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Colorado Governor Bill Ritter recently signed into law HB 1193, a bill that imposes significant new compliance burdens on out-of-state or “remote” retailers that do not collect state sales or use tax on sales of taxable items to Colorado customers.

The new law requires retailers to include a notice on each invoice to Colorado customers informing the customer of its obligation to file a sales/use tax return and to remit tax accordingly. To induce compliance, retailers are subject to a $5 penalty for each failure to provide the required notice.

In addition to the invoice notice requirements, retailers must also report their annual transactions in two additional filings. One filing requires the retailer to furnish each Colorado customer with an annual itemized statement by January 31, detailing the customer’s purchases for the preceding calendar year. The year-end statement must also include a reminder to the customer of the necessity of filing a Colorado sales or use tax return. The second required statement contains similar information and must be submitted to the Colorado Department of Revenue by March 1. The penalty for each failure to provide a required year-end statement is $10 per occurrence.

Colorado’s sales and use tax rate is 2.9 percent. Thus, the cost in penalties of a failure to provide the required invoice notices and year-end statements could easily exceed the amount of tax due on a particular transaction. As a result, HB 1193 appears intended to coerce remote retailers to collect tax on taxable sales to Colorado purchasers, thereby avoiding the new compliance requirements. HB 1193’s effective date is March 1, 2010, but because “of the brief time period between enactment of the governing statute and required implementation,” the Colorado Department of Revenue issued emergency regulations waiving any penalties that would otherwise apply, as long as an affected retailer “begins to provide the required notices or begins to collect Colorado sales tax prior to May 1, 2010.”

Federal case law precludes a state from imposing sales and use tax collection obligations on a seller that lacks a “physical presence” with the state. See Quill v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904 (1992). HB 1193 deftly sidesteps the physical presence prerequisite to forced retailer tax collection by instead saddling the retailer with onerous notice and reporting duties. It remains to be seen if the new Colorado law will withstand anticipated legal challenges. In the meantime, Colorado has upped the ante on the administrative cost of doing business with in-state purchasers, and some e-commerce retailers have already expressed an intent to curtail their Colorado business activities.

The above described provisions were signed into law in conjunction with other Colorado tax increases totaling over $230 million. These additional provisions include a repeal of the sales tax exemption for certain downloaded software and a rebuttable presumption that an out-of-state retailer has nexus with Colorado for sales and use tax collection purposes if an affiliate of the retailer has a physical presence in Colorado and the retailer and affiliate have at least 80 percent common ownership.