The Colorado Department of Revenue recently issued emergency temporary regulations that radically changed the sourcing rules for sales tax purposes. While many states have similar sourcing rules, Colorado has a far more complicated sales and use tax structure. To learn more about these new rules and how they work, read our insight here.
Most accounting professionals are aware that sourcing rules can vary state to state. Colorado recently announced that starting August 8, 2018, effective for tax years beginning after 2018, companies will be required to allot certain revenue based on market instead of cost of performance. This means that revenue from sales, rentals, leases, or services from customers in Colorado will now be subject to their Corporate tax. Contact Eide Bailly’s State and Local Tax team with questions to learn more.
Normally, the sale of a business interest commercially domiciled in Colorado is considered business income, and statutory apportionment rules apply. This would include the gain in the numerator of the apportionment ratio. In a recent case, however, the business that was sold was a distinct operation with its own administration, manufacturing, and distribution departments outside the state. As such, the Dept. of Rev. determined that the gain on this sale should not be sourced to Colorado.
If you are looking to sell your business, contact an Eide Bailly SALT professional to make sure you remain in compliance throughout the transaction process.
On November 25, 2017 Colorado published a permanent rule in regard to its Notice and Reporting requirement for out-of-state retailers. The permanent rule includes a few minor changes and clarifications from the previously announced requirements.
Summary of Rule
Effective July 1, 2017, Colorado required an out-of-state retailer whose total gross sales into Colorado are $100,000 or more, and who does not collect Colorado sales tax, to give a transactional notice to their Colorado purchasers that sales tax has not been collected and that use tax may be owed. Additionally, if any of their Colorado purchasers purchased more than $500 worth of products in a calendar year, then a Purchase Summary must be mailed to that purchaser and a corresponding Informational Report given to the Colorado Department of Revenue.
Noteworthy Changes with Permanent Rule
- Colorado has recognized that some out-of-state retailers making online sales utilize third party payment processing vendors. Previously, to give a transactional notice, an online retailer would be required to display a transactional notice on the “check out” page. However, for retailers that use a third party payment processor, they may not have control of the content that is on the “check out” page. Therefore, those retailers can now give the transactional notice on the “product page” of their website.
- For retailers that utilize subscription type sales such as a “Jelly of the Month Club,” Colorado has clarified the notice requirements. For subscription type sales, a transactional notice is only required when the purchaser enrolls in the subscription or renews it.
- The maximum penalty limitation given to out-of-state retailers for the first year that they are required to comply, has been removed. Now, if an out-of-state retailer fails to comply with Colorado’s Notice and Reporting rules they will have to show that they “reasonably had no knowledge” of the requirement, to be subject to a maximum penalty.
- Unlike Washington, Colorado does not directly impose a duty to either collect sales tax or comply with their Notice and Reporting requirement on marketplace providers, such as Ebay. But, sellers (with gross sales of $100,000 or more), that utilize online marketplaces, are still required to comply with Colorado’s Notice and Reporting requirement regardless of their use of a marketplace provider platform. However, the permanent rule allows marketplace providers to satisfy the Notice and Reporting requirements on behalf of the sellers.
Colorado has indicated that online retailers must include certain elements in the transactional notice. Sample language would include the following:
[Name of retailer] does not collect Colorado sales or use tax. This purchase is not exempt from Colorado sales or use tax merely because it is made over the internet or by other remote means. The State of Colorado requires purchasers to (A) report all purchases that are taxable in Colorado and for which no tax was collected by the retailer and (B) pay tax on those purchases.
The permanent rule will be effective on January 1, 2018.
If your company makes sales into Colorado without collecting sales tax, contact Eide Bailly’s State and Local Tax Team for assistance with how to comply with Colorado’s Notice and Reporting requirements.
Colorado’s sales and use tax notice and reporting requirements for remote retailers…Still Alive! Previously, the District Court granted DMA’s motion for summary judgement and granted an injunction against the Department of Revenue from enforcing such requirement. However, on February 22 the U.S. Court of Appeals for the Tenth Circuit held that the requirements do not violate the Commerce Clause. In other words, (depending on any further litigation/appeals) Colorado can reinvigorate its efforts to force certain out-of-state retailers selling to in-state customers to:
1) notify Colorado customers that they are obligated to self-report and remit use tax on their purchases;
2) to provide Colorado customers with an annual report, detailing a customer’s purchases in the previous year;
3) notify the customer that the retailer was required to report the customer’s name and amount of purchases to the Department; and
4) report to the Department, the name, billing address, shipping address and total amount of purchases made by Colorado customers.
While Colorado has led the charge, many others states may jump on the reporting requirement band wagon.
Read Sutherland’s full legal alert outlining the background on Colorado’s Use Tax Reporting Requirements, District Court Ruling, Tenth Circuit Ruling, and the possibility of Future Congressional Intervention here.
Colorado’s experiment with marijuana legalization is yielding an unexpected high, with state revenues substantially outpacing projections. Under the influence of these and other unanticipated revenues, the state is moving forward with a provision of the Taxpayer’s Bill of Rights (TABOR) that has languished unused for years: taxpayer refunds.
Colorado’s Taxpayer’s Bill of Rights, enshrined in Article X of the state constitution, requires voter approval for tax increases and institutes taxpayer refunds when state revenues under existing tax rates exceed the rate of inflation and population growth. From TABOR’s adoption in 1992 through 2001, over $2 billion has been returned to taxpayers, but there haven’t been any refunds since, the consequence of recession and a voter referendum suspending the revenue limit from 2006-2010, designed to allow state revenues to recover in the wake of the economic downturn of the early 2000s. This voter measure, designated Referendum C, allowed the state to spend $11.6 billion that would have otherwise been subject to refund during what has been termed the “five-year timeout period.”
Prior to the adoption of Referendum C, the state’s Tabor Limit was defined as
(Previous Fiscal Year Spending) x (1 + Inflation + Population Growth) + (Voter-Approved Revenue Changes)
Referendum C, however, allows the state to retain and spend all excess revenue up to a cap, defined as the highest total state revenue for a fiscal year from the timeout period onward, which eliminates the ratchet effect and allows state revenues to grow quickly as an economy emerges from recession.
Between the economic downturn and Referendum C, refunds were off the table for quite some time. Now, due in considerable part to marijuana tax revenues handily beating the state’s highly speculative projections, Colorado is on the brink of issuing TABOR refunds for the first time in fifteen years.
Colorado’s TABOR includes three refund mechanisms: (1) a six-tier sales tax refund, (2) an Earned Income Tax Credit, and (3) a temporary income tax rate reduction. The basic parameters of each are as follows.
Six-Tier Sales Tax Refund
The term “sales tax refund” is somewhat misleading, as the surplus revenue need not have been collected through sales taxes; instead, it is distributed by formula through the income tax among six income tiers in line with adjusted 1999 distribution data. If the surplus is insufficient to provide $15 or more to each taxpayer, then an equal refund is provided to all taxpayers regardless of income. With larger surpluses, the distribution is made by income tier. The following table shows distribution formulas for single filers:
|$0 – $36,500||(Excess Revenue) / (Qualified Individuals) * 25%|
|$36,501 – $78,500||(Excess Revenue) / (Qualified Individuals) * 23%|
|$78,501 – $114,100||(Excess Revenue) / (Qualified Individuals) * 19%|
|$114,001 – $148,200||(Excess Revenue) / (Qualified Individuals) * 12%|
|$148,201 – $181,100||(Excess Revenue) / (Qualified Individuals) * 6%|
|$181,000 and up||(Excess Revenue) / (Qualified Individuals) * 15%|
For the FY 2014 tax year, excess revenue was $69.7 million, all of which is to be distributed through the sales tax refund mechanism. For single filers in the lowest tier, this will yield a refund of $15 in the current tax year; those in the highest tier will receive a $47 refund.
The sales tax refund is the first refund mechanism and, depending on the excess revenue available, sometimes the last. Only if higher thresholds are met do the other mechanisms kick in, though if they do, this necessarily limits the amount subject to refund through the sales tax refund mechanism.
First enacted in 1999, the state’s Earned Income Tax Credit (EITC)—set at ten percent of the federal credit—is only activated in years when the state runs a sufficient revenue surplus to pay for the credit. Due to the recession and the five-year TABOR “timeout,” the EITC was last paid in 2001. However, legislation enacted in 2013 prospectively eliminates the revenue contingency, making the EITC permanent the next time it is triggered.
The cost of providing the Earned Income Tax Credit in tax year 2016 is an estimated $91.1 million. The state currently projects revenue at $116.8 million above the TABOR limit at the end of the current fiscal year, which is adequate to trigger the EITC and remit the residue ($25.7 million) through the six-tier sales tax refund mechanism. Henceforth the EITC would no longer be contingent upon the existence of a surplus, becoming part of the state’s base spending.
Income Tax Rate Reduction
Finally, if after triggering the EITC, sufficient excess revenue remains to cover the projected amount of an income tax rate reduction, a temporary reduction of the individual and corporate income tax from 4.63 percent to 4.5 percent would go into effect the subsequent year. Since the EITC now becomes permanent the year after it is first triggered, this will soon be the second mechanism, available after the six-tier sales tax refund.
Current projections show an anticipated $434.9 million surplus in FY 2016. Since the EITC should already have been made permanent by the end of that fiscal year, this would be enough to cover the cost of the income tax rate reduction ($226.6 million) while still leaving $208.3 million to return to taxpayers through the sales tax rebate mechanism.
Note that these figures come from a fiscal note and a Legislative Council Staff issue brief released in April. Figures released in the March economic outlook were lower, meaning that the sales tax refunds would be less, though their projected figures were still sufficient to trigger the EITC and income tax rate reduction on the same schedule.
In fact, though, there is a great deal of uncertainty for future years. Late in the 2015 legislative session, a proposal (endorsed by Governor Hickenlooper) was floated to reclassify hospital fees to exempt that revenue from TABOR, and that or similar proposals are entirely possible in subsequent years. Legislators can also go to the voters to seek authority to retain the excess revenue. And because at least part of the additional revenue is due to marijuana taxes—earmarked for education—beating expectations last year, some have expressed frustration about the perceived interference of TABOR limitations.
Legislators will undoubtedly grapple with these issues in the next session. For now, however, taxpayers can expect to benefit from at least the first stages of TABOR refunds.
The Colorado Department of Revenue (CDOR) has made the following system enhancements for the 2014 tax return processing season, as a result of discussion with COCPA members who participate on the COCPA/CDOR Joint Task Force.
New Reduced Refund/Carry-Forward Letter – This new letter will be sent when refunds or carry-forwards claimed on a return are reduced because of a penalty assessment for under payment of estimated tax during the year. The letter will show the penalty amount and the resulting net refund or carry-forward amount.
Enhanced Deceased Spouse Credit Transfer – This enhancement automates the available credit transfer in deceased spouse situations when the surviving spouse was not listed as the primary tax filer the prior year. The system will automatically transfer claimed credits for which it finds a match between the two accounts if the deceased check box is selected on the return.
New POA Correspondence Functionality – The system will automatically send the following letters to the POA on-file for the periods covered by the POA. This will be the new default for the system, but the POA or taxpayer can opt-out of this functionality by calling the CDOR call center (NOD, NOFD, Return Adjustment, Inquiry, Inquiry Resolution, Protest Resolution).
Enhanced Estimated Payments Letter – The Estimated Payments Inquiry Letter will show the date and amount of estimated payments on file with the Department. This letter generates when the taxpayer is claiming more estimated payments than are on the account.
Remember, as a Colorado Society of CPAs member, you can request assistance with particularly difficult client issues involving the CDOR by emailing the following information to COCPA CEO Mary E. Medley. Medley will forward your email and attachment(s) to the COCPA’s contact in the Department for assistance.
Colorado Account Number(s) or last four digits of the SSN(s)
Brief summary of the issue(s)
Whether you have a Power of Attorney on file – If yes, the CDOR will contact you to resolve the issue. If no, the CDOR will contact you to let you know a representative will contact your client directly.
Attached recent notice in pdf format, redacted, if you wish, to preserve client(s) confidentiality