Colorado localities create nexus provisions

In recent months, a growing number of Colorado self-collecting home rule municipalities have enacted their own sales and use tax economic nexus provisions for purposes of local sales tax collection and remittance. These provisions follow a Model Ordinance on Economic Nexus and Marketplace Facilitators (Model Ordinance) adopted by the Colorado Municipal League (CML). The Model Ordinance enables self-collecting home rule municipalities to impose local sales tax collection duties on remote sellers and marketplace facilitators making annual sales into the state in excess of $100,000 per year. Several Colorado municipalities are beginning to enforce economic nexus standards through these provisions without formal notice to the public.

Colorado state and local sales tax background

Under Colorado law, municipalities are permitted to adopt “home rule” status, whereby they choose to be governed by their own rules with respect to local and municipal matters rather than being constrained by state law.¹ Home rule municipalities may either allow the state to collect their local sales tax or elect to self-collect the tax. The approximately 70 self-collecting Colorado municipalities are commonly referred to as home rule municipalities since they all have home rule status with the state. Some of Colorado’s larger home rule municipalities include the cities of Denver, Colorado Springs, Boulder and Aurora.

Self-collecting home rule municipalities generally operate as self-governing taxing authorities and are responsible for the adoption and administration of their own sales and use tax codes, in addition to enforcement and conducting audits. In many cases, the composition of self-collected municipal sales tax bases may differ from the state sales tax base. In contrast, state-collected jurisdictions are required to follow state sales tax laws, with the option to adjust their tax bases for sales of certain types of tangible personal property.

In response to the Wayfair decision, Colorado quickly enacted legislation establishing a sales and use tax economic nexus standard of $100,000 in sales for purposes of the state sales tax and state-collected localities.² Effective June 1, 2019, remote sellers with gross retail sales greater than $100,000 in either the previous calendar year or within 90 days of exceeding the sales threshold in the current calendar year are subject to the state’s sales tax collection requirements.³ Effective Oct. 1, 2019, the law establishes a similar collection requirement for marketplace facilitators meeting the same sales threshold.⁴ The law superseded prior economic nexus regulations adopted by the Colorado Department of Revenue.⁵

Sales and use tax simplification program

In response to calls to simplify the complexities associated with filing and paying state and local sales tax, Colorado enacted legislation directing the Department to develop and implement an online sales and use tax system that local taxing authorities may use to accept returns and process payments of state and local sales tax.⁶ The Department first launched its Sales and Use Tax System (SUTS) in June 2020, and more than 40 home rule municipalities currently participate.⁷ SUTS allows remote sellers, through a separate registration system from that of the state, to access an online centralized filing portal and provides a single point of remittance for state sales and use tax, state-collected local sales and use tax, and self-collected sales and use tax of participating home rule municipalities.⁸ The system also provides additional tools to taxpayers, including a sales and use tax rate lookup tool by address, a taxability and exemption matrix, and the ability to calculate tax rates on items with differing tax rates in the same jurisdiction.

CML Model Ordinance and home rule municipality response

In conjunction with the launch of SUTS, the CML developed the Model Ordinance in consultation with municipal tax professionals and attorneys, the Department and the Colorado business community. The CML is a nonprofit, nonpartisan organization that supports Colorado municipalities by providing services and resources to municipal officials in managing their local governments. Released in May 2020, the Model Ordinance requires remote sellers and marketplace facilitators to collect local sales tax when the seller exceeds $100,000 in annual sales into the state.⁹ The Model Ordinance is intended to reduce complexity for remote sellers attempting to comply with local sales tax obligations in self-collecting home rule jurisdictions through the use of a uniform sales threshold and standardized definitions for doing business in the jurisdiction. The CML has urged self-collecting home rule municipalities to adopt the Model Ordinance only if they also choose to join the SUTS single point of remittance portal. In doing so, the CML suggested that compliance with the Model Ordinance would be unconstitutionally burdensome for taxpayers under the Wayfair decision unless the home rule municipalities also participate in SUTS.¹⁰

Approximately 35 self-collecting home rule jurisdictions have adopted the Model Ordinance to date,¹¹ including the cities of Arvada,¹² Colorado Springs,¹³ Denver¹⁴ and Fort Collins.¹⁵ Three jurisdictions, including Aurora¹⁶ and Boulder,¹⁷ have adopted the marketplace facilitator language of the CML Model Ordinance only. Under the Model Ordinance, home rule municipalities may begin enforcing their sales tax nexus standards 30 days after the date of enactment. While many home rule jurisdictions have amended their municipal codes to adopt the Model Ordinance language in recent months, certain jurisdictions have begun enforcing their economic nexus and marketplace provisions without formal notice to the public.

Commentary

With a combination of state and local taxing authorities consisting of state-collecting jurisdictions and self-collecting home rule jurisdictions, Colorado is notorious for having one of the most complex sales and use tax structures in the nation. Navigating often inconsistent tax bases and rates along with separate filing and payment procedures becomes particularly burdensome for out-of-state sellers that are unfamiliar with the state’s compliance procedures. The development of the SUTS portal and Model Ordinance are the result of an effort to further streamline Colorado’s complicated sales tax structure and bring the system into compliance with the principles outlined in Wayfair.

Despite efforts to implement a single point of remittance and a model ordinance, several complexities remain for Colorado home rule jurisdictions. First, the system lacks software assistance for preparing and filing sales tax returns or a centralized audit system, both of which comprise additional elements of a simplified tax structure. Second, several home rule municipalities are beginning to enforce their economic nexus provisions without the knowledge of impacted remote sellers or marketplace facilitators, raising the question of whether they are receiving sufficient notice of such changes. These factors increase the possibility of legal challenge by affected taxpayers.

Beyond the continuing complexity regarding sales tax compliance in Colorado home rule jurisdictions, the Wayfair decision did not explicitly address whether and how a sales tax economic nexus standard would apply to self-administered local taxing jurisdictions. Not surprisingly, local home rule jurisdictions have applied the holding of Wayfair to local-level sales taxes by adopting their own economic nexus provisions. Similar to Colorado, a group of Alaska localities formed the Alaska Remote Seller Sales Tax Commission, a compact that streamlines local sales tax administration and adopts a uniform remote seller sales tax code. Localities adopting the uniform code are authorized to impose a collection requirement for remote sellers and marketplace facilitators with at least $100,000 in sales or 100 transactions into Alaska per calendar year.

In addition to whether home rule jurisdictions are authorized to assert economic nexus at the local level, it remains unclear whether localities may adopt an economic nexus rule based on a statewide sales threshold versus sales made directly into the individual jurisdiction. Finally, it remains to be seen whether home rule jurisdictions will adopt a common tax base or uniform exemptions in order to streamline the sales tax compliance process and reduce administrative burdens for remote sellers now faced with additional compliance burdens. Such issues are indicative of the challenges that Colorado’s and other home rule municipalities will continue to face as they weigh the burdens of a complex sales tax collection system with their legal authority to administer and collect local sales taxes.

1 The Colorado Constitution grants municipalities the authority to adopt a home rule charter, which gives them the right of self-government in local and municipal matters. COLO. CONST. art. XX, § 6.
2 H.B. 1240, Laws 2019, COLO. REV. STAT. § 39-26-102(3)(c).
3 Id.
4 COLO. REV. STAT. § 39-26-102(5.8), (5.9), (6).
5 The Department first adopted emergency rules with an effective date of December 1, 2018 but implemented a six-month grace period to June 1, 2019 to allow taxpayers additional time to comply with the new rules.
6 S.B. 19-006, Laws 2019.
7 The SUTS website provides a list of participating jurisdictions at https://tax.colorado.gov/SUTS-Jurisdictions.
8 If a self-collecting home rule municipality chooses not to participate in SUTS, taxpayers are still required to file returns with and remit sales and use tax directly to the home rule jurisdiction.
9 Notably, the Model Ordinance defines “economic nexus” as the connection between the municipality and a person not having physical presence in the state. Economic nexus is established when a person or marketplace seller makes retail sales into the state that exceed Colorado’s statutory threshold of $100,000 in gross retail sales into the state in the previous calendar year or within 90 days of exceeding $100,000 in the current year. Model Ordinance on Economic Nexus and Marketplace Facilitators, Sec. 3, Colorado Municipal League.
10 In Wayfair, the U.S. Supreme Court suggested that a state’s economic presence statute would not place an undue burden on interstate commerce if it contained the following features: (i) a safe harbor economic threshold for remote sellers not performing a considerable amount of business in the state; (ii) no retroactive application; and (iii) uniform, state-level tax administration, a simplified tax rate structure and uniform definitions. Given the historical complexity of Colorado’s sales tax regime, the SUTS portal and Model Ordinance were developed with the objective of satisfying the third principle outlined by the Court. In a memorandum addressed to the self-collecting home rule municipalities, the CML acknowledges that the risk of a legal challenge increases if a municipality adopts the Model Ordinance without joining the SUTS portal. Memo, Economic Nexus and Marketplace Facilitator Model Ordinance Project, Colorado Municipal League, May 29, 2020
11 The CML provides an updated list of adopting home rule jurisdictions at https://www.cml.org/home/advocacy-legal/Members39-Guide-to-Legal-Consulting-Services-and-Amicus-Briefs/cml-model-ordinance---economic-nexus-marketplace-facilitators.
12 Ordinance No. 4741, amending ARVADA CITY CODE § 98-61, 98-66, effective Oct. 15, 2020.
13 Ordinance No. 20-47, amending COLO. SPRINGS CODE § 2.7.104; adding COLO. SPRINGS CODE §§ 2.7.315, 2.7.508, effective Sept. 1, 2020.
14 Ordinance No. 1553-20, amending DENVER REV. MUN. CODE § 53-53(a); adding DENVER REV. MUN. CODE § 53-57.1, effective Feb. 1, 2021.
15 Ordinance No. 111, 2020, amending FORT COLLINS CITY CODE § 25-71; adding FORT COLLINS CITY CODE § 25-131, effective Nov. 1, 2020.
16 Ordinance No. 2020-19, amending AURORA CITY CODE § 130-31; adding AURORA CITY CODE § 130-168, effective Aug. 1,
17 Ordinance No. 8425, amending BOULDER REV. CODE § 3-1-1, effective Nov. 1, 2020.