Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. Colorado first adopted a general state sales tax in 1935, and since that time, the rate has risen to 2.9 percent. On top of the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0 percent and 8.3 percent. Currently, combined sales tax rates in Colorado range from 2.9 percent to 11.2 percent, depending on the location of the sale.
As a business owner selling taxable goods or services, you act as an agent of the state of Colorado by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in Colorado is administered by the Colorado Department of Revenue (DOR).
Any sales tax collected from customers belongs to the state of Colorado, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.
In Colorado, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.
To help you determine whether you need to collect sales tax in Colorado, start by answering these three questions:
If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.
If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.
It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.
The need to collect sales tax in Colorado is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.
Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.
In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.
While physical presence still triggers a sales tax collection obligation in Colorado, it’s now possible for out-of-state sellers to have sales tax nexus with Colorado.
Out-of-state sellers with no physical presence in Colorado may establish sales tax nexus in the following ways:
Affiliate nexus: Having ties to businesses or affiliates in Colorado. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.
However, Colorado’s affiliate nexus law allows an exception for remote sellers whose gross receipts to Colorado customers was less than $50,000 in the prior calendar year.
Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after December 1, 2018, a remote seller must register with the state then collect and remit Colorado sales tax if the remote seller meets either of the following criteria (the economic thresholds) in the previous or current calendar year:
The DOR is offering a grace period through May 31, 2019, to ensure remote retailers have sufficient time to make the required systems changes.
Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Colorado in a warehouse owned or operated by Amazon.
Trade shows: Attending conventions or trade shows in Colorado. You may be liable for collecting and remitting Colorado use tax on orders taken or sales made during Colorado conventions or trade shows, even if only in the state for trade show activity for one day.
If you have sales tax nexus in Colorado, you’re required to register with the DOR and to charge, collect, and remit the appropriate tax to the state. Local tax jurisdictions may impose additional collection or reporting requirements on remote vendors.
Non-collecting seller use tax reporting: As of July 2017, every retailer that has at least $100,000 in total gross sales in Colorado in the prior calendar year (and reasonably expects the same in the current calendar year) that doesn’t collect Colorado state sales tax must comply with notification and reporting requirements for non-collecting sellers.
Such non-collecting retailers must:
Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of April 2019, Colorado does not have an explicitly defined trailing nexus policy.
If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Colorado.
If you sell taxable goods to Colorado residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).
As of April 2019, Colorado is in the process of changing its sales tax sourcing rules for in-state sellers. Prior to December 1, 2018, Colorado retailers were only required to collect the taxes they had in common with Colorado consumers. Effective December 1, 2018, with a grace period through May 31, 2019, the state is switching to destination sourcing. Colorado businesses must collect and remit the full sales tax rate in effect at the location of the consumer — the destination of the sale — when taxable goods are delivered to a Colorado address. Destination sourcing also applies to out-of-state sellers.