In 2010, Colorado created a use tax notification requirement to mandate that out of state sellers notify Colorado customers of their legal requirement to report use tax for non-taxed purchases made from their stores.

The law required out of state retailers to do the following:

  • Provide a notice during the transaction to Colorado customers informing them that they may be subject to Colorado use tax
  • Send Colorado customers who purchase more than $500 in taxable goods from the retailer an “annual purchase summary” with the following information:
    – Amounts of purchases
    – Categories of purchases
    – Dates of purchases
    – A reminder of their obligation to pay Colorado use tax on those purchases
  • Send the Colorado Department of Revenue an annual customer information report listing the names, addresses, and total purchases of their Colorado customers

The law does not apply to retailers who sell sold less than $100,000 to Colorado residents the previous year and who do not expect to surpass that threshold of $100,000 in the current year.

Since most eCommerce businesses do not collect sales tax in other states unless they have Nexus in that state, this is another attempt to generate “lost” sales tax revenue by placing a burden on the seller to notify the customer of this legal requirement.

While use tax laws exist in many states and are designed for consumers to “self-report” and pay sales tax on purchases they made out of state, this is the first time a state has actually enacted this type of notification law and successfully litigated its legality.

The DMA (Direct Marketing Association) fought a five year legal battle with Colorado and the Supreme Court of The United States sent the case back to the district court for resolution.

After some additional legal back and forth the case was finally settled and Colorado also agreed not to make retailers responsible for non-compliance to the law on sales prior to July 1, 2017. Technically the law was on the books since 2010, but due to the legal wrangling, enforcement was not possible.

The final executed settlement agreement can be read here

Of course this now opens the door for other states to try to do the same.

Already Arkansas, Hawaii, Louisiana, Vermont, and Pennsylvania state legislatures have introduced or are in the process of introducing similar type of legislation.

Unfortunately, it is entirely possible we may end up with 46 different (4 states do not collect sales tax) versions of similar laws and a possible reporting and compliance nightmare for eSellers.

The use of Sales Tax Automation Software may become a necessity for some SMBs as this trend grows.

Please check our supplier directory for Sales Tax Automation Software vendors that might be able to help you with sales tax collection and use tax notification requirements.

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