These are heady days for sales tax wonks, as state after state works to pass rules and regulations that will allow them to impose sales tax obligations on sellers with no physical presence in their borders. This state of affairs was set up earlier this year by a U.S. Supreme Court decision, South Dakota v. Wayfair, which we have written about here.
Generally, these amended rules will not change things for wineries making direct-to-consumer (DtC) shipments, as many states already required them to collect sales tax as a condition of getting a DtC license. However, there were a few exceptions.
Recently, one of those exceptions, Colorado, announced that it will soon begin requiring out-of-state sellers to start collecting and remitting sales tax on their sales to Colorado residents. This will equally affect wineries shipping DtC into the state as it does any other remote seller.
According to the notice issued by the Colorado Department of Revenue, starting on December 1, 2018, remote sellers will need to begin collecting sales tax on their sales to the state if in either the previous or current calendar year they have made $100,000 or more in gross sales delivered in Colorado, including exempt sales; or 200 or more separate transactions selling goods delivered in Colorado.
Notably, this change will also affect any winery that has already has a Retailer Use Tax account in Colorado. If you have a Retailer Use Tax account, and will exceed the thresholds listed above, you will need to close that account and create a new Sales Tax Account.
Businesses can register their Sales Tax Accounts as of November 1, 2018, and new registrants will not be required to collect sales tax on sales made before December 1, 2018. Information from the state about these rule changes, and how to manage your Colorado tax accounts can be found here.
This all comes in light of a recent post by the Tax Foundation ranking Colorado last among states in their preparation to collect sales tax from remote sellers. And indeed, there are many unsettled questions regarding these rule changes. One major open question is how local taxes will be administered. According to the Colorado DOR, signing up for a Sales Tax Account will only obligate the registrant to collect and remit state-administered taxes (these include the state rate of 4.2%, along with some county, city, and district rates that are filed with the state regulators).
However, Colorado permits 349 county, city, and district tax jurisdictions to operate independently, including the administration, registration, collecting, and filing of sales taxes. This creates an enormous hassle for businesses by establishing separate tax systems within the state.
The latest information from Colorado is unclear as to whether remote sellers will be obligated to collect local-administered taxes, or just state taxes. But if the state does determine that local taxes will need to be collected, that will go far outside the bounds of what Justice Kennedy delineated as permissible for a state in the Wayfair ruling. While no challenge has yet been leveled against these new rules, Colorado seems to be blithely walking into potential litigation.
It is little surprise that states want to jump on the post-Wayfair bandwagon and begin reaping a new source of tax revenue. But Colorado’s situation should underscore the need for a careful, deliberate approach when establishing a tax scheme for remote sellers. Old rules that seemed to work when all but a vanishingly small amount of retailers had physical locations in the state cannot be easily mapped onto out-of-state sellers.
At this time no legal challenge has been announced, but it is eminently conceivable that these rules will have to be litigated.
Still, wineries selling DtC into Colorado who meet the above thresholds should pay careful attention to these rule changes, plan appropriately, and make any needed adjustments in their tax accounts and elsewhere to make sure they will meet their obligations in the state. As things develop, if challenges arise or the state clarifies its rules, we will make sure to keep you informed.