Puzzling out sales tax in Colorado – Wacky Tax Wednesday

A map of Colorado sales tax districts looks a lot like a 300-piece puzzle, with each district a distinct color. The pieces are all sorts of wild shapes and various sizes, some relatively large, some minuscule, and the area around Denver is particularly complex: Several pieces are broken into morsels and scattered about. It’s as if the creator was a practical joker. Or high (it’s legal).

But no, that’s just how sales tax districts work in Colorado. And while it might make for a fun puzzle, dealing with the various sales tax rates and regulations is not fun for businesses required to collect and remit Colorado sales and use tax.

Colorado’s not alone in this; some of its neighbors have even more sales tax jurisdictions. Kansas has about 425, Oklahoma more than 580, and Texas has a whopping 1,500+ different sales tax jurisdictions. These numbers, like all things related to sales and use tax, are subject to change.

What makes sales and use tax compliance in Colorado particularly challenging is that it’s a home-rule state.

State governments decide which sales are taxable or exempt in most states. Local governments may have the power to increase or decrease local sales and use tax rates, but the state tax department handles collecting and distributing sales and use tax revenue, as well as enforcing sales and use tax laws.

In Colorado, approximately 100 home-rule cities and towns determine their own rates and rules, including which sales are exempt and which are taxable (within state guidelines). Although the state collects and administers tax for some home-rule localities, more than 70 home-rule cities* administer their own taxes.

Remember all the pieces in the sales tax district puzzle? Imagine having to register with local governments in about 70 of them. Then picture keeping track of sales tax rates and rules in each district, ensuring that you properly collect sales tax as required. Local rates vary widely, from 0.20% in the Broomfield Arista Improvement District to 4.15% in Broomfield itself (as of February 2020), plus the state sales tax.

Exemptions vary, too. Some localities exempt food for home consumption, others tax it. Some exempt occasional sales by charitable organizations, others don’t.

Finally, instead of filing one sales and use tax return with the Colorado Department of Revenue each reporting period, you file with the department for state-collected districts and with local governments in all self-collected districts. When sales are booming, you may have to file more than 70 separate returns. 

The complexity of Colorado sales and use tax compliance doesn’t merely affect in-state companies. Out-of-state businesses required to collect state sales tax in Colorado are also required to collect state-administered local sales taxes, and may be required to collect applicable taxes in home-rule localities. To know for certain, it’s necessary to contact home-rule governments directly.

When it comes down to it, I’d rather be forced to assemble a complicated puzzle with 1,500 small pieces, without my reading glasses, at dusk.

To learn more about collection requirements for out-of-state businesses making sales in Colorado or other states, see our seller’s guide to nexus laws and sales tax collection requirements.

*The Colorado Department of Revenue provides some information for these jurisdictions but recommends businesses contact home-rule cities directly “to receive up-to-date information concerning their tax rates, exemptions, license fees and procedures.” A list of home-rule cities, along with their contact information, is provided in Colorado Sales/Use Tax Rates (Form DR 1002), which is updated annually in January and July.