Colo. Code Regs. 39-26-105-3

Current through Register Vol. 47, No. 11, June 10, 2024

Rule 39-26-105-3 - Documenting Exempt Sales

Basis and Purpose. The statutory bases of this rule are §§ 39-21-112(1), 39-21-113, 39-26-102(19), 39-26-102(22), 39-26-105(3), 39-26-106, 39-26-107, 39-26-204(2), 39-26-209, 39-26-703(1), 39-26-704(1), 39-26-708, 39-26-713(2)(d) and 39-26-718, C.R.S. The purpose of this rule is to establish the requirements a retailer must meet to be relieved of liability for the collection of sales and use tax.

(1)General Rule. A seller must exercise due diligence with respect to any sale for which the purchaser claims exemption from sales tax. If evidence readily discernible to the seller at the time of the sale provides reason to doubt the purchaser's eligibility for the exemption claimed, the seller must obtain and retain sufficient information and documentation from the purchaser to resolve the doubt or must collect the applicable tax. If the Department subsequently finds a transaction was not exempt at the time of sale, a seller who has complied with this rule will be considered to have met its burden of proof and will be relieved of liability for the collection of tax with respect to that transaction. For purposes of this rule, sellers include both retailers and wholesalers.

(2)Seller's Due Diligence Requirements at Time of Sale.

(a) A seller must verify that the purchaser's sales tax license or exemption certificate is current and valid at the time of the sale.

(i)Verifying a Colorado License or Certificate. Except as provided in this rule, a seller must verify that the license or certificate is valid using the Department's online verification system. To verify that a license or certificate is current and valid, a seller can go online to www.colorado.gov/revenueonline and follow the link to "Verify a License or Certificate." In lieu of verifying a purchaser's license or certificate through the Department's online verification system, the seller may inspect a physical copy of the license or certificate for completeness and ensure the license or certificate has not expired. If the seller relies on a physical copy of the license or certificate for verification, the seller must maintain a copy of the document for their records.

(ii)Out-Of-State Purchasers. A seller may accept from an out-of-state purchaser a resale license, exemption certificate, or other authorized documentation from the issuing state. The seller must maintain a copy of the document for their records. A seller may also have the out-of-state purchaser complete a Department-issued Exemption Certificate or Affidavit of Exempt Sale, or the Multistate Tax Commission's Exemption/Resale Certificate, and maintain the fully-completed document for their records.

(iii)Recurring Business Transactions. A seller who has verified that a purchaser has a current and valid license or certificate is not required to continue verifying the same license or certificate for subsequent purchases made prior to the expiration of the license or certificate, unless the seller has reason to believe that the purchaser no longer has a current and valid license or certificate. A seller that believes a purchaser no longer has a current or valid license or certificate must follow the procedures in paragraph (2)(c) of this rule. A seller must re-verify a purchaser's license or certificate during the first transaction following the expiration of the license or certificate.

(b)Sales to Exempt Organizations. Sellers must consider whether the nature of goods or services sold is consistent with the purchaser's claim that the sale is exempt from sales or retailer's use taxes. Sellers must also verify that the purchase is made directly from the funds of the entity claiming the exemption from sales or use tax. However, a seller exercising due diligence is not required to verify the source of the funds if a charitable organizations purchases total less than $250.

(i)Sales to Charitable Organizations. Goods or services that are reasonably used exclusively in the conduct of the organization's ordinary exempt functions and activities are eligible for exemption, pursuant to § 39-26-718(1)(a), C.R.S. For example, the sale of a diamond ring purchased on behalf of a tax-exempt church would not appear to be the purchase of a good used in the ordinary exempt functions of a church.

(ii)Sales to Governmental Entities. Goods or services that are reasonably used in a governmental capacity are eligible for exemption, pursuant to § 39-26-704(1), C.R.S. For example, the sale of a single set or multiple sets of golf clubs to an employee of the Department of Revenue would not appear to be the purchase of goods used in the Department's governmental capacity.

(c) If evidence readily discernible to the seller at the time of the sale provides reason to doubt the purchaser's eligibility for the exemption being claimed, the seller must obtain and retain sufficient information and documentation from the purchaser to resolve the doubt or the seller must collect the applicable tax.

(i)Resolving Doubts About Purchaser Eligibility for Exemption. A seller has the burden of demonstrating to the Department that the purchaser was eligible for exemption. In resolving any doubt about a purchaser's eligibility for exemption, a seller must either comply with the requirements of this paragraph (2)(c)(i) or collect the tax.

(A)Sales to Wholesalers. The seller must reasonably conclude that the goods sold are reasonably for resale in the course of purchaser's ordinary business. For example, a florist cannot make a tax-exempt purchase of a mattress as a sale for resale, as it is not reasonable to conclude a florist would sell a mattress in the course of a florists' ordinary business.

(B)Documentation. Sellers must keep sufficient information and documentation that demonstrate the seller's due diligence to verify the purchaser's claim for exemption.

(I) A seller must have the purchaser fully complete a Department- issued Affidavit of Exempt Sale, or

(II) Alternatively, a seller may independently record the following information; the name and address of the purchaser, purchaser's license or certificate number, a copy of the license or certificate if applicable, the date of sale, the purchase price, a description of the goods or services sold, a description of the purchaser's business, and the name on the credit card or check used by the purchaser to pay for the transaction.

(ii)Collecting Tax if Doubts About the Purchaser's Eligibility for Exemption Cannot be Resolved. A seller who has not verified the purchaser's eligibility for exemption in accordance with paragraph (2)(c)(i) of this rule must collect the applicable tax at the time of sale and issue the purchaser a receipt pursuant to § 39-26-102(22), C.R.S.The purchaser may then file a claim for refund with the Department.

(3)Seller's Requirements Under Audit. If the Department finds the records of a seller do not demonstrate compliance with the requirements of this rule, the Department shall allow the seller 120 days to collect information sufficient to comply with the requirements of this rule. The Department may extend the 120-day period by 60 days for good cause shown.

39-26-105-3

37 CR 18, September 25, 2014, effective 10/15/2014

38 CR 02, January 25, 2015, effective 2/14/2015

39 CR 10, May 25, 2016, effective 6/14/2016

40 CR 12, June 25, 2017, effective 7/15/2017

40 CR 23, December 10, 2017, effective 1/1/2018

41 CR 13, July 10, 2018, effective 7/30/2018

41 CR 14, July 25, 2018, effective 8/14/2018

42 CR 02, January 25, 2019, effective 12/18/2018, expires 4/17/2019.

42 CR 02, January 25, 2019, effective 12/18/2018

42 CR 06, March 25, 2019, effective 4/14/2019

43 CR 04, February 25, 2020, effective 3/16/2020

43 CR 17, September 10, 2020, effective 9/30/2020

44 CR 01, January 10, 2021, effective 1/30/2021

44 CR 07, April 10, 2021, effective 4/30/2021

44 CR 08, April 25, 2021, effective 5/15/2021

45 CR 04, February 25, 2022, effective 3/17/2022

45 CR 23, December 10, 2022, effective 12/30/2022

46 CR 08, April 25, 2023, effective 5/15/2023