The Internet has certainly changed the way we do business and now state governments want a piece of the action. States are desperate for tax money so it’s no surprise they would go after any and all revenue streams. Colorado is the most recent state to pass an “Internet Sales tax” law trying to increase its revenues from goods sold via the Internet. Unlike New York, which includes affiliates in it definition of nexus, the Colorado bill focuses solely on collecting use tax, and nothing whatsoever with affiliates.

Let’s start with the term “nexus.” Whether an entity is required to file business tax returns depends on whether it has nexus with a state. Nexus is defined as some definite link, or minimum connection, between the state and the entity it seeks to tax. Normally, sufficient nexus for income tax purposes is established when an entity owns, leases property or employs personnel in the state.

If you are an in-state business selling to someone who resides in Colorado, you have always been obligated to collect sales tax whether you sell online or in a store. If you are an out-of-state business that sells tangible personal property in another state, you normally would not collect sales tax, and the final consumer is responsible for paying a “use tax” to their state.

Starting on May 1, 2010, the law requires retailers that do not have nexus in Colorado to do three things:
(1) put a lengthy message on their web sites and on all invoices sent to Colorado customers informing the customers of their obligation to pay Colorado use tax on their purchases ($5 penalty for each failure);

(2) send to each Colorado customer an annual statement, similar to a Form 1099, describing each purchase that the customer made during the year, including the date of purchase, amount of purchase, and whether each purchase is or is not subject to Colorado sales tax ($10 penalty for each failure); and

(3) annually send to the Colorado Department of Revenue a list of the name, address, and detailed purchase information for each Colorado customer who made a purchase from that seller during the year ($10 penalty for each failure).

This last part brings up some serious concerns about the constitutionality of the law, but for now, out-of-state sellers are compelled to comply. Out-of-state businesses selling into Colorado are not required to collect the taxes, but it is certainly makes it more difficult for them to do business in Colorado. Many questions remain unanswered: What about individuals selling on eBay? What about local sales tax? There are more than 280 local taxing jurisdictions in CO, each with their own ability to set rates and bases which the Colorado law does not address. As eCommerce continues to become more popular, expect more states to look for ways to jump on the tax bandwagon. And never expect life on a medium as dynamic as the Internet to be dull.