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Colorado Redefines Nexus: The Law of Unintended Consequences

author photo of Keith Crichton

On June 6, 2014 Colorado’s governor signed HB 14-1269 titled the “Marketplace Fairness and Small Business Protection Act”, which could turn out to be a bit of a misnomer. The bill enacts a rebuttable presumption of physical presence for out-of-state retailers for sales tax purposes only. Previously the state Department of Revenue had to show that an out-of-state retailer had a physical presence in Colorado before it could require the retailer to collect state sales taxes.

In recent months there has been speculation that Colorado’s Home Rule cities might use this new definition of nexus for inter-state sales, and apply it to inter-city sales by Colorado based companies. The result could be that many more businesses with sales of over $50,000 would be forced to collect city sales taxes, and file returns with a much larger number of cities than is presently the case. What is currently a very complex administrative problem for businesses could be made dramatically more so. Even though a taxpayer must still have a physical presence under HB 14-1269, that bill places the burden of proof on the taxpayer to demonstrate that he/she does not have nexus – in other words, to prove a negative. That’s an extremely difficult task.

However, the physical presence requirement would also be removed if HB 14-1348 ever takes effect. That bill amends a bill passed in 2013 (HB 13-1295) which was intended to conform Colorado law to the federal Marketplace Fairness Act. Sylvia Dion described this in her article Colorado’s Marketplace Fairness – New Rules for Home Rules? in July, 2013. The amendment made by HB 14-1348 would only take effect if the federal legislation is passed, but it specifies that all retail sales made within the state will be deemed to take place at the location of the buyer. This seems to imply that the retailer has a place of business in the same location as the buyer. But the primary purpose for passage of a federal MFA is to overturn the physical presence requirement of Quill, so that barrier to the assertion of nexus under HB 14-1269 would be removed. Therefore it could make the assertion of nexus even more difficult to rebut.

On the other hand, if the federal MFA were to pass in its current form, it is quite possible that Colorado would not qualify to adopt its features. That is because it is not clear whether HB 13-1295 succeeded in modifying Colorado law sufficiently to meet the requirements of the MFA. Without the participation of Home Rule cities, we don’t know if Colorado would qualify under the current MFA. The real question is whether the Home Rule cities would agree to allow the state sufficient authority over the administration of their taxes in order to meet the MFA’s demands.

So, at this point in time there are more questions than answers. This certainly was not the intent of the legislature, but it seems to be the result.

Keith Crichton, CPA is President of Crichton Consulting Services, LLC a specialty CPA firm located in Centennial, Colorado, a suburb of Denver. For the last 30 years he has been responsible for the corporate income/franchise, sales and use, property and other tax filings for all 50 states. He has been the tax manager of several multistate companies, including several equipment leasing companies and an international accounting and tax consulting company.

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7 Responses to Colorado Redefines Nexus: The Law of Unintended Consequences

  • Posted by Alexandra on March 1, 2016 6:12am:

    What are the tax implications for a SaaS business based in New York that will have a remote employee in the state of colorado? We have a few Colorado based customers that use our product and pay an annual subscription fee. The employee would be someone in HR so not related to the sales. Thanks for your help!

    • Posted by Keith on March 14, 2016 10:57am:

      The presence of an employee in Colorado will create nexus for your company. However, Colorado only taxes computer software delivered via some tangible media such as a CD, or in packaged form sold over-the-counter. If the software is simply delivered electronically, or accessed electronically, such as SAAS, it is not taxable. Therefore your company is not selling any taxable products and would not be required to register with the Department of Revenue for sales and use tax purposes. It most likely would be required to register for income tax purposes, but that is a different subject beyond the scope of this discussion.

  • Posted by Deanna on February 24, 2016 7:01pm:

    We are a small business in Lakewood. Our customer purchased product at our store, which we delivered to the job site in City/County of Denver. Based on the areas in common, I believe I would only tax them for Colorado and RTD; however, in reading the Denver City/County website, it sounds like I need to be registered in Denver and collect for Denver. Can Denver require that? Or is it the customer's responsibility to file use tax for the Denver portion?

    • Posted by Author photo of Keith CrichtonKeith Crichton on March 14, 2016 10:42am:

      Yes, Denver can require you to collect it's taxes, and you will need to register in Denver. In general CRS Sec 29-2-105(1)(b) provides that title and possession of property pass at the point of delivery, which in this case is in Denver. If this is an isolated instance, you may be able to make the argument with the city that you are not doing business there after 6-12 months so that you can stop filing monthly returns. Also you could have avoided this result by having your products delivered by a common carrier such as UPS or FedEx.

  • Posted by Melissa on January 26, 2016 7:52pm:

    I'm working with a client, and I would love any insight into when a business has to claim nexus in a Colorado home-rule city/locality. My client is an online retailer-Amazon FBA. They are located in Grand Junction and have alerted me that they need to collect, remit, and file sales tax in every home-rule city, because they are an online seller. I feel this client was misinformed. Shouldn't they only need to collect and remit in that home rule city if they have physical presence in that same city? Thanks!

  • Posted by George on July 1, 2014 9:14am:

    Living in Colorado and dealing with small business is already a difficult task. According to a representative from the Colorado Department of Revenue in a sales tax class she presented 1+ years ago, even the government entities get the sales tax wrong because it is such a complex system. Would it not be better for each state, Colorado included, to follow the lead of Arizona? Origination based sales tax and the removal of all home rule (as they are beginning to do Jan 1, 20115). One sales tax return per period based on the sellers location. Even if Colorado would just do away with home rule cities, it would make our states sales tax simpler, and with simplicity comes compliance and with compliance typically comes greater revenue.

    • Posted by Author photo of Keith CrichtonKeith Crichton on July 25, 2014 9:55am:

      George,
      I deal with many small businesses in Colorado and understand your frustration. I have mentioned in the past that Colorado arguably has the most complex sales tax system in the country. What you suggest would simplify things greatly. Unfortunately there are two difficulties that stand in the way.
      First, the legal basis behind Colorado’s sales tax (and that of many other states) is that generally the tax is levied upon the buyer, and is calculated based upon the purchase price of the item bought. It usually must be collected by the retailer, provided that the retailer is doing business in the tax jurisdiction(s) where the buyer is located. If the retailer is not doing business there, then the buyer owes complementary use tax(es) to the tax jurisdiction(s). Accordingly, an origination based sales tax runs contrary to the legal and conceptual foundation of Colorado’s sales tax.
      However the Arizona Transaction Privilege Tax, which is commonly thought of as its sales tax, is legally imposed upon the seller, but is permitted to be passed on to the buyer. Therefore changing it from a destination to an origin based tax is of little consequence, because the seller will simply build it into the selling price of the product.
      Next, the Colorado home rule cities were established by, and the rules for creating one, are specified in the state constitution. Further, the cities are extraordinarily protective of the privileges afforded to them by home rule status. Therefore, the likelihood of doing away with them is about the same as the Colorado Rockies winning the World Series this year. Anything is possible, but….
      So I agree that your proposal would provide simplicity. But it’s highly unlikely.

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