Below I’ll walk you through a step by step guide for how to figure out (hack) how much use tax you (as an individual) should be paying to Colorado. But first, here’s just a little background, without getting too far into the weeds, on why you have to do this in the first place!
Even though I’ve been living in Colorado for almost twenty years, and worked the last 12 in the compliance and tax industries, it didn’t become clear to me until a few years ago that I should be paying “consumer use tax” on purchases I made online. In the Direct Marketing Association v Brohl decision from the 10th Circuit, the introduction provides a pretty good explanation for this, and also acknowledges that very few people actually pay this tax.
When a neighborhood bookstore in Denver sells a book, it must collect sales tax from the buyer and remit that payment to the Colorado Department of Revenue (“Department”). When Barnes & Noble sells a book over the Internet to a Colorado buyer, it must collect sales tax from the buyer and remit. But when Amazon sells a book over the Internet to a Colorado buyer, it has no obligation to collect sales tax. This situation is largely the product of the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that, under the dormant Commerce Clause doctrine, a state may not require a retailer having no physical presence in that state—e.g., Amazon as opposed to Barnes & Noble—to collect and remit sales tax on the sales it makes there.
Faced with Quill, many states, including Colorado, rely on purchasers themselves to calculate and pay a use tax on their purchases from out-of-state retailers that do not collect sales tax. But few in Colorado or elsewhere pay the use tax despite their legal obligation to do so.
To get around the fact that they can’t compel out of state businesses to collect and remit sales tax on sales that originated out-of-state as well as that very few Colorado residents actually collect tax, Colorado passed a law, which has recently been upheld as constitutional, that requires sellers to report their sales data to the Colorado Department of Revenue (DOR). In effect, this law forces sellers that choose not to register with the DOR to rat out their own customers, making it much easier for DOR to then go after Colorado residents for not paying use tax. Because of this, I started paying consumer use tax on my purchases for the past few years.
Almost all of my purchases from out of state sellers are on Amazon, so I’m going to focus on Amazon in this guide, but the same principles can be used for any other sellers. This process can obviously also be used for other states that require consumer use tax. Note, this is not a perfect process, and circumstances vary, but it should give you a general sense of how to make the calculations.
Step by Step Guide for Paying Consumer Use Tax in Colorado for Amazon Purchases
- Go to Your Account -> Your Orders -> Order History Reports
- Set “Report Type” to “Orders and shipments”, select the “Last Year” quick set option to filter on just your shipments from last tax year. Type in a name for your report (like “2016 Tax Report”) so you can easily access it in your account if you ever need to come back to it. Click “Request Report” to run the report.
- Amazon will then provide a .csv file that you can them open with Google Sheets (which I use) or Microsoft Excel.
- Filter on Column L (Shipping Address State) to show only the shipments that were shipped to you in Colorado. You don’t want to include gifts or other shipments you sent to other states.
- Filter on Column T (Tax Charged) to show only purchases where no tax was charged. Depending on the seller, sales tax may or may not be collected on each transaction. You want to pay only on the transactions where sales tax was not collected.
- Sum the values in Column U (Total Charged) to determine the value of transactions for which you need to pay consumers use tax.
- Complete or use as a guide form DR 0104US, which will ask you to multiply by the state consumer use tax rate of 2.9% as well as the rates from any special districts. Note: to determine if you live in a special district, use this handy online lookup tool.
- Report the number from box 7 of the DR 0104US on Line 14 of your Colorado Individual Income Tax form 104.
Whew! Not exactly easy. If you have a better way, I’d love to hear it!