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Colorado's Marketplace Fairness - New Rules for Home Rules?

author photo of Sylvia F. Dion

It’s been more than two months since the U.S. Senate passed the Marketplace Fairness Act of 2013, S. 743. And some would say its fate is uncertain. Even though the proposal had an easy passage through the Senate, the House – where it’s currently awaiting consideration - has yet to address it.

Still, this hasn’t stopped at least one state – Colorado - from enacting legislation in anticipation of the Marketplace Fairness Act of 2013 (“MFA”) becoming final law.

If you’re wondering why Colorado has enacted what I’ll call “MFA conforming legislation” keep in mind that in order for states to have the authority to require remote sellers to collect tax on sales to in-state customers, states must either become full-member Streamlined Sales Tax (“SST”) states or adopt and implement the MFA’s alternative simplification and other provisions. (For this reason, the MFA is sometimes referred to as a compromise or hybrid solution.)

But “collection authority” is not immediate for either SST full-member states or states that seek to qualify under the MFA’s alternative. SST states are required to first publish a notice of the state’s intent to exercise its collection authority. And non-SST states are required to enact state legislation to implement the MFA’s requirements. (I’ll discuss effective dates in a bit!)

Enacting the required state legislation is exactly what Colorado, a non-SST state, has done. On May 28th, Governor Hickenlooper signed Colorado House Bill (H.B.) 13-1295, An Act Concerning the Implementation of the Minimum Simplification Requirements of the Proposed Federal “Marketplace Fairness Act of 2013” in Order for the State to be Authorized by the Federal Government to Require Remote Sellers to Collect Sales Tax on Taxable Sales Made Within the State.

Now the fact that Colorado has enacted state legislation is significant for several reasons. Not only is Colorado the first state to take formal action in anticipation of the passage of the MFA, but Colorado has enacted this legislation even though the fate of the MFA is uncertain. (Note, Colorado's legislation is not effective until July 1, 2014 and its MFA conformity provisions are contingent upon the MFA actually becoming law.) But another aspect that makes Colorado’s “adopting” legislation so significant is its impact on Colorado’s local taxing jurisdictions. You see, Colorado is what is known as a “Home Rule” state.

Before explaining the provisions of Colorado H.B.13-1295, it’s important to spend just a moment on what it means to be a “Home Rule” state. Essentially, some states, like Colorado, Illinois and Louisiana (just to name a few), grant “Home Rule” status to some cities (and sometimes counties) which allows those cities/counties to levy (and in some states administer) their own sales taxes. As SalesTaxSupport’s new “Home Rule” blogger, Keith Crichton, explains in his June 24th post, “Colorado is likely the most difficult state in the country for sales and use taxes because of its Home Rule cities.” Keith adds that, “Under the State Constitution, about 65 cities in the state (and counting) qualify for Home Rule status, which allows them to levy and administer their own sales and use taxes and audits, and to define what is and is not taxable within their city limits. As a result what is taxable on one side of a street may be exempt across the street (literally).

Because the MFA requires things such as a single state-level entity to administer all sales and use tax (“SUT”) laws and a uniform SUT base among the state and its local taxing jurisdictions – well, you can see where the MFA’s requirements could be difficult to implement in “Home Rule” states where local jurisdictions have their own rules and are accustomed to administering and enforcing their own local laws. Now we can segway back to what Colorado’s MFA conforming legislation requires.

Colorado Enacts H.B. 13-1295

As I mentioned above, in anticipation of the potential passage of the MFA, Colorado has enacted legislation which essentially would require that the simplification and other requirements spelled out in the MFA’s alternative for non-SST states are implemented. The new legislation designates the Colorado Department of Revenue (“the Department”) as the sole administrator, collector and enforcer of a remote seller’s sales and use tax requirements. It also requires the Department to provide all of the following:

  • Information regarding the taxability of products and services and information on what products and services are exempt
  • A database of taxability by product/service and sales tax rates, along with a database of local taxing jurisdiction boundaries to remote sellers
  • A 90-day notice to remote sellers and certified software providers (“CSPs”) of any tax rate change
  • Free software for calculating and filing sales tax returns as well as any necessary updates
  • Liability relief from penalties and interest for remote sellers and other retailers which are due to software errors

Like the MFA, the Colorado law defines a remote seller as a person who makes a “remote sale”, but which does not include a small seller as defined under federal law. It also defines a “remote sale” as a sale into the state in which the retailer would not legally be required to pay, collect or remit state or local sales taxes unless provided by an act of Congress. The Colorado legislation also adopts the same hierarchy of sourcing rules in the MFA for non-SST states.

Optional Participation by “Home Rule” Jurisdictions

In order for a Colorado “home rule” taxing jurisdiction to exercise its collection authority over remote sellers (that is, to be able to require remote sellers to collect their local tax), the “home rule” jurisdiction must elect to “opt-in” to the state’s requirements by passing a local ordinance or resolution. Colorado H.B. 13-1295 defines a “local taxing jurisdiction” as a “city, town, municipality, county, special district or authority authorized to levy a sales tax, and any municipality governed by a home rule charter that passes an ordinance, resolution or charter provision accepting the state’s administration and distribution of its local sales tax on remote sales that is collected and remitted by remote sellers in conformance with the provisions of this legislation.

The legislation also states that the local taxing jurisdictions that elect to participate must grant authority to the Colorado Department of Revenue to be the sole administrator, collector and enforcer of a remote seller’s sales and use tax requirements. What this means is that in order for a “home rule” jurisdiction to be able to require remote sellers to collect their local tax, the jurisdiction must be willing to give up some of the autonomy and authority it currently exercises, such as by agreeing to grant enforcement responsibilities to the Department and agreeing to tax products and services according to how the state defines as being taxable.

Conclusion

Even though Colorado has enacted legislation in anticipation of the MFA becoming final law, it should be noted that the effective date of the legislation is not until July 1, 2014 and that the legislation is largely contingent on the MFA being enacted. Because this effective date is a year away, it meets the MFA requirement that a non-SST cannot exercise its collection authority any earlier than the first day of a calendar quarter which is at least six months after the date a state enacts legislation adopting the MFA's requirements. (SST states can exercise their collection authority on the first day of a calendar quarter that is at least 180 days after the state publishes a notice of its intent to exercise its collection authority under the MFA.)

But has Colorado acted too quickly? As of today’s date the U.S. House of Representatives has yet to consider the MFA and key House members have noted that the MFA will be more highly scrutinized by the House. This means that the requirements in the current version of the MFA could change substantially if the legislation makes its way out of the House – which would require Colorado to update its law.

Will other non-SST states follow Colorado’s lead? And what about SST states whose simplification is already in conformity with the MFA?

The SST Governing Board is also moving forward in anticipation of the MFA’s passage. During a recent legislative webcast, Richard Dobson, Chairman of the of the SST's Federal Legislation Implementation Committee, noted that the SST is discussing whether a SST state can issue the 180-day notice even before the legislation has been enacted. This same Federal Legislation Implementation Committee has been busy discussing significant implementation issues and formulating resources that would assist in implementation.

Although some would say the fate of the MFA is uncertain, I'm certain there is more to come. So stay tuned for more developments!!

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Missed my last post? Catch it here: Marketplace Fairness Act: The Issues No One is Talking About"

What to see more of my blog articles on Internet Sales Tax issues? See “Other recent Internet Tax / E-Commerce posts by Sylvia F. Dion” below or view my contributor page here at SalesTaxSupport.com for a full list of my blog articles.

What’s up next? Continued coverage on the Marketplace Fairness Act, including what the MFA will mean for Sales Tax Holidays. Also coming soon, a special update on State “Amazon Laws” (because they won’t go away even if the MFA becomes final law) including which states have enacted them and how the different types of provisions within these laws compare. (This will coincide with SalesTaxSupport.com’s launch of the by-state Amazon Law section.)

About the Author: Sylvia F. Dion, MPA, CPA, is the Founder and Managing Partner of SALT Consulting firm, PrietoDion Consulting Partners LLC. Sylvia has been covering Internet Sales Tax developments for SalesTaxSupport’s Issues blog since 2011. Sylvia is also the “U.S. Sales Tax for Foreign Sellers” contributor for SalesTaxSupport’s Industry blog and the “Massachusetts Sales Tax” contributor for SalesTaxSupport’s State blog. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at sylviadion@prietodiontax.com or at 978-846-1641.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “Internet Tax / E-Commerce” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

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