller exemption and a requirement that the fee be collected by the seller from the purchaser, House Bill 23-143 increased the small seller exemption to $500,000 and eliminated the requirement that the seller collect the fee from the purchaser effective July 1, 2023.

While many jurisdictions in the US impose bag fees, the Colorado statewide carryout bag fee enacted under House Bill 21-1162 is unique because, while the bag fee is imposed on a statewide basis, it’s remitted locally to cities and counties rather than to the state.

For the first phase of the fee, which runs from Jan. 1 to Dec. 31, 2023, a store may furnish a recycled paper carryout bag or a single-use plastic carryout bag if the customer pays a fee of 10 cents per bag, or a higher fee adopted by the municipality or county in which the store is located. Beginning Jan. 1, 2024, the fee remains in place, but the store may only furnish a recycled paper carryout bag. (Single-use plastic bags won’t be allowed.) There are exemptions for restaurants, stores with three or fewer locations, farmers markets, and certain types of bags.

Many Colorado localities also impose and locally collect a variety of other taxes, each with separate requirements. These taxes often lack uniformity among localities. Examples include lodging tax (for cities with state-administered sales tax), admissions tax, marijuana tax, occupational privilege tax, business and occupation taxes, sweetened beverage tax, trash collection tax, electronic smoking device tax, rental unit tax, oil and gas pollution tax, climate action plan tax, lift ticket tax, bicycle vendors tax, public improvement fees, and retail service fees.

Conclusion

While efforts toward streamlining the sales and use tax compliance environment continue to evolve, the changing reporting requirements, increased return volume, and expanded local taxes and fees present additional compliance challenges for businesses and tax practitioners.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rachel Quintana is a partner in the indirect practice at EY. The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

We’d love to hear your smart, original take: Write for Us