On July 1, 2022, Colorado enacted a first-of-its-kind fee on retail deliveries effectuated by motor vehicles in the state. Any seller that otherwise collects Colorado sales tax when shipping to Colorado customers is now obligated to collect this fee. Sellers are obligated to show the fee on their invoice or receipt as a separate item called “Retail Delivery Fees.”
While enacted last year, the Colorado Department of Revenue has only recently begun issuing informal guidance on the fee and is still working on a draft rule that was debated in a public stakeholder workgroup a few weeks ago. Coming out of the workgroup meeting, we know that Colorado positively expects the fee to be applied from July 1 but is suggesting that it may be temporarily lenient with respect to late filings and, for now, won’t necessarily enforce the requirement that the tax is overtly passed to the customer on their receipt.
But leniency comes at a price. If a seller is opting to not pass the fee on to their customer, it likely means that the fee is coming directly out of their bottom line.
Here are the basic facts about the new Colorado retail delivery fee:
- The total fee is $0.27 (it is a conglomeration of six separate fees, each earmarked to a specific state program – many of which are environmentally focused).
- The fee applies on a per-invoice basis; meaning if multiple items are being sold simultaneously, the fee only applies once, regardless of if the items are shipped to a single place or to multiple Colorado locations.
- The fee applies whenever one of the items being shipped is subject to sales tax. If all the items being shipped are non-taxable, no fee should be charged. The fee applies even if the seller offers free shipping and even if the shipping charge itself is not subject to Colorado state sales tax.
- The fee is reported on a new return, the DR-1786. Any sellers with an active sales tax account were automatically registered to file this new return. This return is due at the same time as the standard sales tax return.
- The fee applies to all deliveries effectuated by a motor vehicle (defined as self-propelled vehicles designed to run on the streets and highways), regardless of whether the seller completes delivery themselves through their own vehicle or uses a third-party carrier.
- The fee itself is not subject to Colorado state or county tax. However, certain home-rule municipal governments plan to render the fee subject to their local tax based on the theory that the fee is a component of the otherwise taxable delivery charge.
What does the Colorado retail delivery fee mean going forward?
During the stakeholder meeting, it was suggested that the retail delivery fee “may” not apply to deliveries effectuated by the United States Postal Service (USPS). However, it’s important to understand that a USPS exception is not contained in the statute, the proposed rule nor is it documented in any informal guidance published by the state.
In short, taxpayers should not bank on any exception for postal deliveries until they see it in writing from the DOR. There is absolutely no guarantee that such an exception will be enacted.
If you are working with a client selling retail goods into Colorado, it’s critical that you confirm with them that this new retail delivery fee is on their radar and that they have a plan to charge the fee to their customers, remit the fee amounts collected and file the new return. If they are using a third-party tax engine, you should help them understand if (and how) the tax engine will support the fee.
Since this is a brand-new levy, you will also want to understand whether any configuration changes will be needed on their side to ensure that the tax engine properly applies the fee as expected. Whatever system your clients use, you should test things out before deploying any solution into a live production environment. For example, if your client charges for shipping separately for each line item on an invoice, they will want to be sure that the delivery fee applies only once.
With respect to the future of this fee, two things can happen. There is a lawsuit afoot alleging that the fee violates the Taxpayer Bill of Rights (TABOR) under the Colorado state constitution, which requires voter approval of most new taxes. However, the success of this litigation is far from certain. It’s likewise possible that other states will emulate Colorado and impose their own delivery fees, and for much of the rest of the country, a similar TABOR challenge will not be a barrier.
What should accountants and bookkeepers do to protect their retail clients?
Now that the entirety of the country has economic nexus requirements on the books, states should understand that they are asking a far larger population of taxpayers to comply with their laws. They should build in sufficient time for companies to understand any new obligations and to stand up solutions to support them before they become effective. They should publish clear and comprehensive guidance and publish it early. Rules and regulations should be posted well before the law takes effect so that taxpayers know exactly what’s required and when.
However, not every state affords businesses this luxury and when they don’t, they rely on their trusted advisors to support them as they swiftly move to meet the new compliance challenge. To stay up to date on the latest sales tax changes, subscribe to the Sovos blog.