The Colorado Department of Revenue has published an emergency rule (Rule 39-21-112(3.5)) to implement Colorado’s “tattletale” use tax reporting requirement for sellers who have more than $100,000 of sales into Colorado and do not collect Colorado sales tax.  The law in question is the one that was upheld by the Tenth Circuit Court of Appeals in the case of Direct Marketing Association v. Brohl, CA10, Case No. 12-1175, 2/22/16, cert denied.

The basic requirements of the provision are outlined in Rule 39-21-112(3.5)(1) which provides:

(1) General Rule. Every Non-Collecting Retailer whose Total Gross Sales into Colorado are $100,000 or more in a calendar year shall:

(a) Provide a Transactional Notice to all Colorado Purchasers as described in paragraph (4) of this rule;

(b) Provide an Annual Purchase Summary to all Colorado Purchasers by January 31 of each year as described in paragraph (5) of this rule; and

(c) Provide an Annual Customer Information Report to the Department by March 1 of each year as described in paragraph (6) of this rule.

The transactional notice must be provided must be provided with every Colorado reportable purchase which is not exempt from Colorado sales and use tax.[1]  For online purchases, the rule requires the seller to take the following steps in providing this “Transactional Notice”:

(a) Online Purchases. For all purchases made online, a Transactional Notice shall be prominently located in close proximity to the “Tax” or “Sales Tax” line at checkout, or if no “Tax” line is available, in close proximity to the “Total Price” line shown at checkout.

(i) If it is impractical for the Non-Collecting Retailer to display the Transactional Notice as described above, the Non-Collecting Retailer shall provide a prominent hyperlink in close proximity to the “Tax” or “Sales Tax” line or the “Total Price” line shown at checkout that reads as follows: “See here for information on the tax you may owe to Colorado” so long as such hyperlink directs the Colorado Purchaser to the principal Transactional Notice.[2]

The transactional notice must contain the following information:

• The retailer does not collect Colorado sales or use tax;
• The purchase is not exempt from Colorado sales or use tax merely because it is being made over the internet or by remote means; and
• The state of Colorado requires the purchaser to file a sales or use tax return reporting all purchases that are taxable in Colorado and on which no tax was collected.[3]

For purchases that are not online purchases, the notice must be “prominently located” on any order form in close proximity to the “Total Price” line.[4]  If that is not practical, the seller shall state on the invoice or confirmatory communication near the “Tax” or “Total Price” line “See attachment for information on the tax you may owe” and then provide the information in the Transaction Notice in an attachment.[5]

If a seller is required to provide a similar notice for other states, a generalized notice may be used so long as it provides substantially the same information as required above.[6]

The seller also must provide an Annual Purchase Summary to all Colorado purchasers by January 31 each year, summarizing each Colorado purchaser’s transactions in the prior year. The envelope with the summary must be prominently marked with the statement “Important Tax Document Enclosed” and sent to the purchaser’s last known address.  The rule provides an optional method for purchases to “opt-in” to receiving the notice electronically.[7]

The Annual Purchase Summary must contain:

• The total amount paid by the Colorado purchaser in the prior year.  This total is to include shipping and handling charges unless the seller is certain that these amounts are not subject to Colorado sales or use tax;
• A statement that the State of Colorado requires the purchaser to file a sales or use tax return and pay the necessary tax;
• A notice that the seller is required to report the total amount sold to each Colorado resident to the state of Colorado each year;
• If available:
  • The dates of each reportable purchase;
  • The amount of each reportable purchase;
  • A description of each item purchased; and
• If the seller knows, whether the purchase is subject to Colorado sales or use tax[8]

The notice does not need to be sent to a purchaser if the total purchases by that purchaser for the prior calendar year were less than $500.[9]

Finally, the rule details the filing of the Annual Customer Information Report with the state of Colorado.  The report must be filed by any seller who is required to send at least one Annual Purchase Summary to customer.  The report will contain the following information:

• The name of each Colorado purchaser;
• The billing address, notice address and shipping address of the purchaser (if known by the seller).  There is more than one of these various addresses, each one is to be provided to the state; and
• The total dollar amount of purchases made by the purchaser[10]

As would be expected, there are penalties for sellers who fail to comply with these rules.

The penalty for failing to provide a Transactional Notice is $5 per sale.  If a retailer was not aware of the requirement and begins to provide such notices within 60 days of demand by the state the maximum penalty for the year is capped at $25,000.  Some or all the penalty may be waived for reasonable cause.[11]

The penalty for failing to provide the Annual Purchase Summary to a purchaser is $10 for each summary not issued.  As with the Transaction Notice penalty, this penalty can be capped at $50,000 if the seller was not aware of the requirement and sends out notices within 60 days of demand by the state.  Additionally, if the notices are provided to the purchasers within 30 days of the original due date, the penalty is capped at $1,000.  Again, the Department may waive some or all the penalty for reasonable cause.[12]

The penalty for failing to file the Annual Customer Information Report is $10 times the number of customers whose information should have been reported on the report.  If the report is filed within 30 days of the due, the penalty is capped at $1,000.  For a seller that reasonably had no knowledge of the requirement and files with 60 days of demand by the Department, the penalty is capped at $50,000.  As with the other penalties, this penalty can be waived by the Department for reasonable cause.[13]

 

 

[1] Colorado Rule 39-21-112(3.5)(4)

[2] Colorado Rule 39-21-112(3.5)(4)(a)

[3] Colorado Rule 39-21-112(3.5)(4)(c)

[4] Colorado Rule 39-21-112(3.5)(4)(b)

[5] Colorado Rule 39-21-112(3.5)(4)(b)(i)

[6] Colorado Rule 39-21-112(3.5)(4)(e)

[7] Colorado Rule 39-21-112(3.5)(5)

[8] Colorado Rule 39-21-112(3.5)(5)

[9] Colorado Rule 39-21-112(3.5)(5)(c)

[10] Colorado Rule 39-21-112(3.5)(6)

[11] Colorado Rule 39-21-112(3.5)(4)(f)

[12] Colorado Rule 39-21-112(3.5)(5)(d)

[13] Colorado Rule 39-21-112(3.5)(6)(d)