Colorado’s Dangerous New Tax Example

This post is in: Business

screamingIn February, Colorado passed a tax law that should have everyone on the Internet screaming. Yet I’m not hearing anywhere near the uproar I’d expect.

When I first started researching this bill, I kept running across articles from affiliate marketers saying that it wouldn’t impact them, because Colorado had removed the word “affiliate” from their nexus definition. That’s technically true, but I think they missed the forest for the trees. Colorado could afford to lose the affiliate language from the tax bill, because it was casting a wider net.

Effective March 1st, if you, as an online retailer, sell someone in Colorado a product over the Internet, you are obliged to inform the purchaser that he or she has a use tax obligation. Use tax is what we’re supposed to pay when we buy things over the Internet. It’s the equivalent of the sales tax we would have paid, if we’d got down the road and bought locally.

If you put the pieces together, you come up with this: Colorado has done what many states have been trying to do – figured out a way to tax the Internet.

Back to your merchant obligations. You are obliged to tell the purchaser about their use tax obligation again, at tax time. And, just in case they didn’t get the message, you also are obliged to file a report with the Colorado tax authorities telling them which of their state residents you sold stuff to. So … you get to track the tax, calculate the tax, determine whether there’s state, city, municipal, county, etc., and pay for your own software upgrades, etc.

If you don’t follow Colorado’s new law, you could face fines and penalties, plus have your records subpoenaed.

Or, you could just not sell to customers in Colorado. Think about it. You’re a small business with limited resources. Wouldn’t it make sense to weigh the cost of compliance against the potential or historical lost revenues from CO-based sales?

I don’t like this law. More than that, I’m afraid it will catch on.


  1. crypter says:

    They don’t have jurisdiction over any other state so they cannot force online retailers into doing this. I have spoken with almost a hundred online retailers and most of them say they will either not bother with any of this or they will add a $5 surcharge to every Colorado order to get the message out to CO residents to make an uproar about this to their state government that this is ridiculous. What if every other state follows? You couldn’t keep up with the paperwork involved.

  2. Megan Hughes says:

    Hi crypter,

    Thanks for the links, and your comments. I agree that it’s a crazy proposition, but I’m not so sure it won’t catch on. If it collects any revenue for CO – even if it just persuades residents to file more use tax – then I think we’ll see an avalanche of other states following suit. I know the Multistate Tax Commission is looking at the idea.

    I think the appeal winding through NY will be critical in determining the fate of Internet taxation. If NY loses, then the whole idea of taxing the Internet will have to take a huge step back and reassess.

    The idea of physical nexus in a state has been under fire for years. There have been several major cases in MA, NJ and other states where the idea has been overturned in favor of economic substance. It’s been appealed to the Supreme Court, but they’ve declined to hear anything so far, saying it’s a Congressional issue.

    I think the bottom line is retailers need to be careful and aware of what’s going on.

  3. DrJean says:

    There is a $100,000 minimum, so very small retailers won’t have to comply. But it doesn’t take much to get to the $100,000 mark for larger retailers. There are other states trying the same, and watching Colorado to see what’s going on. See my recent article on this:

  4. Megan Hughes says:

    Hi Dr. Jean

    Great article – thanks for sharing 🙂

    When I read the act, I see the $100k requirement, but only as it pertains to requiring those retailers to file their information returns with the CO Dept of Revenue electronically. Under $100k can file by paper.

    I didn’t read anything that specifically exempted >$100k retailers from the reporting obligation … but then again, I could have misread 😀

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