It’s been almost a year since the Colorado Retail Delivery Fee (CRDF) arrived on the stage. All the players involved have not shied away from sharing their opinions. In this article, we are putting the fee center stage and diving into how its story has unfolded thus far.
For a little background, the CRDF is a state-imposed fee (not a tax) that applies to every order (not invoice) when there is an item of tangible personal property that is delivered by the retailer or a third party via motorized vehicles using the roads and the item is taxable. Retailers must collect the fee, but the actual charge is the liability of the consumer. There is no obligation for the customer to pay the fee if it is not charged by the seller, but they are required to pay it to the seller if the charge is present. The seller has been required to separately state the fee on the invoice separately from any other collected sales or use tax.
The CRDF caused quite a stir in the sales tax world when it was first passed. In the months after the CRDF was implemented, even one of the co-sponsors that created the law was having second thoughts. Colorado Senate President Steve Fenberg “admitted he has heard a lot of consternation,” specifically about the mandate that the 27 cents be listed separately on customer receipts. At that point, Fenberg said he would be willing to “rescind some of the fee’s most vexing provisions.”
Its tedious nature led to issues with invoicing, maintenance of accurate financial records, and remitting funds to the state, and proved to be especially taxing to small businesses.
Due to the loud reaction from legislators, taxpayers, and tax experts around the country, Colorado has quickly reacted. After seeing the struggles this new fee created for small businesses, Colorado started to think of ways to consider the discrepancies. On May 4, 2023, the state made it known by creating an exemption for small businesses to ease the burden. The new legislation, effective immediately, exempts businesses with retail sales of $500,000 or less in Colorado sales in the prior calendar year from the state’s 27-cent CRDF. The exemption applies retroactively to July 1, 2022, when the CRDF was first enacted. The legislation also states that there are no refunds of any CRDFs for retail deliveries made on or after July 1, 2022, but before July 1, 2023, based on the small retailer exemption. The fee is scheduled to increase to 28 cents as of July 1, 2023.
Effective July 1, 2023, the new legislation also allows the seller to determine if they want to pay the RDF on behalf of purchasers or charge the purchasers the fee. Many sellers argued that their lives would be easier if they could simply pay the CRDF themselves. This would eliminate the headache of separately itemizing the CRDF for each delivery. These changes to the CRDF are a welcome benefit to not only small businesses but all businesses responsible for the collection and remittance of this fee. The small business exemption eliminates a significant burden that resulted in more costs than the fee it generated.
Lastly, the legislation requires the Department of Revenue (DOR) to waive processing costs if the processing costs exceed the amount of RDF that the retailer is remitting, and the payment is remitted via ACH Debit.
Businesses making retail sales in Colorado should review their sales into the state to determine if they qualify for the new exemption immediately so they can take appropriate action if applicable. The legislation passed with broad support following hearings in which retailers told lawmakers of the administrative burdens of collecting and remitting the CRDF.
As one state does, others are likely to follow. New tax (or fee) legislation enacted in one state is often implemented in other states. Soft drink taxes and bag fees are perfect examples! The CRDF has prompted two states to evaluate options for their own state. Minnesota and New York are both looking at the RDF as a way to increase revenue in online sales. Let’s take a closer look…
Minnesota is the first state to follow Colorado’s lead. Their governor signed off on a bill that imposes an RDF, effective July 1, 2024. This fee is about double that of Colorado, currently set at 50 cents per retail delivery. Unlike Colorado, the Minnesota bill applies to not just taxable retail sales, but it also applies to the sale of otherwise exempt clothing. This will require retailers that might not otherwise need to be registered in Minnesota to register and implement systems to collect the fee. Like Colorado, the bill has been met with resistance. A long list of organizations, including the Council on State Taxation, has submitted a letter in opposition to the RDF stating the following:
“A delivery fee mandated on nearly every Minnesota consumer is regressive and will negatively impact all families, as well as place an undue burden on businesses… As the state looks for thoughtful solutions to solve transportation challenges, the consumer delivery fee has undeniable impacts and insurmountable challenges.”
One of their main arguments in opposition to the RDF is that this bill does not consider the intricacies required for a retailer to build a system to track, collect and remit the fees. They go on to cite the challenges Colorado has faced since implementing the RDF. With an effective date still a year away, we’ll monitor to see if Minnesota adds a small seller exemption or changes the requirements to invoice the fee.
New York’s similar bill has yet to make it through the Senate, but it is in motion. Their bill suggests the imposition of a surcharge of 25 cents on every online delivery sale only within the city of New York. This certainly seems to be a potential violation of the Internet Tax Freedom Act since it only applies to online sales and not sales made offline. The funds collected would go towards a New York City infrastructure capital fund.
What Minnesota and New York have in common is the goal of increasing the revenue that comes from online sales. States have often looked to impose “fees” in lieu of taxes as a way of raising funds. However, this practice should be minimized as the administrative requirements related to separately itemizing with specific naming of the fee adds significant complexity to all sellers but especially remote sellers. Most selling systems do not support alternative fees to be listed on customer receipts let alone to be accounted for separately from the general sales tax. The additional burdens placed on retailers seem to violate the allowances provided for by the U.S. Supreme Court in the South Dakota v Wayfair decision. States should reconsider passing legislation that increases burdens on sellers, particularly remote sellers.
These initiatives are moving quickly and are expected to continue popping up across the country. Stay in touch with us to ensure you remain up to date on all things Retail Delivery Fees.