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.


A sales tax complexity lesson for the State

One of the crowning achievements of the 2017 legislative session was the grand compromise that ensured that hospitals around the state would not be penalized by the now repealed requirement that counted the hospital provider fee against the state TABOR revenue limit. The fee program is now an enterprise, and hospitals are now receiving all of what they are due from the state and the federal match.

That was the main goal of the bill. However, bipartisan support for fully restoring the hospital provider fee was only achievable because of a complicated array of related agreements. State highways will get about 10 percent of what they actually need, albeit more than they were going to get barring SB 267. (Local roads were not included). Schools will get some support.

A critical part of the deal was an increase in marijuana taxes that will fund other portions of the deal, such as a business personal property tax credit. However, the decision to exempt marijuana from the state’s base sales tax and increase the special sales tax rate was made on the fly. The resulting fallout has become a cautionary tale for many in the state that blame local sales taxes for being complicated but fail to look at state policies that muddy the waters.

 A “drafting error”?

While not the first to report on the issue, the Denver Post was the first take a stab at how the increase in the retail marijuana tax is hitting certain special districts that receive sales tax revenue right in the pocketbook. Understanding the problem requires understanding the short but complicated history of the state’s retail marijuana tax policy.


  • With the legalized sale of retail marijuana starting in 2014, the state began collecting sales tax revenue from the state’s 2.9% base sales tax. The revenue is subject to TABOR and counts against the state’s revenue limit.
  • The state also began to collect sales tax revenue from the state’s 10% special sales tax authorized by voters in 2013 (Proposition AA). The measure established the initial 10% rate, debruced the proceeds of the tax, and allows the legislature to increase the tax to a rate no higher than 15% without additional voter approval.
  • Previous legislation would have reduced the special sales tax to 8% this past July 1, but proposals for increasing the tax and using the revenue for various non-marijuana related programs began last fall.
  • As part of the SB 267 compromise, the legislature agreed to increase the special sales tax to the maximum 15% allowed and eliminate the state’s base sales tax on retail marijuana by exempting it. (This last piece is what started all the trouble). The net result was to increase the total state tax on retail marijuana from 12.9% to 15% – all exempted from TABOR.

As a general rule, changes in the state sales tax base automatically apply to statutory entities – statutory municipalities, counties, and special districts. With over 80 different state sale tax exemptions on the books and legislation every session that propose more, the Colorado Municipal League is perennially busy ensuring that the state’s decision to exempt something from its own base does not automatically exempt it in statutory municipalities. (Home rule municipalities are thankfully unaffected by state exemptions, and such decisions on exemptions are purely local)

The process was no different for SB 267. Prior to the compromise language being adopted, CML Legislative Counsel Dianne Criswell worked with the sponsors and drafter to make sure it didn’t impact statutory municipalities, and CML’s language also gave counties the same cover. Amazingly, no one thought of sales tax collecting special districts like RTD and the Scientific and Cultural Facilities District (SCFD), and the oversight was referred to as a “drafting error.”  But was it a drafting error or rather an error anticipating consequences? Those districts have always followed the state’s tax base. In fact, the League is not aware of any special language exempting special districts in any prior sessions, but there likely was not as much revenue at stake as there is now.

A complex State of affairs

Retail marijuana is now exempted from the state’s base sales tax, while it will continue to be taxed at the local level in municipalities that approve sales. In the upcoming legislative session, it is guaranteed legislation will be introduced to eliminate the state base exemption for RTD and SCFD. Such legislation may even include reparations for the “error.”

Proposals at the statehouse for sales tax exemptions are often more about politics than fiscal policy, and state exemptions chip away at the state’s base. There may be value in the state examining the over 80 other sales tax exemptions it has given, which no doubt create numerous challenges to businesses trying to determine what is taxable and what is not. In fact, there were at least five bills in the 2017 session, in addition to SB 17-267, that would have created new exemptions. One of them was signed into law by Gov. Hickenlooper.

As the discussion unfolds, the League is hopeful state leaders pause and take notice of the state’s own contribution to sales tax complexity in Colorado – and it actually has a chance to do so.  Over the interim this year, the Sales and Use Tax Simplification Task Force – created by 2017 legislation – is charged with studying simplification “between the state and local governments, including home rule municipalities, to identify opportunities and challenges within existing fiscal frameworks to adopt innovative revenue-neutral solutions that do not require constitutional amendments or voter approval.”  CML has appreciated the opportunity to show legislators all of the hard work and progress at the local level, in cooperation with the business community, that is going into reducing complexity for the businesses that collect and remit sales and use tax.

Colorado’s 70 home rule municipalities that self-collect their local sales tax have been diligently working on a process to standardize definitions among all 70. The state was concerned enough about this to pass a resolution encouraging the standardization, and it was a key talking point in the legislation creating the interim task force.  In addition to looking at the impacts of all the state’s sales tax exemptions, one key move the task force could make to demonstrate a commitment to simplification is to propose the State of Colorado go about adopting the standardized definitions package itself.

After all, what’s good for the goose…