State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Colorado Enforcement of Remote Seller Notice and Reporting Requirements Commences On July 1, 2017, the Colorado Department of Revenue began to enforce extensive notice and reporting requirements on remote retailers that do not collect Colorado sales or use tax. The statutory requirements were enacted in 2010, but had been enjoined due to protracted litigation in federal and state courts. On June 30, 2017, the Department adopted an emergency administrative rule to clarify these requirements. 1 Background In 2010, Colorado enacted legislation that imposes the following requirements on remote retailers that do not collect Colorado sales or use tax: (i) a transactional notice to the purchaser of the obligation to pay tax; (ii) an annual summary by January 31 of each year to purchasers of each purchase they made from the retailer during the previous calendar year; and (iii) an information report to the Department by March 1 of each year listing the purchaser s purchases from the retailer during the prior calendar year. 2 The Direct Marketing Association 3 (DMA) challenged the Colorado notice and reporting requirements, resulting in complex and lengthy litigation between DMA and the Department in both federal and state courts. On December 12, 2016, the U.S. Supreme Court effectively ended the federal court conflict by denying a petition for certiorari 4 to consider Brohl v. DMA, in which the U.S. Court of Appeals for the Tenth Circuit had held that the requirements did not violate the dormant Commerce Clause. 5 DMA also pursued separate litigation challenging the notice and reporting requirements in state court. A Colorado District Court granted a preliminary injunction in 2014 based on an initial determination that the requirements unlawfully discriminated against nonresident Release date July 10, 2017 States Colorado Issue/Topic Sales and Use Tax Contact details Metisse Lutz Denver T 303.813.3973 E metisse.lutz@us.gt.com Jamie C. Yesnowitz Washington, DC T 202.521.1504 E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T 312.602.8517 E chuck.jones@us.gt.com Lori Stolly Cincinnati T 513.345.4540 E lori.stolly@us.gt.com Priya D. Nair Washington, DC T 202.521.1546 E priya.nair@us.gt.com www.grantthornton.com/salt 1 1 COLO. CODE REGS. 39-21-112(3.5). 2 COLO. REV. STAT. 39-21-112(3.5)(c), (d). In 2010, the Department issued a prior emergency regulation to clarify the notice and reporting requirements. 1 COLO. CODE REGS. 39-21-112.3.5. 3 The Direct Marketing Association has been recently renamed the Data & Marketing Association. 4 137 S. Ct. 591 (2016). 5 814 F.3d 1129 (10th Cir. 2016). For a discussion of this decision, see GT SALT Alert: Federal Court of Appeals Upholds Colorado s Sales and Use Tax Notice and Reporting Requirements..
Grant Thornton LLP - 2 retailers. 6 In February 2017, DMA and the Department signed a settlement agreement to resolve all of DMA s pending claims in the Colorado District Court, as well as other constitutional claims that could be refiled in the federal District Court for the District of Colorado. 7 Terms of the settlement paved the way for Colorado to begin enforcing its notice and reporting requirements beginning July 1, 2017. New Emergency Rule Clarifies Notice and Reporting Requirements On June 30, 2017, the Department adopted an emergency rule that provides details on the implementation of the notice and reporting requirements for non-collecting retailers. 8 Specifically, the rule defines key terms and details the Transactional Notice, Annual Purchase Summary and Annual Customer Information Report requirements. A retailer that makes less than $100,000 in total gross sales in Colorado in the prior calendar year and reasonably expects total gross sales in Colorado in the current calendar year will be less than $100,000 is classified as a retailer whose sales are de minimis. 9 Retailers with de minimis sales are not subject to the notice and reporting requirements. Transactional Notice A non-collecting retailer must provide a Transactional Notice with every Colorado reportable purchase not exempt from Colorado sales or use tax. 10 For online purchases, the notice must be prominently located near the tax or sales tax line at checkout. 11 If no tax line is available, the notice should be located near the total price line. If it is impractical to display the notice as described above, the retailer should provide a prominent hyperlink to the notice. The use of an online marketplace does not relieve the retailer of the obligation to provide the notice, but the marketplace may provide the notice on the retailer s behalf. For purchases not made online, the notice must be prominently located on the order form near the total price line. 12 If this is not practical, the retailer should provide a statement on the invoice near the tax or total price line directing the purchaser to an attachment containing the notice. 6 Direct Marketing Ass n v. Department of Revenue, District Court, City and County of Denver, No. 13CV34855, Feb. 18, 2014 (Order Granting Motion for Preliminary Injunction). This preliminary injunction remained in effect until the settlement agreement was reached in February 2017. 7 Settlement Agreement, executed by Data & Marketing Association and Colorado Department of Revenue on Feb. 15 and 22, 2017. For further discussion, see GT SALT Alert: DMA Enters into Settlement Agreement with Colorado on Remote Seller Notice and Reporting Requirements. 8 A non-collecting retailer is a retailer that sells tangible personal property to Colorado purchasers and does not collect Colorado sales or use tax. All corporations included in a controlled group are considered to be a single non-collecting retailer. A retailer that collects Colorado sales or use tax is not a non-collecting retailer, regardless of whether the retailer is obligated to collect the tax or voluntarily collects the tax. 1 COLO. CODE REGS. 39-21-112(3.5)(2)(f). 9 1 COLO. CODE REGS. 39-21-112(3.5)(3). A retailer in a controlled group must include total gross sales made by all of the corporations in the group. 10 COLO. REV. STAT. 39-21-112(3.5)(c); 1 COLO. CODE REGS. 39-21-112(3.5)(4). 11 1 COLO. CODE REGS. 39-21-112(3.5)(4)(a). 12 1 COLO. CODE REGS. 39-21-112(3.5)(4)(b).
Grant Thornton LLP - 3 The Transactional Notice must contain the following information: (i) the retailer does not collect Colorado sales or use tax; (ii) the purchase is not exempt from Colorado sales or use tax merely because it is made over the Internet or by other remote means; and (iii) Colorado requires purchasers to (a) file a sales or use tax return reporting all purchases that are taxable in Colorado and for which no tax was collected by the retailer, and (b) pay tax on those purchases. 13 If the retailer is required to provide a similar notice for another state, the notice is sufficient if it contains substantially the same information as required above but is provided in a form that is generalized to any state. 14 A non-collecting retailer is subject to a penalty of $5 for each sale to a Colorado purchaser for which it does not provide notice. 15 However, if the retailer reasonably had no knowledge of the notice requirement and began to provide notices within 60 days of demand by the Department, the annual penalty may not exceed $25,000. 16 No penalty is imposed if the non-collecting retailer only sells items that are not taxed by Colorado, or sells to exempt Colorado purchasers. 17 Penalties may be waived at the discretion of the Department in cases where reasonable cause exists. 18 Annual Purchase Summary A non-collecting retailer must send an Annual Purchase Summary to all Colorado purchasers by January 31 each year summarizing the purchaser s reportable purchases for the prior calendar year. 19 The summary must be sent by first class mail to the purchaser s last known address and the envelope must be prominently marked with the words Important Tax Document Enclosed. 20 A retailer may provide the purchaser with the option to receive the summary by electronic means. 21 The summary must include: The total amount paid by the Colorado purchaser, including any taxable shipping charges or other fees charged to the customer, during the calendar year (to the extent such amounts are subject to tax); The state requires the purchaser to file a sales or use tax return and pay tax on all taxable purchases for which no tax was collected by the retailer; The retailer is required to provide the Department with the total dollar amount of purchases during the prior calendar year, but no other information about the purchases will be provided to the Department; If available, the dates of each Colorado reportable purchase; 13 1 COLO. CODE REGS. 39-21-112(3.5)(4)(c). The Transactional Notice also may provide the following information: (i) the retailer will provide an Annual Purchase Summary to the purchaser; (ii) details on filing the return may be found on the Department s Web site; and (iii) the retailer is required to provide an Annual Customer Information Report to the Department. 1 COLO. CODE REGS. 39-21-112(3.5)(4)(d). 14 1 COLO. CODE REGS. 39-21-112(3.5)(4)(e). 15 1 COLO. CODE REGS. 39-21-112(3.5)(4)(f)(i). 16 1 COLO. CODE REGS. 39-21-112(3.5)(4)(f)(ii)(A). 17 1 COLO. CODE REGS. 39-21-112(3.5)(4)(f)(ii)(B). 18 1 COLO. CODE REGS. 39-21-112(3.5)(4)(f)(iii). 19 COLO. REV. STAT. 39-21-112(3.5)(d)(I); 1 COLO. CODE REGS. 39-21-112(3.5)(5). 20 There are cascading rules for determining a purchaser s last known address. 1 COLO. CODE REGS. 39-21-112(3.5)(5)(a)(i)(A). 21 1 COLO. CODE REGS. 39-21-112(3.5)(5)(a)(ii).
Grant Thornton LLP - 4 If available, the amounts of each Colorado reportable purchase, including any taxable shipping charges or other fees charged to the customer (to the extent such amounts are subject to tax); If available, a description of the type of items purchased, such as books or consumer electronics; and If known by the retailer, whether the purchase is taxable or exempt. 22 If the net value of a Colorado purchaser s annual returns and purchases is equal or results in a credit, the retailer is not required to send the summary. 23 Also, a retailer is not required to send the summary to any purchaser whose total Colorado purchases for the prior year are less than $500. 24 However, the retailer must make commercially reasonable business efforts to identify multiple purchases made by a single purchaser from the retailer. If the charges assessed against the purchaser are not taxable, the retailer may exclude the purchases from the total purchase calculation, but this is not required. The non-collecting retailer is subject to a penalty of $10 for each required summary that it does not send. 25 For a retailer that sent the summaries to all Colorado purchasers within 30 days of the due date, the total penalty is limited to $1,000. 26 If a retailer reasonably had no knowledge of the requirement and sent the summaries within 60 days after demand by the Department, the total penalty is limited to $50,000. 27 No penalty is imposed if the noncollecting retailer only sells items that are not taxed by Colorado, or sells to exempt Colorado purchasers. 28 Penalties may be waived at the discretion of the Department in cases where reasonable cause exists. 29 Annual Customer Information Report A non-collecting retailer that is required to provide at least one Annual Purchase Summary to a Colorado purchaser must file an Annual Customer Information Report with the Department by March 1 each year. 30 The report must provide the following information: The name of each Colorado purchaser; The billing, notice and shipping addresses of each Colorado purchaser; and 22 1 COLO. CODE REGS. 39-21-112(3.5)(5)(a)(iii). The summary may state that details of these requirements, including how to file, may be found at the Department s Web site. 1 COLO. CODE REGS. 39-21-112(3.5)(5)(a)(iv). 23 1 COLO. CODE REGS. 39-21-112(3.5)(5)(a)(v). 24 1 COLO. CODE REGS. 39-21-112(3.5)(5)(b). 25 1 COLO. CODE REGS. 39-21-112(3.5)(5)(c)(i). 26 1 COLO. CODE REGS. 39-21-112(3.5)(5)(c)(ii)(A). 27 1 COLO. CODE REGS. 39-21-112(3.5)(5)(c)(ii)(B). 28 1 COLO. CODE REGS. 39-21-112(3.5)(5)(c)(ii)(C). 29 1 COLO. CODE REGS. 39-21-112(3.5)(5)(c)(iii). 30 COLO. REV. STAT. 39-21-112(3.5)(d)(II); 1 COLO. CODE REGS. 39-21-112(3.5)(6).
Grant Thornton LLP - 5 The total dollar amount of Colorado reportable purchases, including shipping charges or other fees charged to the customer, made by the retailer to each Colorado purchaser during the prior calendar year. 31 If the retailer made more than $100,000 of total gross sales in Colorado during the prior calendar year, the retailer must electronically send the report to the Department. 32 If all of the Colorado purchasers to whom the retailer makes sales are below the $500 threshold, the retailer does not need to provide a report. 33 A member of an affiliated group of corporations may file a report for the entire group provided the report includes all Colorado purchasers and reportable purchases made from non-collecting retailers within the group during the prior calendar year. 34 A retailer that fails to file the report or files an incomplete report is subject to a penalty of $10 for each purchaser that should have been included in the report. 35 If the retailer files a complete report within 30 days of the due date, the penalty is limited to $1,000. 36 If the retailer reasonably had no knowledge of the requirement and filed a complete report within 60 days of demand by the Department, the fine may not exceed $50,000. 37 No penalty is imposed if the non-collecting retailer only sells items that are not taxed by Colorado, or sells to exempt Colorado purchasers. 38 Penalties may be waived at the discretion of the Department in cases where reasonable cause exists. 39 Commentary Colorado enacted the controversial notice and reporting requirements in 2010, but enforcement of the requirements has been delayed for roughly seven years due to protracted litigation. Following the settlement agreement between DMA and the Department in February 2017, the Department is now able to enforce the requirements. Because the notice and reporting statute is not very detailed, the new emergency rule provides useful guidance for non-collecting retailers that are subject to the requirements. The emergency rule is the result of a meeting held on April 25, 2017 by the Colorado Department of Revenue s Taxation Division. The Department facilitated this stakeholder work group to meet and discuss possible revisions to the notice and reporting requirements regulation that was promulgated in 2010. 40 The stakeholder work group 31 1 COLO. CODE REGS. 39-21-112(3.5)(6)(a). Charges and fees may be excluded if the retailer is certain they are not subject to Colorado tax. The retailer should not provide any additional information about the purchases in the report. 32 1 COLO. CODE REGS. 39-21-112(3.5)(6)(c). 33 1 COLO. CODE REGS. 39-21-112(3.5)(6)(d). If the retailer is required to provide any purchaser with a summary, it must include every reportable purchase made by all of the purchasers in its report, including purchases made by de minimis purchasers. 1 COLO. CODE REGS. 39-21- 112(3.5)(6)(e). 34 1 COLO. CODE REGS. 39-21-112(3.5)(6)(f). An affiliated group may choose for each group member to file separate reports. 35 1 COLO. CODE REGS. 39-21-112(3.5)(6)(g)(i). 36 1 COLO. CODE REGS. 39-21-112(3.5)(6)(g)(ii)(A). 37 1 COLO. CODE REGS. 39-21-112(3.5)(6)(g)(ii)(B). 38 1 COLO. CODE REGS. 39-21-112(3.5)(6)(g)(ii)(C). 39 1 COLO. CODE REGS. 39-21-112(3.5)(6)(g)(iii). 40 1 COLO. CODE REGS. 39-21-112.3.5.
Grant Thornton LLP - 6 consisted of accounting professionals (including Metisse Lutz of Grant Thornton s Denver office) as well as industries selected by application to the Department for participation. The industries represented included e-commerce/cloud computing companies, manufacturers and retailers. The work group considered several matters, including: Whether the rule should address Internet marketplace sellers and, if so, how these sellers would be treated under the reporting statute and rule; Whether app sellers or app stores should be subject to this rule; What foreseeable burdens the rule placed on retailers, resulting in possible noncompliance with the requirements; Whether the information collected by the state should be excluded from the information sharing agreements the state has with local jurisdictions; Whether the rule excludes retailers that make sales into Colorado solely by means of downloading digital goods or software, namely because the Department did not want to overreach the statutory requirements without due process nexus; Whether there should be an electronic notification option for consumers to receive, and retailers to send, the annual notice via email or other electronic means rather than first class mail, the manner in which the retailer shows that the customer opted to receive such notice electronically, and how the retailer would ensure or acknowledge that the customer received such notice; and The technical specifications and format for the reports submitted by retailers. At the conclusion of the work group, comments were gathered and the emergency rule was drafted for issuance to the public. Non-collecting retailers should carefully consider the rule because they currently may be subject to the notice and reporting requirements. The first Annual Purchase Summaries are due to Colorado purchasers on January 31, 2018 and the Annual Customer Information Reports are due to the Department by March 1, 2018. Other states have followed Colorado s lead and enacted their own notice and reporting requirements. These states, as well as states considering the enactment of notice and reporting requirements, undoubtedly will monitor Colorado s enforcement of its law. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP.
Grant Thornton LLP - 7 This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.