The fallout from Wayfair continues – and the most recent development highlights the potential for the Supreme Court decision to unleash a patchwork of burdensome and confusing state sales tax rules.
The Colorado Department of Revenue announced on Sept. 11 that it will require out-of-state retailers who do business in Colorado to obtain a sales tax license.
The Department said the change is a result of the Supreme Court decision in South Dakota v. Wayfair, which struck down the requirement that a retailer have a physical presence in a state in order to be required to collect and remit sales tax.
“Tax collection at the point of sale eases the process for our residents and creates a level playing field for Colorado businesses, as out-of-state retailers will be required to collect state sales tax, just as in-state retailers do today,” said Colorado Department of Revenue executive director Michael Hartman.
Guidance for out-of-state retailers will be provided by administrative rule and will be consistent with the court’s decision, including prospective application and a small-seller exception for retailers whose in-state sales do not exceed $100,000 or 200 transactions annually.
“The Department will ensure fair, efficient and transparent implementation of this decision,” Hartman said. “We will pave the least burdensome road possible for businesses to comply with these regulations.”
Scott Peterson, vice president of U.S. tax policy and government relations at Avalara, and former executive director of the Streamlined Sales Tax Governing Board, was somewhat taken aback.
“Even though Colorado has been talking about this for years, I was surprised to see the state take this action, given how little has been done to reduce their complicated sales tax,” he said.
“A few years ago, when Congress seemed interested in giving states this kind of authority, the Colorado legislature enacted a law to take advantage of that authority,” he said. “The law was only going to apply to the state sales tax, with the option for local governments if they made the simplification changes then outlined in federal legislation.”
“Since Congress didn’t enact anything, this issue lay dormant until last year, when the state created a sales tax simplification task force. Members of that task force came from the legislature, industry, local government and the accounting industry,” Peterson said. “I presented at one of their meetings last year and thought they were making progress toward addressing the complexity that exists in their sales tax. I was wrong, but I thought the state would wait until more was accomplished.”
Despite the small-seller exception, which matches South Dakota’s exception, Colorado’s sales tax system is anything but simple.
“The problem with Colorado is that they allow their major home rule cities to basically come up with their own sales tax code, which doesn’t have to conform to the state,” said Marvin Kirsner, a shareholder at law firm Greenberg Traurig.
“Many states have passed or adopted similar rules,” he noted. “The $100,000-in-sales threshold for South Dakota may be reasonable because South Dakota has less than a million people, but there are states with far more. A lot of small merchants will be caught. In my own practice, I have seen medium-size business remote sellers, bigger than mom and pops, struggling to get ready in a short amount of time. Most of the state statutes have an effective date of Oct. 1, and some states are looking to enforce retroactivity. They’re counting on people not being able to hire attorneys and go through the state court systems.”
“Colorado’s sales tax system is a mess,” agreed Andrew Moylan, head of the National Taxpayers’ Union’s Interstate Commerce Initiative. “The problem is that they have a very inefficient and outdated system that would be unlikely to survive a legal challenge, even after the Wayfair decision.”
“They have hundreds of taxing jurisdictions. In effect, localities in Colorado are allowed to define and administer a sales tax completely independent from the state,” he explained. “They set their own base, their own rates, and audit separately. Previously it wasn’t an issue because they only imposed it on their own residents. But thousands of retailers across the country have sales there.”
“They cite the $100,000 threshold as if it gives them blanket authority, but the Supreme Court cited other features of South Dakota’s system, one of which is that South Dakota is a member of [Streamlined Sales Tax]. As a result, South Dakota has a system that is relatively easy to implement, and that’s clearly not the case with Colorado. It’s certain to bring litigation.”
Moylan believes a bipartisan bill will go a long way toward clearing up some of the mess in the wake of Wayfair. Rep. Jim Sensenbrenner, R-Wisconsin, joined Rep. Anna Eshoo, D-California, Rep. Zoe Lofgren, D-California, and Rep. Jeff Duncan, R-South Carolina to introduce the Online Sales Simplicity and Small Business Relief Act of 2018. It would ban retroactive taxation, delay implementation of hastily crafted post-Wayfair laws, and establish a small-seller exception of $10 million in sales.
“It can’t pass soon enough,” said Moylan. “Some states, like Florida, have threatened retroactive taxation. Michigan and North Carolina, among others, have plowed ahead with collection rules despite lacking a statutory basis for them. States like Washington and Pennsylvania seek to impose tax obligations on truly tiny businesses, for whom collecting sales taxes nationwide is a daunting and expensive prospect. And states like Colorado and Louisiana have moved ahead with schemes that are obviously unconstitutional in their scope and reach.”
Moylan believes the Sensenbrenner bill has a good chance of passing.
“It’s bipartisan, and it deals with important issues,” he said. “But it won’t be on the president’s desk next week. There are always forces aligned against bills like this.”