Must an out-of-state bakery seller register and file Colorado sales tax returns when its baked goods are state-exempt?

Plain-English summary

An out-of-state seller shipped individually wrapped brownies, cookies, and bars to Colorado customers. It had no Colorado office or employees, but its 2018 Colorado revenue exceeded $100,000. The Department found economic nexus and required the company to obtain a Colorado sales tax license, collect applicable state-administered taxes, and file monthly sales tax returns even if every reported sale was exempt.

The described bakery products contained flour and qualified as food for home consumption, so they were exempt from Colorado state and special-district sales tax. State-administered cities and counties could choose whether to exempt such food; the seller had to check each jurisdiction. The ruling says Colorado began enforcing the out-of-state retailer obligations discussed there on June 1, 2019.

What this means for you

Remote food sellers

An exemption for your goods does not automatically remove registration and filing duties if your Colorado sales establish nexus. Check both the state treatment of each product and the applicable local jurisdiction's food exemption.

Accountants and bookkeepers

The letter concerns 2018 sales and a June 2019 enforcement start. Review current thresholds and rates before applying it today. The Department pointed to its DR 1002 rate table for state-administered local exemptions and advised contacting self-collected home-rule governments directly.

Common questions

Q: Did the seller need a Colorado physical presence?
A: No. The Department found substantial nexus because the seller's Colorado revenue in the preceding year exceeded the stated $100,000 threshold.

Q: Were its brownies and cookies taxable?
A: The flour-containing baked goods were exempt from state and special-district sales taxes as food for home consumption. State-administered local tax depended on the jurisdiction's election.

Q: Must exempt sales still appear on a return?
A: Yes. The Department required monthly returns reporting taxable and exempt sales after registration.

Q: Does the ruling decide self-collected city tax?
A: No. The Department advised the company to contact those local governments separately.

Citations and references

• § 39-26-102(3)(c), C.R.S. (substantial nexus without physical presence)
• § 39-26-103(1)(a), C.R.S. (sales tax license)
• § 39-26-707(1)(e), C.R.S. (food for domestic home consumption)
• § 39-26-105(1)(b), C.R.S. (sales tax returns)
• § 29-2-105(1)(d)(I)(C), C.R.S. (local food exemption option)

The ruling states: “Company is obligated to file sales tax returns” even if its sales are exempt.

Source

• Landing page: https://tax.colorado.gov/all-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/default/files/PLR%2019-003.pdf

Original ruling text

Physical Address:
Office of Tax Policy Analysis
1375 Sherman Street, Room 607
Denver, CO 80203

Mailing Address:
Office of Tax Policy Analysis, Room 607
P.O. Box 17087
Denver, CO 80217-0087

PLR 19-003

June 7, 2019
XXXXXXXXXXXX
Attn: XXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
Re: Substantial Nexus
Dear XXXXXXXXXXXX,
You submitted a request for a private letter ruling on behalf of XXXXXXXXXXXX (“Company”) to the Colorado Department of Revenue (“Department”) pursuant to 1-C.C.R. 201-1, Reg. 24-35-103.5. This letter is the Department’s private letter ruling. This ruling is binding on the Department to the extent set forth in 1-C.C.R. 201-1, Reg. 24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the ruling is made. Issue 1. 2. 3. 4.

Does Company have substantial nexus with Colorado?
Is Company required to register with the Department for sales or use tax purposes? Are Company’s products exempt from Colorado sales or use tax? Is Company required to file a return each month even if all of its sales are exempt from state sales taxes? Conclusion

1. Company is doing business in Colorado and has substantial nexus with Colorado for purposes of
   state and state-administered sales taxes.
2. Company is required to register with the Department to collect and remit state and stateadministered sales tax.
3. Company’s products are exempt from Colorado state and special district sales taxes. Company’s
   products may be subject to local sales tax from state-administered taxing jurisdictions.
4. Company is obligated to file sales tax returns even if all sales are exempt from state and stateadministered local sales taxes.
   Background
   Company, which is located outside of Colorado, manufactures and sells prepackaged bakery food products, such as brownies, cookies, and bars. Company’s bakery items are fully cooked, individually wrapped and labeled, and sold for human consumption. Company accepts orders from Colorado residents through Company’s website and over the telephone. Company ships products to customers by common carrier and does not make deliveries utilizing Company’s own vehicles. Company does not have employees, agents, or other representatives working in Colorado, and does not maintain an office, warehouse, or other place of business in Colorado. Company represents that it has not obtained a Colorado sales tax license. Company’s gross revenue from delivery of its products into Colorado during the 2018 calendar year exceeded $100,000, and Company sold its products in more than 200 separate transactions.

PLR 19-003
June 7, 2019
Page 2
Discussion

1. Company is doing business in Colorado and has substantial nexus with Colorado for purposes of
   state and state-administered sales taxes.
   A retailer is “doing business in Colorado” if it is selling, leasing, or delivering tangible personal property 1 into Colorado. Colorado requires a retailer that is “doing business in this state” and that has substantial 2 nexus to Colorado to obtain a state sales tax license. A retailer has substantial nexus with Colorado if it has a physical presence in the state or, absent a physical presence, is selling its products into Colorado and has in excess of $100,000 in retail sales of tangible personal property, commodities, or services in 3 the current or prior calendar year. A retail sale of tangible personal property, for purposes of determining 4 substantial nexus, includes sales of goods that are exempt from sales tax collection. Company represents that its retail sales in Colorado in the prior calendar year exceeded $100,000. As a result, Company is doing business in, and has substantial nexus with, Colorado.
2. Company is required to register with the Department to collect and remit state and certain stateadministered local sales tax.
   Company must obtain a Colorado sales tax license and must collect, report, and remit state sales tax and certain state-administered local sales taxes to the Department. This requirement begins June 1, 6 2019.

5

3. Company’s products are exempt from Colorado state and special district sales taxes. Company’s
   products may be subject to local sales tax from state-administered taxing jurisdictions. Food sold for domestic home consumption is exempt from Colorado state and special district sales and 7 use tax. Colorado has adopted the U.S. Department of Agriculture’s (“USDA”) definition of “food" as used 8 in the Supplemental Nutrition Assistance Program (“SNAP”). Among food items eligible for the 9 exemption are candy, cakes, and cookies. However, “candy” and “soft drinks” are subject to state and 10 special district sales and use taxes. “Candy” is “a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruit, nuts, or other ingredients or flavorings of bars, 11 12 drops, or pieces.” Candy does not include any preparation containing flour. Based on our conversations, Company represents that all of their prepackaged bakery food products include flour. As such, the sale of Company’s baked goods is exempt from state and special district sales and use taxes. State-administered cities and counties have the option to exempt the sale of food for domestic home 13 consumption. State-administered cities and counties that elect to exempt food for domestic home 14 consumption must use the same definition for food as the Department. It is important to note that the exclusion of candy from the exemption provided in Section 39-26-707(1.5)(a), C.R.S., does not apply to

1

Section 39-26-102(3), C.R.S.
Section 39-26-103(1)(a), C.R.S.
3
Section 39-26-102(3)(c), C.R.S.
4
Section 39-26-102(9), C.R.S.
5
Company is obligated to collect sales tax based on the destination of delivery. See Section 39-26-104(3)(a) and (c), C.R.S. 6 See House Bill 19-1240 at https://leg.colorado.gov/bills/hb19-1240. 7 Section 39-26-707(1)(e), C.R.S. Special Districts levy a sales or use tax on the same transactions as does the state (e.g., the Regional Transportation District in Section 32-9-119(2)(a), C.R.S., and the Scientific and Cultural Facilities District in Section 32-13-107(1)(a), C.R.S.). 8 7 U.S.C. Section 2012(k). 9 1-C.C.R. 201-4, Reg. 39-26-102.4.5. 10 Section 39-26-707(1.5)(a), C.R.S. 11 Section 39-26-707(1.5)(b)(I), C.R.S. 12 Id. 13 Section 29-2-105(1)(d)(I)(C), C.R.S. 14 Section 29-2-105(8), C.R.S. 2

PLR 19-003
June 7, 2019
Page 3
15

local tax. Therefore, a state-collected city or county that exempts food for domestic home consumption would exempt the sale of Company’s products, including candy, as they meet the USDA’s definition of food. The Department publishes the Colorado Sales/Use Tax Rates (DR 1002) twice a year, which lists the exemptions allowed for all such Colorado cities and counties. Company is advised to consult the DR 1002 in order to determine which cities and counties exempt food. Company should separately contact homerule cities and counties to determine if they exempt food from sales tax.

4. Company is obligated to file sales tax returns reporting all sales to the Department.
   16

Once Company registers with the Department, sales tax returns must be filed on a monthly basis. 17 Colorado retailers are obligated to file sales tax returns reporting all sales, both taxable and exempt. The Department offers taxpayers the ability to file sales tax returns online with Revenue Online or by submitting paper returns. Taxpayers electing to file online are eligible to file returns in various formats (e.g., approved XML files or spreadsheets) depending on their reporting obligations. Company is encouraged to research which method of filing is most advantageous. It is important to note that, as a result of House Bill 19-1240, Colorado’s enforcement of taxing obligations for out of state retailers will begin on June 1, 2019. Miscellaneous This ruling is premised on the assumption that Company has completely and accurately disclosed all material facts and that all representations are true and complete. The Department reserves the right, among others, to independently evaluate Company’s representations and assumptions. The ruling is null and void if any such assumption and representation is incorrect and has a material bearing on the conclusions reached in this ruling and is subject to modification or revocation in accordance to 1-C.C.R. 201-1, Reg. 24-35-103.5. This ruling is binding on the Department to the extent set forth in 1-C.C.R. 201-1, Reg. 24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the ruling is made. Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this redacted version of the ruling will be made public within 60 days of the date of this letter. Please notify Ryan Doerflein in writing within that 60 day period if you have any suggestions or concerns about this redacted version of the ruling. If you have any other questions regarding this ruling, please contact XXXXXXXXXXXX at (xxx) xxx-xxxx or [email protected] Sincerely,

Colorado Department of Revenue
Tax Policy Division
This ruling cannot be relied upon by any other taxpayer other than the taxpayer to whom the ruling is made.

15

The exclusion of candy from exemption subjects such sales to “state sales tax.” See Section 39-26-707(1.5)(b)(I), C.R.S. 16 Section 39-26-105(1)(b), C.R.S. 17 1-C.C.R. 201-4, Reg. 39-26-105(1)(b).