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Colorado tax changes: SB21-282 and small business exception

Jul 13, 2021

On June 30, 2021, Colorado Governor Polis signed SB21-282 into effect that would extend the small business exception for destination sourcing to February 1, 2022. The bill is a win for smaller retailers doing business in the state as the new sourcing laws would have placed additional strain on small businesses in a year already filled with tough questions and decisions due to the impact of the COVID-19 pandemic and remote working. All retailers, both in-state and out-of-state, that do not fall under the small retailer classification (less than $100,000 in annual retail sales) will be required by law to comply with destination sourcing rules beginning July 1, 2021.

House Bill 19-1240 and destination sourcing for small retailers

House Bill 19-1240, enacted in 2019, codified the Department of Revenue’s destination sourcing rule for state sales and use tax collection. That bill included an exception to allow small retailers to continue to source their sales to their business’ location regardless of where the purchases or end-user received or held the sold good for up to 90 days after a geographic information system (“GIS”) was provided by the state.

On April 1, 2021, the Department of Revenue issued a notice that the GIS has been provided by the state and is online and meets requirements set out in HB19-1240. Before SB21-282 was signed, this meant that as of June 30, 2021, the small business exception to destination sourcing would be effectively repealed.

Now, effective February 1, 2022, all retailers with sales tax nexus will be required to adhere to destination sourcing rules regardless of retail sales volume.

Destination sourcing as it applies to the imposition of sales and use tax is laid out in three parts by the Colorado Department of Revenue:

  1. If the purchaser takes possession of the property or the first use by the purchases is at the seller’s business location, the sale is sourced to that business location.
  2. If the property or service is delivered or performed at a location other than the seller’s business location, the sale is sourced to the location of the delivery or use of purchased service.
  3. If the purchaser requests delivery of the property or service to another recipient (i.e., the purchase is a gift), the sale is sourced to the location the recipient takes possession of the purchased property or first uses the purchased service.

Next steps and other considerations

It is important to note that these sourcing rules do not apply to leased property. Colorado provides guidance on the sourcing among other topics of leased property through the Department of Revenue website that be found by searching “Sales & Use Tax Topics: Lease.”  

As February 1, 2022 approaches, small retailers will want to adjust controls and processes to ensure compliance with destination sourcing. As states continue to rely more on data analytics to evaluate taxes, it will be imperative that businesses are aware of the continuously changing state and local tax landscape. If destination sourcing for a sale is unclear based on the guidance above, Colorado provides additional guidance with Section 39-26-104(3)(a), C.R.S. for sourcing retail sales.

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