Colorado investing to try to improve one-stop sales-tax remittance portal

A worker signs a document electronically.

Colorado is spending millions of dollars to boost its underutilized one-stop sales-tax remittance portal, undertaking changes that will make it easier for businesses to use the system and funding a public-awareness campaign to educate employers who haven’t yet signed up for it.

And the efforts to increase use of the three-year-old Sales and Use Tax System may not stop with carrots to the business community. A prominent state senator suggested during an interim committee meeting Tuesday that he may run a bill to exempt employers from having to remit sales-tax revenues to cities that have yet to agree to sign onto the statewide portal.

The moves are necessary, several members of the legislative Sales and Use Tax Simplification Tax Force said, because the uptake on the portal has fallen short of what legislators hoped it would be when they spent $8 million to build out the system. After the U.S. Supreme Court declared in 2018 that state and local governments can require out-of-state e-tailers to remit sales-tax revenues for products sold to their residents if the filing requirements are not overly complex, Colorado built SUTS to capture revenue both from out-of-state internet giants and from local businesses that hadn’t been reporting local sales.

A history of SUTS

To do this, it first instituted a destination-based taxing system in which products that are sold and shipped to consumers are taxed based on the location of the consumers rather than on the location of the companies shipping them.

Then, it created a portal through which retailers could plug an address into the system and know which municipalities and special districts it must remit taxes to for the sale. They also could bundle-file all of their sales taxes through the SUTS and have the state distribute them to the proper local governments — as long as the recipients were among the home-rule municipalities that had agreed to sign up for the system.

Three years after the launch of SUTS, however, just 15,993 businesses were registered with the system as of June, according to a dashboard put up by the Colorado Department of Revenue. Judy Vorndran, state and local tax partner for business tax-and-consulting-services firm TaxOps, noted there are exponentially more businesses in the state — nearly 700,000, according to the U.S. Small Business Administration — and 10 times more that could remit sales taxes when national and international firms selling to Coloradans are factored into the equation.

Task-force members reeled off several factors that they believe are responsible for the slight registration numbers.

State and municipal factors

Jefferson County Commissioner Tracy Kraft-Tharp, a former legislator who was instrumental in creation of the SUTS, said she believes too many business owners don’t know the tax-filing option exists. State Rep. Cathy Kipp, D-Fort Collins, said the operations of the system have been so “clunky” at times that it’s difficult for businesses to use. And state Sen. Jeff Bridges, D-Greenwood Village, said too many home-rule cities continue to shun the system, forcing businesses to remit taxes directly to them for each sale made within their boundaries.

Colorado state Sen. Jeff Bridges discusses a bill on the Senate floor during the 2023 legislative session.

Legislators this year overwhelmingly passed House Bill 1017, sponsored by Kipp and Republican Rep. Rod Bockenfeld of Watkins, to put $6.7 million toward SUTS over the next two years to try to fix some of those problems. It was one of the two primary sales-tax-and-fee-focused bills OK’d by legislators, along with a measure that simplified how companies could remit retail delivery fees charged on the shipping of saleable items.

The bulk of the money in HB 1017 will go to upgrading SUTS in ways that should make it easier for businesses to use. One improvement will allow retailers to upload all their data about taxes being remitted in a spreadsheet form rather than having to type in information about what amount they are paying to each city and special district. Another will create a bulk testing option for addresses that will allow businesses to find information about sales destinations more efficiently.

Other improvements to sales-tax system

The law, signed last month by Gov. Jared Polis, also gives $200,000 to the revenue department to create a campaign to promote SUTS and solicit feedback on how to improve the system. Kraft-Tharp bemoaned that the amount is “disappointing” and may be too small to make the kind of impact needed to sustain the system for decades to come, but revenue-department official Amber Egbert said it will allow the agency to reach beyond the tax-preparer community it’s traditionally targeted to get business registration.

HB 1017 also prohibits the state from collecting processing fees for payments made through the system – fees that had generated as much as $300,000 a year.

Legislators may not be done trying to change the system to boost business participation, however. And one method they may consider next may be less of a carrot to retailers than it is a stick to municipalities to force them to sign onto SUTS.

So far, 59 of Colorado’s 68 home-rule cities that choose to collect their own sales taxes rather than let the state to collect the taxes and pass them along have signed up, said Egbert, the director of research and legislative services for the revenue department’s taxation division. Those include the 10 largest self-collecting cities in the state and 18 of the 20 largest, with holdouts Castle Rock and Grand Junction having begun or committed to begin the process of signing onto SUTS, she said.

Most remaining cities have said they need to see additional changes to the system to make it more compatible with their existing collection systems or have prioritized internal tax issues over signing onto SUTS, Egbert told the task force. But Bridges said this wasn’t good enough.

A controversial next step?

Not being a part of the one-stop filing system means any business selling goods to residents of those cities must do the extra work of getting local business licenses and filing individual payments to each such city — something that may stop businesses from reporting taxes at all, he said. As such, he is considering sponsoring a bill in the 2024 session that would exempt retailers from having to pay taxes on online sales to any city that is not a part of SUTS.

“It just feels like these folks move quickly when they need to, but when they don’t have to, they don’t,” Bridges said. “Frankly, I think it is illegal for them to continue to demand that businesses have a special carveout for these snowflake cities who demand that they get special licenses.”

Several officials from the Colorado Municipal League urged caution to Bridges, though, noting that the bill creating SUTS specifically allows home-rule cities to choose not to opt into the system. Associate counsel Rachel Bender noted that the organization advised members not to require payment from out-of-state retailers if they are not part of SUTS — something that’s at the heart of a lawsuit that e-tailer Wayfair filed against the city of Lakewood before it signed up for the system — but added that municipalities have different reasons for not jumping in yet.

“I know that SUTS has been in place for several years … but I do believe the self-collecting cities are proceeding in due time,” Bender added.