Legislation signed into law on February 24 will have a profound effect on e-commerce and catalog companies that sell to customers in Colorado.
Companies that do not collect Colorado sales tax must notify their Colorado customers that they are obligated to file a use tax return to pay the sales and use tax themselves. It also requires them to send out an annual information statement. In addition, out-of-state e-commerce companies with related companies (for example, subsidiaries or sister corporations) in the state must collect sales tax.
E-commerce companies that do not have a related company in Colorado will have to give a notice to Colorado purchasers of their obligation to pay use tax. They will also be required to provide annual information statements to their customers, giving details of the sale transactions. These information-like returns must also be sent to the Colorado Department of Revenue, which will certainly follow up with the Colorado customers to make sure that they pay applicable use tax (at the same tax rate as the sales tax).
Although it is not certain whether Colorado has the power to mandate e-commerce companies to comply with these requirements, they should consider taking steps to do so until further guidance is issued by the Colorado Department of Revenue or by the courts.
Notice to Colorado Purchasers of Their Tax Obligations
This new law requires e-commerce and catalog companies (“Remote Sellers”) that do not collect Colorado sales tax on sales to Colorado purchasers to notify them of their tax obligations and to report such sales made as of March 1, 2010. This very fast moving sales tax bill was passed to help balance the state’s budget, and could be a precursor to similar actions in other states that are struggling to close large budget deficits. Due to the short lead time between passage and the new law’s effective date, many Remote Sellers might be caught off guard, without adequate time to tweak software to modify the record keeping that will be necessary to comply with this new notice rule.
A Remote Seller that does not collect sales tax is required to send a written notice to its Colorado customers that the customer is required to file a Colorado sales and use tax return if the Remote Seller does not collect sales tax. The penalty for each failure to notify purchasers of this obligation is US$5. This penalty will often be more than the sales tax that would otherwise have been due on the sale, in many cases, and many believe that Colorado is imposing this requirement to persuade Remote Sellers to collect the tax.
On March 2, the Colorado Department of Revenue published Emergency Regulation 39-26-102.13 on its Web site, detailing the notice companies are required to give to Colorado customers.
The Emergency Regulation provides that the sales tax notice must be given on all sales of tangible personal property that are shipped to a Colorado address, and on electronic downloads of digital goods where the “bill to” address is in Colorado. The notice must be given on the invoice, or if no invoice is normally provided, the notice must be given to the purchaser as part of the sale,either immediately before or immediately after the sale.
If an invoice is not normally given and the vendor does not have a reasonable method of giving the notice, then the notice may be given sending a confirmation email containing the notice. Remember, if an invoice is given, or if any other type of notice is usually given to the customer, the sales tax notice must be on the invoice or other notice, not just sent by email.
The sales tax notice must contain the followingstatement prominently, immediately adjacent to the dollar total of the transaction, in bold font: “Please see important tax information.” The notice must provide the following information:
- (i) The retailer is not obligated and does not collect Colorado sales tax;(ii) The purchase is subject to Colorado sales tax unless it is specifically exempt from taxation; (iii) The purchase is not exempt merely because it is made over the Internet or by other remote means;(iv) The State ofColorado requires that the taxpayer file a sales/use tax return at the end of the year reporting all purchases that were not taxed and pay tax on those purchases; (v) Retailers that do not collect Colorado sales tax are obligated to provide purchasers with an end-of-year summary of purchases to assist them in filing their tax report;(vi) Details on how to file this return may be found at the Colorado Department of Revenue Web site; and(vii) Retailers that do not collect Colorado sales tax are required by law to provide the Department with a report of the total amount of all of a purchaser’s purchases at the end of the year.
The Emergency Regulation also provides a de minimus rule that will relieve small e-commerce companies of this obligation. It says that any Remote Seller that made total gross sales in the prior year of less then $100,000, and reasonably expects total gross sales of less then $100,000 in the current year will be exempt from the notice requirement to Colorado customers. The language of this exception states that the $100,000 threshold is for total gross sales of the Remote Seller, not just sales to Colorado customers, so it should not be widely applicable to established companies. However, this exception may be helpful to start-up companies just getting sales under way.
Year-End Sales Information Requirements
In addition to the tax obligation notice requirement, a Remote Seller is obligated to send a year-end tax information statement to each Colorado purchaser (the “Annual Purchase Statement”) by January 31 of each year .This Annual Purchase Statement is to include the dates of the purchases, the amount ofthe purchases, and whether the purchase was an exempt item for all purchases made during the prior calendar year. The Annual Purchase Statement is to be sent by first class mail, with a label on the envelope that reads “Important Tax Document Enclosed.” A Remote Seller is subject to a penalty of $10 for each required Annual Purchase Statement that it fails to send. Once again, this penalty will often be greater than the sales tax actually due, which might motivate some companies to collect the tax rather than comply with this requirement. The Emergency Regulation says that additional rules will be published on this Annual Purchase Statement requirement in the future.
An annual information statement showing sales to Colorado residents must be provided to the Department of Revenue by March 1 of each year. If the Remote Seller has more than $100,000 in annual sales to Colorado customers, it will be required to file this information on magnetic media. This disclosure of information will present interesting privacy issues, because the information to be provided is to include the category of merchandise purchased. This might cause a chilling effect on purchases from some Remote Sellers.
Finally, Remote Sellers will be required to respond to subpoenas of sales information on sales to Colorado residents.
It is not certain whether Colorado will have the authority to enforce these tax obligation notice and Annual Purchase Statement requirements, because of U.S. Supreme Court cases holding that a company must have a presence in the state in order to be required to collect sales tax. It is possible that Colorado will take the position that this notice requirement is not a tax, but a regulatory requirement, which does not require the same level of presence that a sales tax collection obligation does. It is also possible that the Department of Revenue will first seek to enforce the penalties for failure to give the sales tax notice, or failure to provide the Annual Purchase Statement against e-commerce companies with affiliate programs when affiliates are present in Colorado.
This is not clear at the moment. In the interim, all Remote Sellers should, for the time being, give the Colorado use tax notice as required by the Emergency Regulation and also modify software in order to be able to generate the Annual Purchase Statement. Since the Annual Purchase Statement for 2010 sales would not be due until January 2011, there is still be time to decide whether the Annual Purchase Statements will be necessary for Remote Sellers that have no presence in Colorado, and that have no affiliates in the state.
Remote Sellers Required to Collect Sales Tax
Under the new law, a Remote Seller that is a member of a controlled group of corporations under Section 1563 of the Internal Revenue Code is deemed to be doing business in Colorado if any other member of the controlled group has a physical presence in the state, and so would be required to collect sales tax on sales to Colorado purchasers. This definition of a related company is very broad, and it would apply to many parent-subsidiary corporation and brother-sister corporation relationships.
This presumption that the Remote Seller is deemed to be doing business in the state is the statutory vehicle that attempts to establish the nexus that would allow Colorado to impose this sales and use tax collection requirement. Note that it might be possible to modify a corporate ownership structure so that a Remote Seller and a related entity with a physical presence in Colorado are not members of the same controlled group of companies. This would require a careful analysis of the ownership chart of the controlled group.
The presumption that a Remote Seller is doing business in the state can be rebutted by a showing that the in-state affiliate did not solicit any business on behalf of the Remote Seller. So a Remote Seller should take very specific actions to be certain that any related companies in Colorado do not solicit any business for the Remote Seller. For example, if anational retailer has a store in Colorado, the store should not advertise the related Remote Seller’s Web site, or offer coupons for purchases made on the Web site. Furthermore, it would be a good idea for the in-state related company to give an annual certification to the Remote Seller that it did not engage in any type of solicitation on behalf of the Remote Seller.
So, Remote Sellers that do not collect Colorado sales tax and have a related corporation doing business in Colorado should either: (1) register as a dealer and begin to collect Colorado sales tax on sales to customers there; (2) take steps to be able to prove that none of its related Colorado entities conduct any activities that can be construed as soliciting on behalf of the Remote Seller; or (3) consider a corporate restructuring so that the Remote Seller and the related Colorado entity are not considered part of the same controlled group of corporations.
This sales tax collection obligation was a compromise in the Colorado legislature. The bill began as an affiliate nexus bill, similar to the legislation adopted in New York in 2008, which would have required sales tax collection as a result of sales referrals from click-through arrangements. However, the final result requires an actual corporate relationship with a related company in order to establish the sales tax collection obligation.
Marvin Kirsner is a shareholder in the tax department of the international law firmGreenberg Traurig.