Colorado's requirement, which kicks in on July 1, requires vendors that sell at least $100,000 in the state to notify those out-of-state residents who purchase at least $500 a year that they must pay the state's use tax. The use tax rate of 2.9 percent is the same as its sales tax rate.
"I think this new approach has some legs," Andrew Johnson said during a panel discussion at the Avalara conference. Johnson is a founding partner of Peisner Johnson, a Dallas, Texas-based CPA firm that specializes in state tax consulting.
The Colorado law was enacted in 2010 but could not be put into effect until it survived court challenges. That happened in December when the Supreme Court declined to hear an appeal by direct marketers in which a lower court found the law constitutional.
Vermont has a similar requirement with a use tax rate of 6 percent that is the same as its sales tax levy. The state tied the effective date for collection to the outcome of the legal challenge to the Colorado law to it also goes into effect July 1. Kentucky, Louisiana, Oklahoma and South Dakota have also enacted notification laws.
The Colorado law has teeth. It requires the vendors who meet sales thresholds to notify the consumers of their annual purchases and their obligation to pay the use tax. Those who fail to file the report can be fined $10 for each failure to file the annual report with the Colorado Department of Revenue at $5 for each failure to send notice to customers. Vermont has similar penalty requirements.
One trigger is expected to be vendor unwillingness to field the volume of calls from customers who receive such notices, combined with that $15 per customer charge. Johnson said the approach makes the seller "the bad guy" in the process.
"If I put this notice on my invoices, am I ready to take all these phone calls?" he continued. Most vendors, Johnson believes, will decide "I am going to start paying tax in Colorado and Vermont."
Now that the law is in effect, other states are eying the approach. Alabama, Arkansas, Hawaii, Pennsylvania and Washington are considering bills.
Johnson sees the Amazon decision, combined with proposed laws that would impact platform vendors such as eBay and Overstock, as tipping the merchant community toward collecting sales taxes. With Amazon collecting the taxes, "Everyone else is going to flip," he said.