Jim Flynn: Not easy to determine when sales tax owed

Once upon a time, not too long ago, buying goods from an out-of-state seller had a built-in benefit – the seller didn’t collect sales tax (now 8.25 percent if you live in Colorado Springs).

But states, realizing they were losing millions of dollars in revenue, began taking steps to require out-of-state sellers to collect sales tax.

This generated a tsunami of litigation in which out-of-state sellers claimed that states could not impose tax collection burdens on them without violating the commerce clause of the U.S. Constitution. From these lawsuits came a confusing set of rules in which some out-of-state sellers are required to collect tax and others are not.

To back up a bit, it has always been the case that, if you buy goods from a purely out-of-state seller having no obligation to collect sales tax, you, as the purchaser, are obligated to pay a tax – a use tax instead of a sales tax. Purchasers, however, never quite understood their use tax obligation or, if they did, they ignored it. And, as a practical matter, there isn’t much states can do to force compliance.

So, what states have been trying to do is to get out-of-state sellers to collect use tax owed by scofflaw in-state purchasers.

The litigation over the right of states to require out-of-state sellers to collect sales tax quickly (as such things go) made it clear a state could require an out-of-state seller with a substantial connection to the state to collect sales tax. However, a state could not impose such a requirement on an out-of-state seller with no such substantial connection.

The legal battleground then shifted to what constitutes a substantial connection. Some states tried to claim a substantial connection existed because of the way out-of-state sellers used in-state companies to facilitate sales. But out-of-state sellers responded by getting rid of in-state relationships.

In Colorado, the General Assembly came up with a law in 2010 requiring out-of-state sellers with no substantial connection to Colorado to provide Colorado purchasers with a notice telling them they owed use tax on their purchases.

Under the 2010 law, sellers also had to give the Colorado Department of Revenue a list of their Colorado sales, showing amounts paid. This law was challenged in court and found to be just as much in violation of the Constitution as a law requiring out-of-state sellers with no substantial connection to Colorado to collect a tax.

What Colorado now has in place is a law that tries to define, as broadly as the Constitution will allow, what constitutes a substantial connection with the state. Anyone selling, leasing or delivering tangible personal property in this state and maintaining, directly or indirectly, an office, salesroom, warehouse or similar place of business will have such a connection. Out-of-state sellers without a physical presence in Colorado but having affiliated companies with such a presence also come under the law, as do companies having a single employee in Colorado involved in sales-related activities.

Most online sellers have given up trying to understand and dance around state laws addressing the substantial connection issue and have, as the path of least resistance, chosen to collect sales tax.

There has also been an effort in Congress, since 2013, to pass legislation allowing states to require out-of-state sellers to collect sales tax. At the moment, teed up in the Senate is a bill called the Market Fairness Act of 2017 and in the House a bill called the Remote Transactions Parity Act of 2017. Whether either of these bills survive and become law is anybody’s guess.

If you think you owe use tax and don’t want to be a scofflaw, you can, with a little clicking around, find filing and payment instructions at https://colorado.gov/tax.

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