Wayfair in Colorado

Slow and steady wins the race

Colorado’s unique system of sales tax collection gets much attention from both within and outside of the state, but that attention has grown even more since the June decision by the U.S. Supreme Court in South Dakota vs. Wayfair. The result of upholding South Dakota’s scheme of requiring remote sellers meeting certain criteria to collect and remit sales taxes is an opening for all states to require the same.

Brick and mortar has a chance at a level playing field with “click and order.”

But it is just that…an opening – and for Colorado’s self-collecting home rule municipalities, it means pumping the brakes a bit before launching local requirements for remote sellers to get local sales tax licenses.


Colorado’s unique, decentralized sales tax collection process consists of state sales tax collection on behalf of itself, statutory municipalities and counties with sales taxes, a handful of special districts with sales tax authority, and 24 home rule municipalities that do not self-collect.  In addition, there 71 home rule municipalities choosing to self-collect.  This creates some additional, yet not insurmountable hurdles, as it relates to collection of local sales taxes from remote sellers in such a way that does not violate the basic tenets of Wayfair.

The Supreme Court, in overturning prior precedent in the pre-Ecommerce Quill vs. North Dakota (1992) decision, held that the prior requirement of “physical presence (nexus)” was an incorrect interpretation of the Commerce Clause. The Supreme Court noted that South Dakota’s system was designed to prevent “discrimination or undue burdens upon interstate commerce.” There were three keys to this holding:

  1. Establishment of a de minimisthreshold for application of state law to a remote seller
  2. The law was prospective and not retroactive
  3. South Dakota’s adoption of the Streamlined Sales and Use Tax Agreement (SSUTA).

This is where things get interesting because Colorado has not adopted the SSUTA and never will, if municipalities have any say. The SSUTA requires all entities to adopt a single rate and the state’s base for a single point of collection.  The only problem is that both statutory and home rule municipalities may have established different tax rates, and home rule municipalities have not given away the over 80 sales tax exemptions that the state has over several years of special interest pressure. Simply put – adopting a single rate and the state’s base would mean a significant fiscal impact to municipalities that have not granted exemptions in the same free-spirited manner as the State of Colorado. So SSUTA will never make sense in Colorado, although some of the principles of simplification it promotes could possibly be tailored to meet Colorado-specific conditions.

The Supreme Court recognized the following aspects of SSUTA:

  • Standardizes taxes to reduce administrative and compliance costs
  • Single, state-level tax administration
  • Uniform definitions of products and services
  • Simplified rate structures
  • Related uniform rules
  • Remote seller access to state-funded tax administration software and associated immunity from audit liability for using it

To be clear, the Supreme Court did not require that states had to utilize SSUTA to require remote sellers to remit sales tax, but the Court certainly established the characteristics of South Dakota’s system it found helpful in order to ensure there is no barrier or impediment to interstate commerce. Colorado will have to be wary of these issues moving forward at both the state and the local level.

Some pundits believe Colorado is already a lawsuit waiting to happen. One recent blog post from Colorado LegiSource opines that the “constitutional authority of home rule jurisdictions to levy and collect taxes is arguably an obstacle to statewide uniformity” and that the “Supreme Court could find that a fractured collection requirement is discriminatory or an undue burden to interstate commerce.”

Earlier this month, a senior manager of state and local tax for KPMG told the 2018 California Tax Bar and California Tax Policy Conference attendees that “we’re waiting with bated breath to see what happens in Colorado…there are many home-rule jurisdictions in Colorado [that] essentially operate their own little kingdom of sales and use tax, and they are very aggressive, and a lot of people are waiting to see what they will do.” She and other panelists peg future legal battles on non-SSUTA state’s choices and whether or not they will lead to lawsuits claiming they impede interstate commerce. They surmised Colorado will get sued first, helping to clarify the limits of taxing authority for all other non-SSUTA jurisdictions.

However, these scenarios only become true if individual municipalities attempt to require remote sellers to obtain a local sales tax license for sales occurring within their jurisdictions. Self-collecting home rule municipalities are aware of the issues and are taking steps to prevent Colorado from being the test case that folks seem to have already decided it will be. If legislation is required in the Colorado General Assembly, then municipalities through CML will lead the effort, as opposed to being  forced to react to notions by others of what municipalities should be doing.

Next Steps

Discussions have been ongoing since June within and among Colorado’s 71 self-collecting home rule municipalities.  More recently, CML’s Sales Tax Simplification Committee – which is made up of a large number of finance directors, tax administrators, and revenue managers – has been meeting to discuss how to move forward. Already, there is a growing consensus that self-collecting home rule municipalities will have to have a uniform approach to collections from remote sellers, with the exception of those remote sellers that choose/are convinced to voluntarily obtain a local sales tax license.

The committee will be meeting again in December and will revisit a very similar discussion that occurred back in 2013 when CML negotiated legislation to allow self-collecting home rule municipalities to be able to collect from remote sellers if the Marketplace Fairness Act passed. Of course, it never did. What is clear is that the statute cannot just be modified to cut “MFP” and paste “Wayfair.” It may provide a “process template” for coming up with methodology to allow self-collecting municipalities to receive taxes from remote sellers that do not voluntarily get a local tax license. That said, all possibilities will be explored, and no stone will be left unturned.

Taking Our Time is Important (aka “Staying off the front page”)

There is certainly significant interest at the local level to begin remote collections sooner rather than later, and local businesses that have continued to weather the current unfair playing field deserve results. It may take some time to do this right, but it is worth it to ensure the least possible chance of litigation.

No mayor wants to be on the front page of the Wall Street Journal or the Denver Post trying to explain a Wayfair-style lawsuit against his or her municipality for going rogue and trying to mandate local sales tax compliance. Such a lawsuit could also result in all governmental entities in the state being enjoined from collecting from remote sellers. That is not a popularity contest any local official will want to enter.

Meanwhile, it will be important for the remainder of the self-collecting municipalities to adopt the Standard Definitions created by the CML Sales and Use Tax Simplification Committee, as uniform definitions are one of the SSUTA components notably identified by the Supreme Court. Of concern, though, is that the State of Colorado will still have different definitions and will need to find a way to adopt the standard definitions that municipalities took the lead on creating.  If 71 municipalities and come to agreement on them, then the state should be able to find a way to get on board, as well.

Another area of concern at the state level is the more than 80 sales tax exemptions given by the state over the years, and the constant drumbeat every legislative session of interest groups asking for more. A downside of uniform state collection is that self-collecting municipalities would likely have to accede to the state’s reduced base on taxes collected from remote sellers on their behalf.


South Dakota vs. Wayfair has most certainly opened the door to collection of remote sales taxes within Colorado. It is critical that careful thought and a uniform approach are agreed to before Colorado municipalities walk through it.


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