Tax Efficiency
Michael Austin

Colorado has taken a step toward combating tax losses from online sales, and other states may take note. The U.S. Supreme Court declined to hear a challenge to a Colorado law requiring online sellers such as Amazon to let customers how much they owe in taxes, and to provide this information to the state as well. Accordingly, the United States 10th Circuit Court of Appeals decision that the State of Colorado can address use-tax noncompliance through notice and reporting obligations stands.

With the increasing prevalence of online retailers, Colorado’s use-tax revenues have become more volatile, and Colorado’s brick-and-mortar stores have been getting an increasingly unfair shake because they have had to collect and remit sales tax, whereas out-of-state stores have not. Why not?

A simple way of understanding the difference is that vendors located in Colorado have a legal duty to collect sales tax from purchasers on sales in Colorado. The average sales tax in Colorado is 7.52%. But what happens if a person in Colorado makes a purchase from out of state? If the person does not pay any sales tax to another state, the person may owe use tax to Colorado for that purchase. While the use tax is complementary to the sales tax, Colorado cannot require a vendor who has no presence in Colorado (or no “nexus”) to collect the use tax from the purchaser. Instead, the purchaser is supposed to self-report and remit the use tax if purchases exceed $500. Compliance with this law is not believed to be strong.

In fact, Colorado state officials estimate that Colorado is losing as much as $172.7 million a year in unreported/unpaid use taxes. Obviously, stores located in Colorado are at a competitive disadvantage if purchasers can buy the same product for 7.5% less simply by ordering the products from out of state

The Colorado law recently upheld by the U.S. 10th Circuit Court may be a model other states follow as they consider the revenues lost because of the different collection obligations for sales versus use taxes. The 2010 Colorado law imposed three obligations on out-of-state retailers that do not collect sales taxes.

  1. Send a “transactional notice” to purchasers informing them that they may be subject to Colorado’s use tax.
  2. Send Colorado purchasers who buy goods from the retailer totaling more than $500 an “annual purchase summary” with the dates, categories, and amounts of purchases, reminding them of their obligation to pay use taxes on those purchases.
  3. Send the Colorado Department of Revenue an annual “customer information report” listing their customers’ names, addresses, and total amounts spent.

As in Colorado, Missouri’s brick-and-mortar stores are likely at a disadvantage against online retailers because many Missourians are probably unaware of their use tax responsibility. If noncompliance is widespread, then the issue is whether Missouri has a sensible and fair tax policy. At a minimum it would seem that the state should not have a tax system that is honored more in the breach than in the observance.

About the Author

Michael Austin.JPG
Michael Austin
Policy Analyst
Michael Austin was a Policy Analyst at the Show-Me Institute specializing in state and local budgets, taxes, and economic growth. Michael graduated with a BBA in business management and economics from Washburn University in Topeka, Kansas, and holds an MA with honors in economics from the University of Kansas.