Destroying Local Online Businesses

So once again the State of Colorado has decided to try and drive most online businesses out of business. Is it purposeful hatred of online companies? Or is the state government just stupid?

To pick a couple of quotes from the Denver Post article on this (very well written):

When all of Colorado’s 344 cities, counties and special taxing entities like RTD are layered over one another, there are 683 possible sales tax combinations in the state.

And it doesn’t stop there. They each have their own rules as to what is taxed, and at what rate. In our case I finally had the State Department of Revenue tell us they couldn’t tell us if the annual maintenance we sell is taxable, so they told us to decide if it was taxable and then if they disagreed, they would sue us (yes really!).

Out-of-state companies and in-state competitors will no longer have an advantage over local companies when selling similar products because they will all be adding the same taxes.

But local brick & mortar stores have a giant advantage here – they collect tax for the jurisdiction they are located in, not for 683 different jurisdictions. And 683 different categorization criteria.

He believes filing monthly returns will be his third-largest business expense next year, behind raw materials and contractors. He has already informed his online and social media contractor he won’t be able to afford her services after Jan. 1.

So it’s already killing jobs. And it shows the state’s clear animus toward online business in the state when they are imposing what will become the third largest cost on companies.

At my company we’re about to release a new online store and a new pricing model where we charge by the month for a much lower amount. The charge is for per use of our software and support so we would be facing deciding if we should charge tax, based on what category or service, and then wait to get sued by 683 jurisdictions.

So we’ll go with the easier solution – we just won’t sell to people in the State of Colorado (except for large corporate purchases where it’s worth the hassle).

Ah… the joys of doing business in a state that is trying to drive you out of business. Or at least out of the state.

And kudos to Tracy Kraft-Tharp who appears to be one of the few that understands the scope of the problem. Hopefully she’ll get us to a point where there’s a single place to report any pay the proceeds and a single taxing authority who will provide a definitive answer as to if something is taxable, and if so, in what category (rate). (A single rate is nice, but not that big a deal as there are services to provide the rate info. It’s the categorization that’s killer. And having to make payments to 73 distinct entities is expensive.)

8 Community Comments, Facebook Comments

  1. DavidThi808 says:

    I came up with a couple of interesting questions around trying to figure out what to collect:

    On the questions below, this is enterprise software purchased by a business, not a personal purchase. And it's installed on user's workstations (usually a laptop) and servers.

    1. We've never been able to get a definitive answer to is our annual maintenance taxable. I don't care if it is or is not – but we do need to know if we should, not make a decision and wait to get sued (what the DoR suggested).

    2. When we sell a 10-pack of our software, it's then going to be installed on 10 user's computers. Nowadays I can pretty much guarantee that those systems will be in several states. It's going to be a mess if we have to ask each customer to give us the address of each user?

    3. If a user works at home 50% of the time and at work 50% of the time – taking their laptop back and forth, which jurisdiction gets the sales tax?

    4. One of our early large customers was AT&T. It was bought by the group in the death star building (Westminster?). But it was installed and used in New Jersey. Who gets the sales tax?

    5. A company in Colorado purchases our server software and installs it on AWS in Iowa. And is set to fail-over to AWS in Virginia. Who gets the sales tax?

    6. We're bringing in a new system where they can scale out on the fly. This is where their system automatically spins up additional servers when the traffic to their server goes over a set amount. This scale out can put the additional servers in various locations (based on where the traffic is coming from). Who gets the tax revenue for charges for a server spun up for 4 hours "somewhere."

    7. Our customers will be paying us monthly. When they move to a server to a different jurisdiction, do they have to report it to us so the next monthly payment has the tax go elsewhere. And do you think any company would buy from us if we have that requirement?

    I'm sure there's a lot more questions like the above.

    • Andrew Carnegie says:

      David:

      Most online businesses are out of state and don't vote.

      Politicians tend to deal with local squeaky wheels.

      The current system is crazy and broken.

      The solution is for the state to create a unified system up front and on the back-end for the state to distribute the funds in some agreed formula.

      It would require a responsible leader to propose and push.

      Good luck finding one.

      • Voyageur says:

        Carnholio actually made an intelligent comment, one congruent with my own though much less detailed.

        Will wonders never cease?  Or did the million monkey rule finally assert itself?

        • Andrew Carnegie says:

          V, 

          It is likely troubling for both of us, but I suspect we agree on more than we disagree.

          As it relates to property rights, government that serves the public and the unreliability of polling this cycle, I think we are in sync.

          • Voyageur says:

            The polling problem isn't, or shouldn't be , political.  Years ago I spent your tax dollars on a government grant at North western studying it and then for eight years co-taught a course at the CU Denver graduate school of public Affairs with the state's best pollster, Floyd Ciruli.  

            Cellphones, 99 percent refusal rates, and changing demographics , and growing public anger and distrust call all the old assumptions into question.

             

            Throw out the polls and just count the votes.  We'll have answers soon enough.

      • DavidThi808 says:

        My biggest worry is they will slowly keep bringing in a system that would be good 10 years ago. Trying to stay up with they way things work now is not something the government normally accomplishes.

        And you're right, they'll never hear from the people who decided to not start an online company. Or who quietly located it in another state.

  2. JohnInDenver says:

    Seems like a problem ripe for a legislative (or regulatory) solution. Perhaps a new Governor or Treasurer would like to take it on… simplifying to at least a state-wide and county-level assessment with a single set of definitions of what is or isn't taxable. And if counties want to provide a tax break, THEY can cut a check to the buyer.

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