Posted: December 23, 2010
The days of tax-free Internet purchases are gone
House bill 1193 is kicking inKatie Crenshaw and Hank Vanderhage
Colorado use tax audits may soon be on the rise, and the state of Colorado has a new tool to determine if your business has an outstanding use tax liability. Unless a sales or use tax exception applies, most businesses should file use tax returns and pay use tax at least annually on purchases for which they have not paid sales tax. In the past, the state has relied upon traditional audit procedures to find non-compliant taxpayers. Because of a law that makes Internet and other purchase information available to the state, more businesses may be subject to use tax audits and resulting assessments of back use taxes during 2011. The law will make it easier for the state to determine if a business should have filed a use tax return.
Use tax is due on any purchase by a Colorado person where sales tax was not paid unless a specific exception applies (for example, certain purchases for resale). A Colorado purchaser is required to self-report use tax to the state on a Consumer Use Tax Return, DR 0252, if the items purchased are used, stored, or consumed in Colorado. This use tax obligation applies to both individuals and companies in Colorado, although the state has traditionally only audited and assessed companies for use tax.
Due to the increase in Internet purchases from out-of-state sellers, where quite often the seller does not collect sales tax, the state has seen sales and use tax revenues decline. Taxable purchases have been escaping sales tax and Colorado purchasers have not been paying the corresponding use tax. Many states are enacting sales and use tax laws in an attempt to capture these lost revenues.
In March 2010, the Colorado legislature enacted House Bill 1193, Colorado Revised Statute § 39-21-112, which requires out-of-state sellers to either collect sales tax on sales to Colorado purchasers or send notices to the Colorado purchasers of their use tax reporting and payment obligations. If a seller decides to send the notices instead of collecting sales tax, the seller must send three notices:
First, at the time of purchase, the seller must give the purchaser a notice advising the purchaser that her purchase may be subject to use tax and she may have to file a Colorado use tax return.
Second, before January 31 of the next year, the seller must send another notice to the purchaser advising the purchaser of her total purchases from the seller, of the details of her purchases from the seller (i.e. dates and amounts), and that Colorado requires a use tax return be filed for all purchases.
Third, before March 1 of the next year, the seller must send the state a notice including the total amount paid for Colorado purchases by each purchaser.
The third notice, which is sent to the state, essentially provides an audit roadmap that the state can use to find persons who have intentionally or unintentionally avoided sales or use taxes. The state will receive identifying information such as a name and address and can match that information to use tax returns filed, or not, as the case may be. If the state determines that a person owed use tax, that person may owe not only the tax, but interest, penalty, and penalty-interest as well.
To avoid penalties and interest, purchasers should ensure that use tax is paid on purchases that were not subject to sales tax. Purchasers should also ensure that they can reconcile the items disclosed on any year end notices they receive to their internal records of items for which use tax was paid and items that were not subject to use tax. Finally, it should be remembered that use tax is owed regardless of whether an out-of-state seller complies with the law and sends the required notices.
Ms. Crenshaw is an associate at Holland & Hart with a practice focused on tax law. She has experience with the Federal, state and local tax aspects of structuring the formation, acquisition, disposition, operation, and liquidation of businesses in various industries and of various sizes. Prior to practicing law, Ms. Crenshaw worked as a Certified Public Accountant.
Mr. Vanderhage is a member of the tax practice group at Holland & Hart. He focuses his legal practice on a wide range of federal and state tax matters. Prior to entering private practice, he was an attorney for the Internal Revenue Service Office of Chief Counsel.