Today I want to talk about the sales and use tax issue raised when an online retail company located outside of Colorado permits an employee to work out of a Colorado home office. This company sells product to customers throughout the country, including Colorado customers. It ships its products from outside of Colorado. The company neither owns or leases any tangible real or personal property in Colorado.
All its employees perform all their duties outside of Colorado; save one employee. The one exception is an employee that does research and development and contract negotiation for the company from a Colorado home office. However, this employee is not a sales representative and does not promote the company’s online sales.
The company requested a ruling from Colorado that it did not have to collect use tax from its Colorado customers because of its Colorado home office-based employee. It argued that it did not have the required physical presence or nexus in Colorado because this employee did not participate in sales activities for the company.
Colorado disagreed, holding that the company must collect Colorado use tax from its Colorado customers; that it did not matter whether the Colorado employee’s activities were related or not to the online business. It cited for authority the famous 1977 United States Supreme Court case involving National Geographic’s mail order business. The high court held there that the in-state California presence of property and employees, even though unrelated to the mail order business, is all that was constitutionally necessary to require National Geographic to collect use tax from its California mail order customers. National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977).
The Colorado private letter ruling is Colo. Dept. of Rev., PLR-17-008 (October 3, 2017), and can be found at: https://www.colorado.gov/pacific/sites/default/files/Employee%20Nexus%20Private%20Letter%20Ruling%20PLR%2017-008.pdf
Comment. This ruling by Colorado is made at a time when the United States Supreme Court is considering a challenge to the longstanding physical presence test. It is quite possible that sales and use tax nexus for out of state businesses may change as a result this case.
By John McCauley: I help people buy and sell businesses.
Email: jmccauley@mk-law.com
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