Colorado answers questions about new retail delivery fee

Businesses worldwide are scrambling to prepare to collect and remit Colorado’s new retail delivery fee before it takes effect July 1, 2022. And it is a scramble. Though the law establishing the fee was enacted in 2021, the Colorado Department of Revenue didn’t issue draft guidance until May 2022. Final guidance may not be released for another six to eight weeks.

Before the Department of Revenue can implement an administrative rule, it must walk the rule through a formal notice and comment process. The department sometimes finds it useful to also hold a stakeholder workgroup meeting, to help determine how to improve the final rule. To that end, it held a stakeholder workgroup meeting on the retail delivery fee on June 23, 2022.

Key takeaways from the meeting include:

• The retail delivery fee takes effect July 1, 2022
• Remote businesses not required to register for sales tax are not subject to the fee
• The department will be lenient in enforcing the requirement to separately state the retail delivery fee on invoices “for the foreseeable future”
• Some home-rule governments may tax the retail delivery fee
• The USPS may — or may not — count as a person, meaning retail deliveries made by the USPS may or may not be subject to the fee
• The fee is not subject to use tax
• The fee applies differently to different service models
• There are still unanswered questions

The meeting was hosted by Josh Pens, Director of Tax Policy for the Colorado Department of Revenue. Read on for details. 

Numerous participants noted that the department didn’t give businesses enough time to prepare to collect the fee. Some asked whether the department could push back the start date.

Pens’ response left no room for doubt: “The department doesn’t have the authority to delay the start date for the fees. … I can’t change the timing of the fee; we are obligated to begin collecting the fee July 1.”

Retail delivery fee returns are due by the 20th day of the month following the reporting period. For most retailers, the first return will be due by August 20, 2022. Retailers that file their Colorado sales tax returns on a quarterly or annual basis should follow the same schedule for their retail delivery fee return.

Pens pointed out that the definition of “retailer” is “linked to the sales tax definition.” Thus, “if you’re a retailer for state sales tax purposes, you’re a retailer for the retailer delivery fee purposes” — and if you’re not, you’re not.

An out-of-state retailer with no physical presence in Colorado is required to register for Colorado sales tax if their sales into Colorado meet or exceed the state’s economic nexus threshold. Per the Colorado Department of Revenue, “Any retailer who does not maintain a physical location in Colorado is exempted from state sales tax licensing and collection requirements if the retail sales of tangible personal property, commodities, and/or services made annually by the retailer into Colorado in both the current and previous calendar years are less than $100,000.”

This point is of particular interest to out-of-state wineries. Most states require wineries to register for sales tax even if they don’t have a physical presence or economic nexus with the state. In Colorado, an out-of-state winery that has no physical or economic nexus with Colorado may not be required to register for sales tax or the retail delivery fee. 

Hearing this, several speakers pointed out that they cannot collect the fee from customers at this time because the software they use isn’t able to accommodate it. “I have clients that cannot charge this tax,” said one commenter.

Pens reminded that the department does not have the authority to change the requirement that retailers collect the fee from consumers starting July 1 and separately state the fee on invoices. Only the Colorado Legislature can do that. However, the department can provide “a commitment not to enforce the requirement that [the fee] be collected from the purchaser.”

In other words, retailers can pay the 27-cent fee themselves for a time, if their systems are unable to charge the fee to customers.

The question is, for how long?

When one speaker asked if they could pay the fee “indefinitely,” Pens said, “the department is not in a position to say indefinitely that the statutory requirement can be ignored. What I can say is we have no plans for the foreseeable future to enforce that provision as long as retailers are complying with their obligation to pay the fee.”

The department can also waive late filing and late payment penalties and related interest. And according to Pens, it plans “to be generous in granting requests for waiver, for those making a good-faith effort to comply.”

It’s worth underscoring these two points:

1. Taxpayers must make a good-faith effort to comply
2. Taxpayers must request relief from penalties and interest

Another point worth emphasizing: The department didn’t say exactly how long “the foreseeable future” will last. The department gave taxpayers a six-month grace period when sourcing rules and remote sales tax obligations changed in 2018.

Several participants asked whether the fee itself would be subject to sales tax, as fees sometimes are. Pens said state sales tax and state-administered local sales taxes won’t apply to the fee. However, he didn’t know whether home-rule jurisdictions planned to tax the fee.

One speaker said they’d contacted the city and county of Denver. As of now, Denver is apparently “considering the fee a freight charge and it is considered taxable.”

Another speaker said they’ve asked approximately 15 home-rule cities about this issue. Three cities reportedly said they weren’t going to tax the fee, but 10 cities said they were planning to tax it.

The Colorado Department of Revenue is discussing this issue with the Colorado Municipal League. As the department learns whether localities plan to tax the retail delivery fee, it will update its online taxability matrix.

The Department of Revenue is still trying to determine “whether or not the post office is a person as defined in the statute” and whether an instrument of the federal government can be a person subject to the retail delivery fee. If it determines the post office isn’t “a person,” deliveries made by the USPS likely wouldn’t be subject to the retail delivery fee.

However, Pens added that if a private delivery service or retailer takes the goods by motor vehicle “most of the way,” the fee will likely still apply even if the department concludes the postal service is “not a person.”

A similar question arose around bike deliveries. The department is thinking the retail delivery fee will apply to deliveries made “most of the way” by motor vehicle, even if “a bike took it the last mile.” 

According to Pens, paragraph four of the rule specifies that there’s no purchaser counterpart to retail delivery. Therefore, if a retailer failed to collect the retail delivery fee as required, the purchaser won’t need to self-accrue use tax and pay that to the department.

Likewise, if a retailer removes some untaxed inventory for their own use, it will not trigger a retail delivery fee because “that transaction was properly exempted.”

In response to a question about how the fee applies to contracts billed periodically, Pens offered two examples: a jelly-of-the-month club and a monthly clothing or food box. (You remember the Jelly-of-the-Month Club, “the gift that keeps on giving the whole year.”)

According to Pens, in the case of the jelly club, “you pay upfront a certain amount to get 12 shipments over time.” The department considers that to be “one sale and one retail delivery fee,” despite the fact that there are 12 separate deliveries.

Yet some businesses allow customers to sign up to receive a package of food (or clothing or wine) each month with the understanding that although they’re “subscribed indefinitely,” they can cancel at any time.

In this case, although you’d get a box every month just like with the jelly-of-the-month club, you’d actually be “renewing your order for that box” each time. Since every shipment represents a separate retail sale instead of being one retail sale, the retail delivery fee would apply each time a delivery is made.

Participants asked many other good questions about the retail delivery fee, including:

• How does the retail delivery fee apply to marketplace facilitators?
• How does the retail delivery fee apply to an order with multiple invoices?
• How does the retail delivery fee apply to leasing?
• Does the retail delivery fee need to be returned if a consumer returns the product?
• Does the retail delivery fee apply to service calls that result in the sale of tangible personal property?
• Does the retail delivery fee apply to mobile sales trucks, like food trucks or mobile florists?

Considering these questions and others will help the Colorado Department of Revenue craft its guidelines. While retailers wait for those to be finalized, they have to take it on faith that, as Pens said, the department will be slow to enforce certain requirements.

Once the department starts enforcing collection and remittance of the retail delivery fee, it will enforce it “just the same as the sales tax.” For example, “the field audit will audit the retail delivery fee at the same time they audit the sales tax. Those will just be wound together.”

In fact, Pens likened the “burdens” of the fee to the “burdens” of sales tax. For example, as with sales tax, the burden to prove that the fee doesn’t apply will fall on the retailer. And as with sales tax compliance, complying with the fee will likely prove to be burdensome. As one speaker noted, “I just want to reiterate that the cost of compliance is extremely burdensome, especially for small taxpayers.”

The retail delivery fee comes on the heels of renewed Congressional interest in South Dakota v. Wayfair, Inc. (June 21, 2018), the decision by the Supreme Court of the United States that enabled states to tax remote sales. Shortly before the fourth anniversary of the Wayfair ruling, the Senate Committee on Finance held a hearing examining the impact of Wayfair on small businesses.

During the hearing, representatives from two small businesses explained why complying with online sales tax laws in multiple states was costly and burdensome. One of them said his company was currently scrambling to comply with Colorado’s new retail delivery fee.

In his opening statement, Senator Ron Wyden of Oregon called online sales taxes “a major source of headaches and costs for small businesses around the country.” He said Wayfair (and subsequent remote sales tax laws) have created “a burden for small businesses everywhere.”

But according to Scott Peterson, vice president of Government Relations at Avalara, complexity has always been there. “People say Wayfair created complexity, but that’s not true,” he said. “Complexity has always been there, it’s just that fewer businesses were exposed to it. Wayfair amplifies all changes that create complexity.” Changes like Colorado’s new retail delivery fee.

The Colorado Department of Revenue isn’t planning to have “further direct contact with taxpayers” about the upcoming change. However, it will keep the retail delivery fee FAQ up to date. Retailers making taxable retail sales for delivery into Colorado would be wise to bookmark that page and visit it frequently in the coming weeks and months.

If you use Avalara AvaTax and want to learn how it will support the Colorado retail fee, check out the Avalara Help Center.