Colorado Colorado Sales and Use Tax & Audit Guide

Colorado Sales Tax & Audit Guide

Straightforward Answers to Your Colorado Sales Tax Questions.

  • Do I need to collect Colorado sales tax?
  • Should I be collecting or paying Colorado use tax?
  • What do I do if I should have been collecting but haven't?
  • I received an audit notice. What should I do?
  • Guidance on fighting a sales tax assessment in Colorado.

Who Needs to Collect Colorado Sales and Use Tax?

Any retail sale that is made in Colorado is subject to Colorado taxation.

A retailer who maintains any place of business in Colorado directly, indirectly, or by a subsidiary must obtain a retail sales tax license regardless of the volume of sales made in Colorado.

Like most states, to be subject to Colorado sales tax collection and its rules, your business must:

1) Have nexus with Colorado, and

2) Sell or use something subject to Colorado sales tax.

How is Nexus Established in Colorado?

According to the Colorado Department of Revenue, sales tax nexus is created in Colorado if a business has a physical presence in Colorado, such as:

    1. Occupying and maintaining an office, distribution center, warehouse, or physical location where business is conducted.
    2. Having independent sales reps, employees, or agents conducting business in the state, including selling, delivering, or taking orders for taxable items in Colorado.
    3. Assembling, installing, servicing, or repairing products in Colorado.
    4. Owning, renting, or leasing real property or tangible personal property in Colorado, including a computer server or software to solicit orders for taxable items.
    5. Delivering goods to Colorado customers using your company-owned or leased truck.
    6. Maintaining inventory in Colorado using a third-party fulfillment service, such as Fulfilled by Amazon (“FBA”).

Additionally, business that do not have a physical presence in Colorado, can establish economic nexus by exceeding a certain annual sales threshold in the state. See the next section for details.

Economic Nexus (Wayfair Law) and Internet Sales in Colorado

Under Colorado law, a retail sale is usually sourced to the location where the purchaser takes possession of the purchased property. This is known as destination sourcing.

Colorado's sourcing rules apply to both state and local sales taxes.

An out-of-state retailermust apply for a Colorado Sales Tax Licenseand collect Colorado sales tax if:

  • Your gross sales, delivered in Colorado, including exempt sales, reached $100,000 or more in either the previous or current calendar year.

Any retailer who does not maintain a physical location in Colorado is exempted from state sales tax licensing and collection requirements if:

  • the total annual retail sales in both the current and previous calendar years were less than $100,000.

How is the $100,000 gross revenue threshold calculated?

All retail sales are included for the purpose of calculating the $100,000 threshold, whether those sales would be subject to Colorado tax.

Marketplace Sellers

If your business sells through Amazon or a similar marketplace provider, you may not have to collect sales and use tax on those sales. Specifically, if the marketplace provider certifies that they are collecting and reporting sales tax, you do not need to pay taxes on these sales.

However, such sales may still count towards your total sales threshold. You'll still need to collect tax onsales made directly through your website or any other marketplaces that don't collect sales tax on your behalf.

See this Marketplace Guide for Colorado Sales Tax for more information.

Which Sales are Subject to Colorado Sales Tax?

General Transactions

Any retail sale that is made in Colorado is subject to Colorado taxation.

Colorado requires the collection of sales tax on retail sales of tangible personal property except when such sales qualify for an exemption authorized explicitly by law.

Additionally, sales tax applies to prepared foods and drinks sold in restaurants, bars, and other similar establishments. Short-term rentals of rooms and accommodations are also subject to Colorado sales tax.

The rules seem simple, but many details make applying Colorado's tax rules to your business challenging.

Common Exemptions from Colorado Sales and Use Tax

Colorado does not impose a sales tax on items within several categories.

The Department of Revenue has provided guidance for the tax-exempt items listed here:

Services

Sales of services are generally not subject to Colorado sales tax, except for the following:

  • Gas and electric service for commercial use
  • Intrastate telephone and telegraph services

You can find additional information here.

Software

Colorado sales tax applies to any sale of computer software where all of the following conditions are met:

  • It is prepackaged for repeated sale or license; and
  • A tear-open nonnegotiable license agreement governs its use; and
  • It is delivered in a physical medium such as a disk, tape, or card.

Software as a Service (Saas)

Sales of computer software are non-taxable when the software is delivered by any of the following methods:

  • Provided through an application service provider "Application service provider" or "ASP" retains custody over or hosts computer software for use by third parties. Purchasers will typically access the computer software via the internet.
  • Delivered by electronic delivery "Electronic computer software delivery" means the software is transferred remotely to the purchaser's computer, and the purchaser does not receive any tangible medium in the transaction.
  • Transferred by "load and leave" delivery: "Load and leave" computer software is delivered to the purchaser using tape, disk, compact disc, card, or comparable physical medium, but the software is manually loaded at the purchaser's location. And no title to or possession of the tape, disk, compact disc, card, or comparable medium is transferred to the purchaser.

Shipping & Handling

Shipping charges are exempt if "separable from the purchase and separately stated" on the invoice.

In other words, if the charges are added after the property is offered for sale and the purchaser can select the shipping method, these charges are exempt. Shipping charges for non-taxable items are also exempt.

Colorado Delivery Fees

Retailers who make retail deliveries must collect and remit a delivery fee for each taxable sale of tangible personal property delivered by motor vehicle to a purchaser at a location within Colorado.

  • This delivery fee also applies to deliveries by motor vehicle from another state to a site in Colorado.
  • A motor vehicle is any self-propelled vehicle designed primarily for travel on the public roads, is generally and commonly used to transport people and property over the public highways or roads; or a low-speed electric vehicle.
  • If every item in a retail sale is exempt from sales tax, the delivery is also exempt from the retail delivery fee.
  • Conversely, if one or more items in the transaction are subject to sales tax, you must collect the retail delivery fee.
  • The total fees must be shown on the receipt or invoice as a separate item called "retail delivery fees."

Industry-Specific Guidance

While the general sales tax rules seem straightforward, applying those rules can get tricky when gray areas come up. The Colorado Division of Taxation provides some industry-specific guidance for the following:

  • Gasoline and Special Fuel Subject to Sales Tax - FYI Sales 57
  • Leases - Sales & Use Tax Topics
  • Motor Vehicle Daily Rental Fee (under review) - FYI General 19

Determining Local Sales Tax Rates in Colorado

The state sales tax rate in Colorado is 2.900%. You can use this tax lookup tool to find information about local taxes in the state of Colorado.

County and city sales taxes collected by the state are administered in the same manner as state sales tax. If the sale is subject to state sales tax, it is also subject to state-collected local sales tax.

The Colorado Department of Revenue collects sales tax on behalf of cities, counties, and special districts. Such jurisdictions are referred to as "state collected".

All Colorado counties that impose a sales tax are state collected, except Denver County and Broomfield County.

"Home-rule" cities are cities that have elected to administer their own local sales and use taxes. They are referred to as "self-collected". Self-collected jurisdictions determine which goods and services are subject to local sales and use taxes.

You can find local sales tax rates in the Colorado Sales/Use Tax Rates Publication . For more information about local sales tax, refer to Part 8 of the Colorado Sales Tax Guide.

Local Sales and Use Tax Tables

The following tax table shows the total tax rate in each Colorado county.

COUNTY NAME

TOTAL TAX RATE

Adams County

9.25%

Alamosa County

8.40%

Arapahoe County

8.81%

Archuleta County

7.90%

Baca County

5.90%

Bent County

7.90%

Boulder County

8.99%

Broomfield County

8.64%

Chaffee County

8.65%

Cheyenne County

4.90%

Clear Creek County

10.55%

Conejos County

8.90%

Costilla County

6.90%

Crowley County

6.90%

Custer County

7.90%

Delta County

8.70%

Denver County

9.25%

Dolores County

8.15%

Douglas County

8.75%

Eagle County

9.90%

Moffat County

8.90%

Montezuma County

7.35%

Montrose County

8.65%

Morgan County

6.90%

Otero County

7.90%

Ouray County

9.45%

Park County

8.90%

Phillips County

7.40%

Pitkin County

10.40%

Prowers County

6.90%

Pueblo County

7.60%

Rio Blanco County

6.50%

Rio Grande County

8.50%

Routt County

8.90%

Saguache County

9.50%

San Juan County

10.40%

San Miguel County

8.65%

Sedgwick County

6.90%

Summit County

10.38%

Teller County

8.49%

Washington County

6.90%

Weld County

8.52%

Yuma County

5.90%

*Exact tax rates vary. Occupancy fees and taxes are not included in this table.

I Should Have Collected Colorado Sales Tax, But I Didn't

Many of our competitors will suggest Filing a Voluntary Disclosure Agreement in each state. This is a one-size-fits-all solution that isn't always the best. Our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.

If you determine your business has nexus, but you have not collected Colorado sales tax, here are your options:

    1. Register and pay back taxes, penalties, and interest, or
    2. Complete a VDA to cut penalties (and, in some cases, reduce your tax liability and avoid interest).

Here is what you need to know about each option to make the best decision for your business:

Option 1: Register to Pay Back Taxes, Penalties, and Interest.

A VDA is not cost-effective if the past liabilities and penalties are minimal. Sometimes the best solution for a business is to register with Colorado and pay back taxes, penalties, and interest.

Be wary of the tax professionals that recommend doing a VDA in these cases. They are looking to make a buck rather than looking out for your best interests.

When to consider registration and payment:

  • If you established nexus less than 3 or 4 years ago.
  • The sales tax penalty is LESS than the professional fees charged for the VDA.
  • Your business does NOT have a sales tax collected issue.

Beware: Registering does not generally end past liabilities.

If you're unsure what your past liabilities are, contact us. Our state tax professionals work with you so you can make the right choice for your business.

Option 2: Voluntary Disclosure Agreement (VDA)

Colorado's lookback period: The standard lookback period is three years for sales and use tax.

In many situations, voluntary disclosures are a valuable tool to reduce extended periods of past exposure.

The voluntary disclosure limits the lookback period to three years. Suppose you should have collected sales tax over the past ten years but didn't. If that is the case, you may benefit from doing a VDA.

A VDA may be a good option for you if:

  • You established nexus more than 3 or 4 years ago.
  • The sales tax penalty savings is MORE than the professional fees charged for the VDA.
  • You have a sales tax collected but not remitted issue.

What to Expect During an Audit

The typical audit process is shown in this flowchart. Detailed guidance for each stage of the audit process follows in the sections below.

Colorado Sales Tax Audit Protest Process Flow Chart

Audit Notice Received à 2-4 weeks à Audit Begins à Entrance Conference/Preliminary Documentation Requested à Site Visit (Sometimes) à Sales & Purchase Detailed Exam à 3-6 months à Preliminary FIndings à 30 days à Aduit Report Issued à 30 days à Resolve with Auditor or Notice of Deficiency Issued

Colorado regularly audits businesses required to charge, collect, and remit various taxes in the state. An audit is often set into motion when you receive that dreaded preliminary audit notice.

If the Colorado Department of Revenue determines the correct amount of tax has not been paid, your business will receive a Notice of Deficiency.

I Received a Colorado Sales Tax Audit Notice. What Should I Do?

Businesses that receive a sales tax audit notice need to consider the following questions:

  • If you don’t have sales tax audit experience, how can you trust that the state's auditor abides by the rules and follows proper procedures?
  • How will you know when to provide documents or when to push back?
  • Do you have a thorough understanding of your sales and use tax areas of exposure?
  • Controlling the audit is paramount to limiting exposure and shaping the results. Are you confident in doing that on your own?

Unless you can confidently answer these questions, hiring a professional is most likely to be the best option. Contact us to learn how our sales tax professionals can give you the peace of mind and confidence you’ll need during your audit.

Visit our resource pages for more information to help you make critical decisions during your Connecticut sales and use tax audit.

The Audit Overview & Selection Process

The General Audit Process

Statute of Limitations Extensions & Issues

Managing the Sales Tax Auditor

What to Expect from a Colorado Sales Tax Auditor

In addition to the standard audit procedures outlined below, Colorado has also enacted a policy regarding retail transactions where an audit finds a retailer hadn't collected sales tax from another retailer currently being audited. If you are doing business in Colorado, it may be worth reviewing.

It's quite a lengthy read. If you have questions about your situation, contact us to discuss it with one of our tax professionals.

For now, here is the summary of the general audit process:

  • The auditor will conduct pre-audit research.
  • The auditor will often schedule and perform an entrance conference.
  • The auditor will request records (many of which the auditor is not entitled to and does not need)

Once the auditor receives the necessary records, they will compare your Connecticut sales and use tax returns to your federal income tax returns or bank statements to determine whether you reported all applicable or gross sales on your Connecticut sales tax return(s).

NOTE: A slight error in how the tax was charged on even a single type of transaction can add up to a significant sales tax liability.

Once the auditor is confident all sales are accounted for, they will:

  • Review your exempt and out-of-state sales.
  • Conduct a use tax audit – the auditor will request documents of accounts to make sure use tax was paid adequately on applicable purchases.

Common areas audited include:

  • Advertising Expense
  • Auto & Truck Expense
  • Repair and Maintenance
  • Office Expense
  • Miscellaneous Expense
  • Supplies
  • Equipment

If a business buys an item online without paying sales tax, the business may still be obligated to remit use tax to Colorado. Believing otherwise often leads to shocking results for the unsuspecting taxpayer during an audit.

After the Audit – Understand and Defend Your Businesses Rights

Unless you agree with and choose to pay the state's estimated total due, a Notice of Deficiency will require you to respond by filing a protest or request for a hearing.

Under Colorado law, a notice of deficiency can be issued no later than three years after the return was filed or three years after the return was due, whichever is later.

However, for taxpayers who do not file a required return, or in the case of a false or fraudulent return with the intent to evade tax, there is no limit on the time for the tax department to estimate the tax due, along with any applicable penalties and interest, and issue a Notice of Deficiency.

It is wise to start by getting a state and local tax professional involved to prepare for the audit.

I Received a Colorado Sales Tax Notice of Deficiency. What Should I Do?

Businesses that receive a sales tax audit notice need to consider the following questions:

  • If you don't have sales tax audit experience, how can you trust that the state's auditor abides by the rules and follows proper procedures?
  • How will you know when to provide documents or when to push back?
  • Do you have a thorough understanding of your sales and use tax areas of exposure?
  • Controlling the audit is paramount to limiting exposure and shaping the results. Are you confident in doing that on your own?

Unless you can confidently answer these questions, hiring a professional is most likely to be the best option.

Contact us to learn how our sales tax professionals can give you the peace of mind and confidence you'll need during your audit.

Visit our resource pages for more information to help you make critical decisions during your Colorado sales and use tax audit.

The Audit Overview & Selection Process

The General Audit Process

Statute of Limitations Extensions & Issues

Managing the Sales Tax Auditor

Contesting Audit Findings with the Auditor

Colorado Sales Tax Audit Protest Process Flow Chart

Notice of Deficiency / Adjustment Issued à 30 days à Protest Filed with agency à if unresolved, sent to hearings division à 6-12 months à Final Determination Issued à30 days à Appeal to Judicial Court

Appeal/Protest with The Colorado Department of Revenue

Under Colorado law, a formal administrative hearing before the Director of Revenue must be allowed for taxpayers who timely dispute a notice of deficiency or rejection of refund claim.

Taxpayers who receive a notice of deficiency or notice of refund rejection may submit a written protest and request a hearing to dispute the notice within 30 days of the date of the notice.

The protest or request for a hearing must contain at least the following information:

  • Taxpayer name, address, and account number
  • The tax period(s) involved.
  • The type and amount of tax in dispute
  • A summary statement of findings with which the retailer disagrees and the grounds upon which the retailer relies to show the tax is not due.
  • The retailer must sign the protest or request for a hearing.
  • The application for a hearing must be made to the Executive Director. However, it should be mailed to the reviewer's attention whose name and address appear on the notice of deficiency or rejection of refund claim.

You can be denied valid standing in an appeal to the courts if a valid protest is not filed on time and this can allow the Department to begin collection procedures.

All protests will be reviewed by the originating section (Sales Tax) for factual matters.

If the protest is not resolved by the review of factual matters, the dispute will be forwarded to the protest to the Tax Conferee Section.

Though we don't recommend doing this without first speaking with a tax professional at any time during the audit process, the Colorado Department of Revenue allows taxpayers to request that the Executive Director of the Colorado Department of Revenue reconsider the deficiency without a hearing.

If you have received a Notice of Deficiency and haven't talked to someone experienced in Colorado State and Local tax, now is the time. Do it today, before the deadline has passed.

What to Expect from a Colorado Tax Conferee

Upon receipt of a request for a hearing, the Department's Tax Conferee Section will assign the case to a Tax Conferee.

The Tax Conferee will:

  • Review your written protest before the scheduling of any formal hearing.
  • Review your exempt and out-of-state sales.
  • Conduct a use tax audit – the auditor will request documents of accounts to make sure use tax was paid adequately on applicable purchases.
  • Accept or reject the suggested changes listed in your protest.
    • schedule one or more informal conferences for the following purposes: to discuss the administrative hearing procedures,
    • to clarify the relevant facts, issues, and law,
    • To allow the submission of additional evidence in support of the protest, and, if possible, to settle the matters in dispute.

The informal conference does not waive the taxpayer's right to a formal administrative hearing.

Common areas audited include:

  • Advertising Expense
  • Auto & Truck Expense
  • Repair and Maintenance
  • Rent (including related party rent)
  • Office Expense
  • Miscellaneous Expense
  • Supplies
  • Equipment

If a business buys an item online without paying use tax, the business is still obligated to remit the tax to Colorado. Believing otherwise often leads to shocking results for the unsuspecting taxpayer during an audit. Here is more information on Colorado Use Tax.

This is your first opportunity to see the state's findings. You'll want to push back on areas where they have overstepped their bounds or misapplied Colorado's sales tax laws. It is advisable to have a sales tax professional present during this meeting.

It's best to hold off on agreeing to anything until a sales tax professional has reviewed it for issues that should be challenged.

NOTE: A slight error in how the tax was charged on even a single type of transaction can add up to a significant sales tax liability.

Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel weren't well versed in the sales tax laws that, if challenged, could have reduced their sales tax liability.

If you have questions about your situation, contact us to discuss it with one of our tax professionals.

After the Audit (Tax Conferee Review) – Understand and Defend Your Businesses Rights

If the Tax Conferee cannot resolve the protest, the case will be forwarded to the Hearing Division of the Department, and an administrative (formal) hearing will be scheduled.

The Executive Director/ Deputy Director must notify you in writing of the time, date, and place for the hearing at least 30 days before the hearing date.

Administrative Hearing

The hearing will be held before the Executive Director/Deputy Director, or another designated employee within the Department of Revenue who will be selected by the Executive Director to hear your dispute. Under Colorado law, partnership and corporate taxpayers must be represented by counsel.

Due to the nature of the administrative hearing (it is very similar to a court hearing),we strongly recommend having an experienced representative at this stage of the audit process.

Our team has handled hundreds of administrative court cases. We can help your company receive the resolution you are entitled to. Get in touch with us today.

Final Decision

After reviewing the evidence and arguments, or the brief and written materials submitted instead of a hearing, the Executive Director/Deputy Director will make a final determination within sixty days.

The deadline for a final determination may be extended in sixty-day increments. The Executive Director is able to modify the tax, penalties, and interest disputed at the hearing or approve a refund if necessary.

If you cannot resolve the Colorado sales and use tax dispute through the protest/appeal process, the Colorado Department of Revenue will issue a Final Decision.

Appeal to Judicial Court

The district court is able to affirm, modify, or reverse the determination of the Executive Director. The district court's decision shall be entered as a judgment, as in other civil cases, against the taxpayer or the Executive Director, as the case may be.

Settling a Colorado Sales Tax Liability

After any one of the critical notices is issued, it's possible to settle your Colorado sales tax case with the Colorado Department of Revenue by filing an Offer in Compromise. However, to qualify, the business must meet specific criteria. Often, you can get better results negotiating here than with the auditor.

Without experience and knowledge of Colorado tax laws, knowing a fair settlement from an unreasonable one will be challenging.

DO NOT attempt to negotiate a settlement without an experienced Colorado state and local tax lawyer or other professional.

Contest a Colorado Jeopardy Assessment

Colorado may issue a Notice of Jeopardy Determination in certain situations.

The jeopardy assessment gives the Colorado Department of Revenue the right to try to collect immediately.

You must make a security for payment satisfactory to the executive director to stay collections. Due to the jeopardy nature, the taxpayer only has 20 days to contest the assessment and must place a security deposit to fight the issue.

Colorado Court of Appeals

If you or the Department of Revenue is not satisfied with the decision by the district court, either or both may appeal further to the Colorado Court of Appeals or the Colorado Supreme Court. In order to appeal the district court's decision, the taxpayer must first satisfy a bond requirement.

After the above appeals are exhausted, the taxpayer or the Department of Revenue must pay any amount the court determines is owed.

Additional Colorado Sales Tax Resources

Colorado Sales Tax Guide

Colorado Department of Revenue Sales Tax Website

Colorado Sales and Use Tax Guidance Publications

Colorado Procedure and Administration Regulations

Code of Colorado Regulations: Taxation Division

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