E-commerce has never been more important to retail success, but some Colorado business owners say they are putting the brakes on web-based sales to avoid burdens imposed by new tax rules in the state.
Signed by Gov. Jared Polis last week, House Bill 1240 takes effect Saturday. The bill, an updated, baked-into-the-Colorado Revised Statutes version of rules originally rolled out by the Department of Revenue last year, makes destination-based sales tax the law in the state.
That means regardless of where a business is located, if it ships products to another city, county or town in Colorado, it is required to calculate, collect and pay the sales taxes for that jurisdiction. That includes accounting for overlapping boundaries and special taxing districts such as RTD.
The rules have been coming for some time. The Department of Revenue was already tinkering with an update to sales tax rules when it was spurred into emergency action by a new federal standard set by the Supreme Court’s South Dakota vs. Wayfair ruling last year.
Two sales tax bills passed in the 2019 session: HB 1240 and Senate Bill 6, which directs the state to find a technology partner to create a simplified “one-stop” online sales tax portal. But many business owners say the laws did nothing to solve their problems.
“In every way, I just think this was so ill-advised and premature,” said Laurie Hessemer, owner of Casa Verde Paint in Denver. “I think they needed to do the infrastructure stuff first. To not have a one-stop place to do your filing and remittance, I think, is incredibly burdensome.”
Casa Verde specializes in environmentally friendly paints, plasters and wood finishes, a niche but growing segment of the home improvement market. It was founded in 2010.
Hessemer, her own bookkeeper, started remitting sales taxes to jurisdictions she ships to in February. She has run into one problem consistently: home-rule cities that do their own tax collections outside of the Department of Revenue. There are 71 in the state, ranging in size from Denver to La Junta, each with its own tax rates and list of what qualifies as taxable.
Under the terms of SB 6, home-rule cities are encouraged to be part of the one-stop portal the state’s information technology office has been tasked with procuring, but they are not required to participate.
In April, Hessemer sold a sample-sized product into the self-collecting home-rule town of Winter Park. The sale earned her $1.60 in profit. She owed $1.38 in taxes, but was told she needed to purchase a $60 business license to pay that. Instead, she plans to stop selling in Winter Park, something she considers a loss for her and for eco-conscious customers there.
Last year, Hessemer moved her website and point-of-sale system to a cloud-based software platform, greatly expanding her online options for customers. She agreed to pay a $1,000 annual licensing fee for the system.
“Now, it feels like that was all something I am going to have to write off and walk away from because of the problem of being unprofitable,” she said.
At Lakewood’s Village Roaster Coffee & Tea, co-owner Eric Bakken said the new tax rules have driven him to look for more over-the-counter retail sales opportunities instead of pushing his beans online.
“I am happy that we have a local business that has local customers, and I am not interested in becoming a statewide e-commerce business, not in the current climate,” said Bakken, who in addition to his roastery operates a cafe at St. Anthony Hospital and sells coffee, tea, wine and beer at the Lakewood Cultural Center.
The Village Roaster does have loyal customers in rural areas that Bakken does want to ship to, he said. With the potential losses he faces making small sales into home-rule cities, he said one accountant told him to skip filing in those places and set some money aside in case of an audit.
“The cost of the constant compliance is so much greater than compliance through penalties … ” he said.
Legislators did write rules to take the pressure off the state’s smallest businesses. Department of Revenue officials this week highlighted that if a business does less than $100,000 in sales in a year, it is exempt from the new rules until a computer system making it easier to assess tax rates is built.
That $100,000 standard is permanent for out-of-state retailers so long as they don’t ship through “marketplace facilitators” such as Amazon or Etsy. Facilitators are required to collect on behalf of brands. The uneven standard, set in a place to conform with the Wayfair decision, is another rule Hessemer said puts her at a disadvantage compared with out-of-state competitors. Casa Verde Paint and Village Roaster both do more than $100,000 in sales per year.
The DOR has put training and information materials on a dedicated website — colorado.gov/pacific/tax/sales-tax-changes — to help businesses comply with the rules and has grants to hire four full-time employees that will work specifically on issues.
“We understand that there are going to be challenges initially, so it’s not going to be something that we are targeting at all,” said Brendon Reese, acting director of the DOR’s taxation division.
For business owners, an easy fix would be to create a single sales tax rate for the state, but because of a knot of rules including the Taxpayer’s Bill of Rights, such a thing would likely require a statewide election. Stripping home-rule cities of their right to self collect sales tax has also been floated, but that runs afoul of the state constitution, lawmakers and lobbyists.
Tracy Kraft-Tharp, the Democratic state representative who spearheaded both sales tax bills this session and helms the state’s Sales and Use Tax Simplification Task Force, said the legislature could have done more this session, but the two bills brought all sides — including home-rule municipalities — together. Kraft-Tharp, who represents the home-rule cities of Arvada and Westminster, said getting participation in the portal is key.
“What I am hearing from the local municipalities is they have every intention of participating,” Kraft-Tharp said. “It’s not the end all, be all, it’s not the perfect answer, but hopefully it will make things a little better.”
Kevin Bommer, the executive director of the Colorado Municipal League, wasn’t ready to commit. He noted self-collecting municipalities were always operating under a destination-based sales tax system even if not every seller was complying. Now the rest of the state has caught up.
Self-collecting municipalities are seeking assurances that the one-stop system works before jumping on board. They also want to maintain the authority to audit and set their own tax rates, Bommer said.
If it can do all that, “then I think it’s got a real potential to be a solution,” Bommer said. “But that means a lot of people need to roll up their sleeves and make sure it’s done right.”