Colorado Sales Tax Sourcing – Destination Sourcing
As businesses continue to move towards online sales models, Colorado has adopted new legislation around sales tax collection to account for the shift. On June 1, 2019, The Colorado Department of Revenue implemented a new Sales Tax Sourcing rule; Destination Sourcing.
What is Destination Sourcing?
Destination Sourcing requires that state sales tax be collected & remitted based on the buyer’s addresses when a taxable product is delivered to a customer, regardless of the business’ physical location. This affects events such as caterings, food trucks and delivery services because sales tax will need to be collected at the rate applicable where the sale or delivery is ultimately made.
Destination sourcing is also used when a product or service has a lease/rental agreement with periodic recurring payments. Businesses will now be required to collect and remit sales tax for all retail sales to Colorado consumers, regardless of the physical location for the business.
Example: A company located in Boulder, CO delivers food for a catering event in Denver, CO through a food truck; the proper sales tax collection is based on Denver sales tax rate. Furthermore, said Catering Company will need to file the Denver sales tax return separate and distinct from their Boulder sales tax return. They will then need to remit the sales tax collected to Denver, regardless of the company’s base location in Boulder. For sales made at the physical location in Boulder, sales tax would still be collected and remitted based on Boulder’s sales tax rate—no change there.
What is the rollout timing?
Destination Sourcing took effect on June 1, 2019 by the Colorado Department of Revenue.
In addition to this change, as of October 1, 2019 the state of Colorado may classify certain third party delivery services (Grubub, Uber Eats, DoorDash, etc.) to be a marketplace facilitator, which may require that third party to collect & remit sales tax instead of the restaurant. This state law will require marketplace facilitators to calculate the taxable price; sourcing the sales and determining the applicable tax rates; determining whether items and services are subject to tax; and determining whether a sale is tax-exempt.
What are the penalties if not followed?
Utilizing the example noted above, if sales and sales tax were reported and paid to the incorrect jurisdiction, i.e. Boulder rather than Denver, not only will the sales tax collected and paid to Boulder be due to Denver, but penalties & interest will also more than likely be assessed.
For example, the company located in Boulder delivers and sells food in Denver wherein $2,000 should have been collected. Not only will the $2,000 in tax be owed but there will more than likely be a penalty of 15% of the tax due plus interest of 1% on the tax due for the first month and an additional 1% accrued each month it is past due (i.e. past due by twelve months, the interest rate would be 12% for the 12th month + 11% for the 11th month + 10% for the 10th month and so on).
Therefore if $2,000 in tax is due; and, late by twelve months, the total amount due is:
$2,000 TAX + $300 PENALTY + $1,560 INTEREST = $3,860
If you break it down, that’s an additional $1,860 owed due to not being reported timely, in addition to the $2,000 of sales tax that should have been collected initially.
The graphic above depicts the interest of 1% on the tax due for the first month plus the additional 1% interest accrued each month the sales tax is past due.
How can RASI assist?
RASI can assist restaurants with remaining in compliance through the development of a custom set of GL accounts for each jurisdiction (i.e. Boulder Food Sales; Denver Food Sales), which ensures proper reporting of sales & tax payments to each jurisdiction. The custom set of GL accounts would appear on a client’s website, further aiding them to audit sales by jurisdiction for accuracy on a daily basis. Our system of daily checks & balances makes sure there’s no scrambling to determine sales by jurisdiction. Coding sales by jurisdiction to the custom set of GL accounts will eliminate missed reporting or payments and serve as supporting documentation to POS report during an audit!
Whether your business is a multichannel seller, marketplace seller, marketplace facilitator, or contracts with a marketplace facilitator, RASI has the necessary systems in place to file sales tax returns and remit payment for each jurisdiction required. Before jumping into massive changes RASI always recommends a consultation with legal counsel to identify which local jurisdictions your business is required to collect & remit sales tax in because this law is complex and each city/county can have different requirements for collecting sales tax at the local rate. If your third party delivery service is required by law to collect and remit sales tax to local jurisdictions it is always a good idea to contact each third party delivery service for documentation and proof they are collecting & remitting sales tax to each jurisdiction to protect the business in the case of an audit.
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