Use Tax Reporting Requirements for Remote Sellers

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In my last article I alluded to the Direct Marketing Association case out of Colorado. This case arose out of a law enacted in Colorado that imposed certain notice and reporting requirements on remote sellers.

Under Quill, without a physical presence in Colorado, out-of-state sellers are not constitutionally required to collect Colorado sales or use taxes on sales to their Colorado customers. Rather than try to impose an economic nexus standard and require such sellers to collect the tax (which my previous article discussed), Colorado instead enacted a law in 2010 that imposed use tax notice and reporting obligations on sellers. Colorado, like all states, knows that there are millions of dollars of unpaid use taxes that individuals and businesses are not paying to the state from purchases that are made from out-of-state sellers (via the internet, for example). Knowing that it is currently unconstitutional to require remote sellers to charge the tax when they don’t have a physical presence in the state, Colorado creatively instituted a notice and reporting requirement.

Under these requirements, remote sellers that have at least $100,000 of gross sales into Colorado and are not charging sales tax are required to send a Transactional Notice to their Colorado customers, notifying them that Colorado use tax may have to be self-assessed (i.e., paid by the customer directly to the states). Additionally, remote sellers must provide an Annual Purchase Summary (showing the dates, categories, and amounts of purchases) to each of their Colorado customers who spent more than $500, as a further reminder of their obligation to pay use taxes. Moreover, remote sellers must also provide an Annual Customer Information Report to the Colorado Department of Revenue that details each the remote sellers’ Colorado customers’ names, addresses, the total amount of purchases and other related information. By instituting these measures, Colorado hopes that its residents’ use tax non-compliance will be curtailed. Presumably, under a matching program, Colorado will be able to determine who has properly self-assessed and remitted their use taxes, and who has not, for which they will assess tax, penalties, and interest.

Direct Marketing Association (“DMA”) brought suit alleging that these requirements violated the provisions of the U.S. and Colorado Constitutions. Without getting into the details of the court battles that ensued (including reaching the U.S. Supreme Court where certiorari was denied), it was held that Colorado’s notice and reporting requirements do not violate the respective constitutions. The law requiring non-collecting sellers to notify Colorado customers and report transactions to Colorado did not discriminate or unduly burden interstate commerce. Colorado is not requiring remote sellers to charge, collect, and remit the tax, which is clearly unconstitutional under the U.S. Supreme Court’s Quill decision, but rather is only requesting that remote sellers notify their customers and report to the state that use taxes may be owed.

Subsequent to the decision, Colorado has agreed to start enforcing the notice and reporting requirements, effective July 1, 2017. Therefore, remote sellers selling to Colorado customers after June 30, 2017 will either have to charge Colorado sales (use) tax or comply with the notice and reporting requirements. Non-collecting remote sellers will have to begin issuing Transactional Notices to their customers and their first Annual Purchase Summary will be required to be mailed to Colorado customers by January 31, 2018 (for 2017 purchases). In addition, the Annual Customer Information Report will be required to be filed with the Colorado Department of Revenue by March 1, 2018 (for 2017 purchases).

Colorado Department of Revenue is working on rules to implement the now-sanctioned legislation. Follow this link to hear the working group address the notification and reporting requirements.

But wait there’s more…Colorado is not the only state that has passed such legislation. Notice and reporting mandates have also been enacted in a number of states including Kentucky, Louisiana, Oklahoma, South Dakota, and Vermont. Although these states have passed legislation that is similar to Colorado’s, as separate sovereignties, they, of course, have different requirements and due dates. And, as a bonus, more state legislators have raised potential legislation during this year’s legislative sessions to require remote sellers to inform their customers of their use tax obligations and to provide a listing of those informed customers to their tax authorities.

The world of sales and use tax compliance is getting exceedingly complex. Remote sellers need to be extremely aware of their nexus footprint, both physical and economical, in order to comply with their sales and use tax collection obligations. Once aware, remote sellers then need to understand the taxability of their products and services in each jurisdiction they sell into and, if taxable, at what tax rate to charge, and, if not taxable, securing and maintaining correct exemption certificates. In states that don’t mandate sales tax collection under the Quill standard or the (unconstitutional) economic nexus standard, remote sellers may now have to issue their customers and the Departments of Revenue information about customer names, addresses, purchases, amounts, and taxability. Understanding these rules and complying with them create a significant compliance burden on businesses, where it is easy to run afoul and be exposed to significant taxes, interest, and penalties, all of which may be uncollectible from their customers.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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