This article was originally published in the Colorado Society of CPAs May/June 2014 NewsAccount. To read the rest of the issue or to see the original copy of the article, click here.
It seems a simple question — when do you have to collect local sales tax on your sales? The answer has traditionally been different for Colorado’s home-rule cities (cities that collect their own sales tax) and state-collected cities (those that “piggyback” on the state).
For example, if you use your own truck and make more than one delivery a year into a home-rule city, that city usually claims you are “doing business” there and you must begin collecting sales tax. However, if you ship by common carrier into the home-rule city, and otherwise do not have a presence there, no collection requirement exists.
The rule is different for state-collected cities. If you have a store, sales room, office, or some similar permanent place of business in a state-collected city, you collect the city sales tax. If you don’t have such a location, you do not have to collect city sales tax no matter how many deliveries in your own truck you make into the city each year. [See Colorado Revised Statute (“CRS”) §29-2-105(1) (b).] Unfortunately, that rule may be slipping away.
The Colorado statute governing when a taxpayer is “doing business” is CRS § 39- 26-102(3)(a) and (b), and its accompanying regulation, 1 CCR 26-102.3. The statute provides that a taxpayer is “doing business in this state” when a taxpayer is “selling, leasing, or delivering in this state… tangible personal property by a retail sale” and “maintaining within this state… an office, distributing house, salesroom or house, warehouse, or other place of business.”
Regulation 39-26-102.3(1) requires that a taxpayer must collect sales tax if the taxpayer both (1) sells, leases, or delivers tangible personal property in Colorado, and (2) maintains an office, salesroom, or similar place of business within the state. According to the regulation, a person meeting both these requirements must obtain a Colorado Sales Tax License and collect sales tax. [Emphasis added.]
If a taxpayer is simply selling, leasing, or delivering tangible personal property in the state but does not have a “place of business” as required in paragraph (1) of the regulation, paragraph (2) states that the taxpayer should, not must, obtain a Colorado Retailer’s Use Tax License and collect use tax. [Emphasis added].
It is important to note the difference between .3(1) and .3(2). Under .3(1), a seller that has a permanent place of business must get a sales tax license and collect and remit sales tax, but under .3(2), where the seller does not have a permanent place of business, the Colorado Department of Revenue can only say the seller “should” get a use tax license to collect and remit use tax. In short, a remote seller (a seller located outside of a state-collected city) will not have a sales tax collection obligation under .3(1) in that city because the seller does not have a permanent establishment.
In addition, a remote seller will not have a use tax collection obligation under .3(2) unless it decides it “should” do so. Furthermore, since state-collected cities and counties only levy use tax on motor vehicles and building materials, remote sellers selling anything other than motor vehicles or building materials do not have a use tax collection responsibility, since there is no use tax due to collect.
Based in part upon the preceding analysis, the state has, until recently, consistently held that a seller without a permanent place of business in a state-collected city or county did not have a sales or use tax filing obligation for that city or county. In fact, in Policy Position 8-88 (May 1988) the state held that the presence in the city of a vendor’s delivery trucks and personnel does not constitute “doing business” in a state-collected city. However, if a vendor such as a food truck carries its inventory with it, Revenue Bulletin 81-1 (Sept. 1, 1981) holds that mobile vendors, where the sales are conducted from a truck and the sale is consummated at the customer’s location, must collect tax for that location. The sale is considered consummated at the customer’s location “since it is there that the order it taken, purchase price is paid, and title and possession pass.”
That said, the state may be changing its mind without changing the law. In a recent Private Letter Ruling (PLR), the state held that the “sustained presence of Company employees” creates a filing obligation in a state collected jurisdiction. According to the PLR, the “sustained presence” could be as little as an employee on site for one day a month. [See Colo. PLR-11-006 (December 20, 2011).]
It's unclear how much weight should be given this PLR. First, PLR’s are binding only upon the Department and the taxpayer to which they are addressed. They cannot be cited as precedential by either taxpayers or the Department in any hearing or litigation. Second, the PLR indicates that the physical presence addressed in the example in the PLR was of employees “stationed at [a] Company’s customer business location… for as long as the Company has a contract with the customer.” Does this mean that such a contract, even if the employee is only on site one day a month, constitutes a permanent establishment in the jurisdiction? In any event, it does not seem consistent with the Department’s past policy nor its FYI (For Your Information) publications addressing the same topic.
The Department’s FYI Sales 62: Guidelines for Determining When to Collect State-Collected Local Sales Tax (April 2013) seems to remain consistent with the state’s traditional policy. For example, the FYI states, “Delivery of tangible personal property into another local taxing area does not require the vendor to collect the local sales taxes of the delivery area if the vendor does not have a business presence there.” And it states, “Out-of-state retailers who file Retailer Use Tax Returns (DR 0173) are responsible for collecting state sales/use taxes but are not required to collect sales taxes for any state-collected city or county, provided the retailer has no place of business in such state-collected city or county.” Finally, this position was echoed in the January 2012 revision of FYI Sales 56: Sales Tax on Leases of Motor Vehicles and Other Tangible Personal Property:
In the case where city, county, and special district taxes are collected by the state, local taxes are applicable only if the lessor has a form of business location in the same jurisdiction as the lessee. Any office, shop, warehouse, salesroom, or the temporary but frequent presence of an employee for repair, sales, or service purposes is a business location. If the lessor of tangible personal property does not have a business location in a city, county, or special district, no local tax is to be collected. In the case where there is no business location, no local tax should be collected even if the property is delivered within the boundaries of a local taxing entity. [Emphasis in the original.] It is important to note that this paragraph was deleted from the April 2013 revision of the FYI. Does that indicate a change in the Department’s position? It may.
While these statements have been repeated and unchanged in every version of these FYIs for the last 30 years, recent audit activity indicates that some state auditors are adopting the stance long maintained by home-rule cities: Delivery in your own vehicles triggers a filing obligation. The requirement that a taxpayer must have an office, sales room, or other permanent establishment in a state-collected city before the filing obligation kicks in may be changing, too.
Bruce Nelson, CPA, is a tax director in EKS&H's State and Local Tax (SALT) group. He can be reached at 970.282.5400 or at email@example.com.