Unfortunately, taxes are unavoidable
And sales tax can get pretty complicated, especially here in Colorado.
But I would argue that we have it worse than most, and it all dates back to an archaic update made to the Constitution back in 1902. Now every town, city or tiny hamlet in our great state has the constitutional right to tax items. They are effectively waging war on small business owners.
Imagine a tiny business located in Boulder, Colorado that makes lip balm. This is just an individual for argument sake, but could grow to be an LLC or even a corporation one day. The rules are the same regardless. Every product sold is subject to sales tax. No problem, being a good citizen, our lip balm creator applies for a Colorado sales tax license. This license covers Boulder County tax as well, fantastic!
She sets up a table in her front yard and begins selling her products to neighbors. Her lip balms are $10 retail and she struggles to sell more than one or two a month. And she has to add 2.9% for state tax and another 1.185% for county tax, so customers are spending $10.48 for a lip balm. The extra 48c is periodically remitted to the CO Department of Revenue. She starts out filing annually since she’s not making much money, but it’s still kind of a PITA. Within a year, she’s told that she has to file quarterly because apparently she sold more than 18 lip balms in the first year of business, who knew? Yes, that is correct, in order to quadruple the sales tax paperwork, a small business has to cross the whopping threshold of $15 a month.
And yeah, I simplified the above scenario to point out just how stupid this whole sales tax system is. Thank you Colorado 🤦
But wait, it gets worse! After breaking through the very low bar of selling just 30 lip balms a month (one a day), our owner now has to file EVERY MONTH with the DoR. Ugh that is 12 times as much work! She tries to hire a bookkeeper to help her, but the price is prohibitive compared to the $400 or so she makes each month, so she decides to go it alone. The bookkeeper does, however, alert her to the fact that she was also supposed to be collecting and filing taxes with the City of Boulder, since she lives (and sells) her lip balms within city limits. Crap! She looks up how to get a City sales tax license and adds another 3.86% to her tax calculation. Lip balms are now $10.86 and she has to file and remit on two different websites each month. Not to mention, Boulder charges her a $25 fee just to get her license. Ouch 😬
She begins to rethink her business strategy. After all, her neighbor sells candles for $10 cash and just pockets all the money without all this headache. She was trying to be a good citizen and she wants to be prepared for when her business scales!
Too late to look back .. and she’s determined to succeed. So, she decides it would be a great idea to start a website since customers have been asking .. and soon she is shipping little packages all over the place. She uses Shopify as her platform and clicks the handy dandy button that enables them calculate and collect sales tax for her. Yippee!
She makes $1,200 her first month and is beyond excited by the growth! It’s not until the end of the month, when it’s time to file her sales tax returns that she realizes Shopify has collected all different kinds of taxes and now she is expected to remit paperwork and tiny bits of cash to any of the 70+ home rule jurisdictions in Colorado. According to some online wisdom the use of SUTS has somewhat diminished this burden, but as a sales tax filer for several small businesses, I have found it more painful than dealing with the home rule entities themselves.
Point is, our small business owner, who has tirelessly worked to build up her lip balm sales, now spends the majority of her downtime trying to figure out how to pass on minuscule amounts of tax to multiple cities and towns in Colorado. And ironically, it is 10,000 times easier to sell to a customer in Hawaii than it is to sell to someone one town over (let’s say Longmont, Colorado) because of a simple sounding but incredible complicated and ridiculous rule.
It’s stupid to say the least .. and creates a huge burden on small business owners. I believe Colorado can and should do better!
Side Note: Alabama, Alaska, Arizona & Louisiana also deal with Home Rule sales tax issues.
And btw: use of software like Avalara is both prohibitively expensive and prone to user error (not mine but the CPA before me) because their setup is more complicated than the stupid home rule to begin with and their customer service is bunk.
For some other info on Sales Taxes: How to set your Sales Tax correctly
Feel free to email me any follow up questions you have or leave a comment below.
Justine Reed has an undergraduate accounting degree and a Masters in Business Administration. She owned and operated two brick & mortar retail stores in Colorado for 16 years before attempting (and failing) to retire in 2020. She continues to work part-time as a bookkeeper and consultant for other small businesses.
