Colorado Sales and Use Tax Guide: Nexus Rules, Rates, and Compliance

Sales and Use Tax Basics in Colorado

Sales Tax

In Colorado, sales tax is imposed on retail sales of tangible personal property, prepared food and drink, and specifically listed services. If the transaction includes a bundled sale of tangible goods with service, the sale may be taxable unless certain conditions are met.

Under Colorado sales tax rules, a sale is any transaction that includes the full or partial transfer or agreement to transfer any taxable property to another person, the performance or provision of any taxable service, or the agreement to perform or provide any taxable service to another person for a fee.

Use Tax

The so-called consumer use tax complements sales tax and is imposed on storing, using, or consuming tangible goods in Colorado. If the retail seller does not charge, collect, and remit sales tax on taxable sales, the consumer is responsible for paying use tax at the same rate as the sales tax. When the buyer is another business, and the inventory acquired at wholesale is used by the company instead of being sold to customers, the buyer must pay use tax.

When the sales tax is paid in another state, the proof of payment may be submitted to credit the amount paid against the due Colorado use tax.

Colorado Sales and Use Tax Rates

Colorado has state, county, city, and special district sales tax rates. The state rate is 2.9%. City tax rates vary from 0.5% in Leadville to 4% in Holly, Larkspur, and Yampa. Additionally, county tax rates vary from 0.25% in Arapahoe to 3% in Sedwick. There are currently also 26 special districts where tax rates vary from 0.10% to 5.50%.

While the state use tax is the same as the state sales tax, not all cities, counties, and special districts have a corresponding use tax, further complicating tax compliance.

Tax-Exempt Transactions

Transactions that include sales of tangible goods, such as food for home consumption, food for vending machines, gas, electricity, and similar for residential use, occasional sales for charity organizations, farm equipment, renewable energy components, and goods used for space flights, are some of the transactions that are exempt from sales and use tax.

Nexus Rules in Colorado

The most essential question for determining whether a taxable person has a nexus in Colorado is whether it is doing business in that state. Taxable persons may perform business activities and establish a physical, economic, or marketplace nexus in Colorado. 

Once one of these nexuses is established, taxable persons must obtain a sales or use tax license and collect and remit taxes according to state laws.

Before introducing the economic and marketplace nexus, click-through and affiliate nexus rules existed between 2014 and 2019 when they were repealed. 

Physical Nexus

Suppose a taxable person sells, leases, or delivers tangible goods and maintains, either directly or indirectly, an office, salesroom, warehouse, or similar facility in Colorado. In that case, it is considered that it is doing business in the state. This further implies that obtaining a Colorado sales tax license will be required.

Even if a taxable person sells, leases, or delivers tangible goods without a physical presence and regularly or systematically advertises by catalog, newspaper, radio, television, e-mail, or the Internet, it is considered a physical nexus in Colorado.

Economic Nexus

Taxable persons with no physical presence in Colorado may still find themselves in a position to be required to register for sales and use tax purposes. Suppose taxable persons make retail sales of tangible goods, commodities, or services to Colorado consumers, and the value of those sales is more than USD 100,000. In that case, they must obtain a sales tax license and start charging, collecting, and remitting state, county, city, or district sales tax.

Marketplace Nexus

The introduction of marketplace nexus followed the introduction of economic nexus. Therefore, once the marketplace facilitator exceeds a threshold of USD 100,000, it is deemed to be doing business in the state, which makes it liable for collecting and remitting sales tax on behalf of its marketplace sellers.

Taxable Goods and Services in Colorado

As stated, retail sales of tangible goods are subject to sales and use tax in Colorado. These tangible goods may be any physical products, merchandise, or goods not listed as exempt, such as hardware, clothing, everyday household items such as cooking utensils, cleaning and paper products, soaps, toiletry articles, grooming items, cosmetics, and medicine.

Services are generally not subject to sales tax, except intrastate telephone and telegraph services, and gas and electric service for commercial consumption. 

Bundled Transactions and the True Object Test

In the case of bundled transactions, the true object test determines whether the transaction is taxable. For example, sales tax does not apply to cable and satellite TV or radio subscriptions since they are service-based transactions. However, digital content delivered through these subscriptions is considered tangible goods.

Therefore, the key issue is that these transactions may consist of both taxable and non-taxable parts. In this case, the transaction consists of the content, treated as tangible goods and transmitting services. The true objection test considers the primary reason the customer buys the subscription. If the primary purpose is obtaining tangible goods, the transaction is taxable. In contrast, the transaction is non-taxable if the test determines that the primary objective is the service, such as a subscription service.

E-Commerce Framework

The e-commerce rules mainly apply to out-of-state or remote sellers. When a remote retail seller from another US state or foreign country sells tangible goods and services to consumers in Colorado, it must consider its economic presence.

In other words, if the total sales exceed the amount of USD 100,000 in the previous or current calendar year, remote sellers must obtain a sales tax license within a 90-day deadline and begin charging, collecting, and remitting sales tax.

Marketplace Rules

Any seller who sells tangible goods, commodities, or services through a marketplace facilitator is considered a marketplace seller. However, if a marketplace seller also offers tangible goods, commodities, or services for sale through its store or website, it is considered a multichannel seller.

When a marketplace seller only sells through one or more marketplaces operated by the marketplace facilitators, obtaining a sales tax license and collecting and remitting sales tax are generally not required. The responsibility lies with the marketplace facilitator. If the marketplace seller previously obtained a sales tax license, it must either revoke it or file tax returns without sales activity.

Multichannel sellers are subject to slightly different rules than marketplace sellers. Whereas marketplace facilitators are liable for any sales multichannel sellers make through the marketplace, multichannel sellers are responsible for collecting all state and local sales taxes applicable to their retail sales made outside marketplaces operated by marketplace facilitators.

Both marketplace and multichannel sellers are responsible and liable for sales tax if marketplace facilitators fail to collect and remit taxes due to false or incorrect information provided by the sellers. 

Digital Goods and Services

Digital goods delivered or stored digitally, such as video, music, or e-books, are considered tangible goods and, as such, are subject to sales and use tax. Moreover, the delivery method is not crucial for determining the taxation of the sale of tangible goods. This means that tangible goods, including digital goods, can be delivered with compact discs, downloaded, or streamed and will be taxable.

Computer software is subject to sales tax if it is prepackaged for repeated sale or license, its use is governed by a tear-open nonnegotiable license agreement, and delivered on a physical medium such as a tape, disk, compact disc, or card. However, if only one condition is not met, it falls out of the scope of sales tax.

Furthermore, computer software delivered to the consumer through online access, downloaded, or installed directly onto a consumer's system without a physical copy is not taxable.

Digital Marketplace

In October 2019, the Colorado General Assembly adopted and implemented legislation specifically designed to address the rising issue of tax compliance with digital marketplaces, commonly known as marketplace facilitators. As in other US states, this decision resulted from the Supreme Court's 2018 Wayfair v. South Dakota ruling.

Digital Platform Operator

According to the Colorado regulatory framework, any individual or business that contracts with one or more marketplace sellers to facilitate their sales for a fee, commission, or other consideration, directly or indirectly communicates the offer and acceptance between a buyer and seller, and collects payment for sales individually or with third parties and transmits it to the sellers is considered a marketplace facilitator.

In contrast, a person who only provides online advertising services or lists goods for sale and does not meet the three listed requirements is not considered a marketplace facilitator.

Generally, marketplace facilitators are liable for collecting and remitting sales tax on all sales made through the marketplace once the sales value exceeds USD 100,000. The threshold applies to all sales of tangible goods, commodities, or services marketplaces make directly or facilitate, regardless of whether those sales are subject to sales tax in Colorado.

Once the threshold is reached, the facilitator must apply and obtain a sales tax license within a 90-day deadline. After completing the registration process and obtaining the license, facilitators must calculate taxable prices, source the sale, determine the applicable tax rate, and determine whether the sale is taxable, non-taxable, or tax-exempt.

Filing and Payment Requirements in Colorado

The filing frequency of a tax return is determined by the monthly sales tax collected. Therefore, an annual tax return is required if the collected amount is USD 15 or less. Quarter tax returns are due when the monthly tax ranges from USD 15 to USD 600. When the monthly tax exceeds USD 600, taxable persons must submit monthly tax returns by the 20th of the month following the reporting period.

Taxable persons who pay more than USD 75,000 annually in state sales tax must complete the payment by Electronic Funds Transfer (EFT). Other payment methods for amounts below USD 75,000 include Revenue Online Direct Debit, credit card, debit card, e-check, cryptocurrency, and ACH Credit.

Penalties for Non-Compliance with Sales and Use Tax Requirements

Those who fail to comply with sales tax rules regarding filing, paying, or correctly calculating due tax will face a penalty of USD 15 or a percentage unpaid tax, whichever is greater. The percentage is set at a minimum of 10% of the unpaid or uncalculated tax, and for each month the tax is not paid, an additional 0.5% is added. This continues to apply until the total penalty reaches a maximum of 18%.

In addition to the penalties, anyone who makes a late tax payment will lose any service fee benefit.