A bill that would etch controversial rule changes to Colorado’s sales tax collection framework into law received unanimous support from the House Finance Committee on Thursday. It will now head to the Appropriations Committee as its sponsors race to get it approved before the 2019 legislative session ends on May 3 and the twice-delayed rules go into effect June 1.
House Bill 1240, dubbed the “Sales and Use Tax Administration” bill, is being co-sponsored in the House by Rep. Tracy Kraft-Tharp, D-Arvada, and Rep. Kevin Van Winkle, R-Highlands Ranch. If passed, it would make a number of changes to the state’s sales tax system.
Most impactful, it would codify a rule change announced by the Colorado Department of Revenue last year that establishes a destination-based sales tax system in the state. Instead of online retailers assessing, collecting and paying the state sales taxes based on taxing jurisdictions they share in common with their customers, the bill would mandate that they collect taxes based on the buyer’s address.
It’s that requirement that has proved controversial: Many small-business owners worry the additional red tape will put them out of business.
In a state featuring a multitude of special taxing districts and entities, as well as home-rule cities that establish their own tax codes, there are about 700 unique sales tax combinations in Colorado, state tax officials say.
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The bill, as with the Department of Revenue’s 2018 rule change, is motivated in part by a U.S. Supreme Court ruling last June that cleared the path for governments to tax retailers who ship goods into their states even if they don’t have a physical presence or other so-called “economic nexus” within their borders.
“I can only find six states that haven’t established some sort of nexus in state law,” Van Winkle said Thursday. “Both Wyoming and Nebraska have bills similar to this that take effect on July 1. Utah, North Dakota, South Dakota and Texas already have passed those bills, and they already are operating under this new tax system.”
Kraft-Tharp has been a crusader for sales tax changes in Colorado. She leads the state’s bipartisan sales tax simplification tax force. She co-sponsored a bill earlier in the 2019 session that gives state officials authority to partner with a software provider to build a one-stop sales tax platform, a tool that would allow retailers to assess and pay taxes online. That bill is scheduled to be signed by Gov. Jared Polis on Friday.
Beyond making the Department of Revenue’s administrative rules state law, there are four other things HB 1240 will do if enacted, per Kraft-Tharp’s comments before the finance committee Thursday.
- Starting June 1, it would mandate that all out-of-state retailers that do a minimum of $100,000 worth of sales in the state in a given year must collect and assess taxes based on where their Colorado buyers live, a threshold consistent with the Supreme Court ruling in South Dakota. Out-of-state retailers who sell less than $100,000 worth of taxable goods in Colorado over the course of a year are exempt from the rule.
- It grants Colorado-based businesses that sell less than $100,000 worth of products a reprieve on performing destination-based tax collections until the state’s online portal or another suitable system is in place. The portal process could take more than a year.
- It requires “marketplace facilitators” such as Amazon, Etsy and other online retail marketplaces to collect and remit taxes on behalf of the business that use their platform. Amazon already does this in the state. This rule would go into effect Oct. 1, Kraft-Tharp said.
- It does away with outdated references to old law on the topic.
The bill has big fans at the Colorado Retail Council, a nonprofit industry trade group representing large retailers. Organization president Chris Howes told the committee, “We are happy to see some fairness coming our way.”
No individual retailers spoke at the hearing but it’s likely some small business may chafe when they read the bill. Many small-business owners have lobbied to be exempt from the destination-based collection rules if they do less than $100,000 in sales in Colorado in a year, the same threshold applied to their out-of-state competitors. Senate Bill 131, a bill also co-sponsored by Van Winkle, would have created that exemption but it was struck down in committee in February.
Kraft-Tharp said that bill would have cost the state and home rule governments a combined $50 million in tax revenue if it passed. She continues to tinker with technical language in HB 1240 to ensure it is clear and doesn’t have unintended consequences for any industry. Her mission, she said, is to strike a balance between all involved.
“We’ve been working with everybody and getting everybody’s input,” she said. “Nobody is 100 percent happy, and nobody is 100 percent unhappy.”
