Colorado’s Unique Sales Tax Could Cut off Consumers (1)

June 20, 2019, 8:45 AM; Updated: June 20, 2019, 9:02 PM

There’s something bizarre going on in the Centennial State.

Alan Smith of Sales Tax LLC is a practitioner who represents retailers trying to comply with rules that Colorado put in place after the U.S. Supreme Court’s South Dakota v. Wayfair decision. As such, he is well-versed in the confusion the state’s sales tax changes—which went into effect June 1—have created for many small businesses located outside of the state.

But Smith recently experienced the upheaval caused by the new rules first-hand.

Smith was shopping online for new parts for his 2009 Toyota Sienna minivan and his 1994 Chevrolet Camaro Z28 convertible. Shipping and tax for the parts came to $78.76.

He hit “send.” And the order was promptly rejected.

The online store, Madison, Wisc.-based Rock Auto.com, said it couldn’t ship the parts to his address because it’s located in a tax jurisdiction that currently requires sales tax collected from customers to be paid separately to state and city governments, Smith said.

A message on the company’s website states: “We comply with state-administered taxes nationwide, but do not have the capacity to file city tax returns in hundreds of individual localities where we have no physical presence.”

The out-of-state seller’s response is an incorrect interpretation of the new rules, Smith said. The site has set its system to refuse sales to Colorado’s home-rule cities because of an improper understanding of tax changes, which at present only apply to “statutory” tax jurisdictions—local governments for whom the Colorado Department of Revenue collects taxes, he said.

It may be far from an isolated case of confusion.

“I’ve been expecting this to happen for a while now, and I’m sure it isn’t just one company that’s doing this,” said Phil Horwitz, a director in the national state and local tax practice for Moss Adams in Denver. “The problem with Colorado’s system is that it could keep companies from selling into the entire state all together ... Colorado cities are so focused on making their own way, regardless of the cost to consumers.”

Horwitz backs Rock Auto’s decision not to sell into some parts of Colorado, calling the move a “well informed business decision.” Other businesses that haven’t considered the issue and might subject themselves to similar complexities “are doing so with ignorance,” he said.

Editor’s Note: This piece is one in a series of articles centered on the one-year anniversary of the Wayfair ruling.

Colorado Stands Alone

There are two other full-fledged home-rule states—Alabama and Louisiana. But Horwitz said consumers in these states wouldn’t experience a similar issue because Alabama offers a voluntary single rate for registered sellers, and Louisiana’s remote sales tax law is currently delayed while the state addresses its home-rule issue.

Colorado’s home-rule provision in a post-Wayfair world means that each jurisdiction in the state could technically administer its own sales tax rate and collection requirements, creating confusion for companies trying to sell into the state.

The high court’s Wayfair decision tossed out its 1992 physical presence standard affirmed in Quill Corp. v. North Dakota that limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law would pass constitutional muster.

Since the Wayfair ruling, dozens of states have passed versions of South Dakota’s law or have enforced existing economic threshold laws and rules they already have on the books. Many states are also rushing to impose duties on marketplace facilitators, arguing that marketplaces such as Amazon.com Inc., and Etsy Inc. have a duty to collect and remit all sales taxes applicable to transactions by remote sellers using their sales platforms.

With Home Rule Comes Confusion

No home-rule city in Colorado has adopted South Dakota-styled enforcement law since the Wayfair ruling, Smith said. Since Smith lives in Commerce City, Colo., a self-collecting home-rule municipality, retailers with physical presence there are the only ones required to collect the city’s sales taxes.

After he was denied, Smith emailed Rock Auto’s customer service in an attempt to salvage his order. “They go far beyond what I can buy at a local parts store chain including auto body parts, convertible tops and far more,” he said.

Rock Auto responded—incorrectly, Smith says—that it’s required to collect taxes for all cities in Colorado. “We can only allow orders for cities in which the tax is state collected, we cannot ship to cities that follow the home rule,” a customer service representative told Smith in an email.

Rock Auto didn’t respond to Bloomberg Tax’s requests for comment.

(Updated to include information on marketplace facilitators in 15th paragraph)

To contact the reporters on this story: Tripp Baltz in Denver at abaltz@bloomberglaw.com; Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com

To read more articles log in.

Learn more about a Bloomberg Law subscription.