What makes Colorado so difficult?
Colorado is arguably the most difficult state for handling sales and use tax. Many businesses face years of accumulation of unknown liabilities – until audited or a change in personnel or information occurs or a perspective buyer’s due diligence team discovers it.
We’ve found that the major difficulties result from these few primary issues:
The Colorado Department of Revenue does not administer sales and use tax for all local jurisdictions.
The Colorado Department of Revenue (“DOR”) collects for many smaller towns and cities, special districts and all but two of the counties that have a sales tax. One sales tax license for each physical location allows for the collection and remittance of the State and state-collected jurisdictions’ sales tax.
However, there are 72 self-collecting home-rule jurisdictions like Aurora, Denver, Colorado Springs, Fort Collins and Lakewood.
For a list of all state-collected local and home rule jurisdictions, rates, etc. check the DR 1002 which is typically update in late December or early January and late June or early July.
Difference in Taxability, the Tax Base and Rates
Though the DOR administers sales tax for many local jurisdictions, those state-collected or “Statutory” jurisdictions still can opt in or out of 16 different exemptions the DOR offers. These include Food for Home Consumption, Machinery and Machine Tools, Farm Equipment, Food Sold through Vending Machines and School Supplies to name a few. This adds layers of complexity for proper sales tax compliance.
The home-rule jurisdictions do not have to follow the State’s laws on taxability, etc. They have their own laws that often differ from the State’s and from each other.
Even if a definition is exactly the same between jurisdictions, their interpretations can be different. One may tax it and the other might not. They have their own municipal codes and guidance, their own auditors or contract auditors and court cases, etc. This results in the challenging need for an ERP system that can calculate tax differently for the State and the local level on the same item such as delivery charges.
Sales tax rates vary widely among the state-collected and home-rule jurisdictions. There are also varied rates within some home-rule jurisdictions for food, regular taxable items, aviation fuel, automobile rentals and marijuana, etc.
Rate changes for all jurisdictions and changes to the Opt In/ Opt Out Exemptions for state-collected jurisdictions generally occur for a few jurisdictions every 6 months. See the DR 1002.
Separate Registrations, Licensing and Reporting
For the home-rule jurisdictions, separate registrations, licensing and reporting are required through each local jurisdiction’s own online portal or paper process.
A central portal for registrations, filing returns and remittance of the tax is in the works, but the home-rule jurisdictions do not have to use it.
Address Verification is Crucial
Customer’s mailing addresses commonly differ from the actual addresses. Zip+4 is not sufficient.
The mailing address often does not reflect the true city or it lists a city for an address in an unincorporated part of a county. Even if the mailing address city name is correct, determining whether or not the address is in a County or Special District boundary is still essential.
The DOR will provide a GIS database for address verification with a hold-harmless provision this summer. For now, refer to the DOR’s Sales and Use Tax Rate Lookup page for options.
State-wide collection of State and state-collected sales tax and reporting by Branch/ Site Ids.
– This entails physical and nonphysical location Branch IDs. It also generally means filing separate returns for each location, the preapproval for up loading a spreadsheet or the use of a sales tax software compliance provider. This significant change to full Destination Sourcing became effective 6/1/19 along with Economic Nexus and Marketplace changes effective 10/1/19.
There are Small Business Exceptions for out-of-state and in-state sellers
Multiple Audits
On top of the difficulties in determining what jurisdictions customers are in, what is and isn’t taxable, what the current rates are and getting register and filing returns, businesses are subject to multiple sales and use tax audits for the same periods.
The DOR and each home-rule city can audit. Denver generally has 40+ auditors at any given point in time and they travel to audit businesses in other states that are doing business in Denver.
Get Help if Needed – Handling Colorado sales and use tax properly is complicated. We’re here to help.
Sales Tax Colorado, LLC
303-289-6100