Since 2018, states have been able to assess sales tax collection obligations on online businesses even if they have no physical presence in that state. That’s caused a whole host of problems for smaller businesses that lack the accounting tools to manage their sales tax collection obligations in 45 states across the country — not to mention local jurisdictions. But even as reform is desperately needed in that space to forestall a rash of small business closures over tax compliance obligations their owners were unaware of or simply could not keep track of, some states are exploring ways to make the problem even worse.
Proposals to impose “delivery fees” on transactions that involve a delivery to a customer in-state are gaining traction in states across the country. While often framed as climate-friendly, these “fees” are in truth just another excuse to tax what is perceived as a productive and growing industry — with little regard for the difficulties created for businesses that have to figure out how to comply.
Ironically, the first state to pass into law a “delivery fee” — Colorado — was trying to solve a very Colorado-specific problem. Colorado’s Taxpayer Bill of Rights requires that any tax increases be approved by taxpayers via referendum. To avoid this inconvenient requirement for taxpayer feedback, Colorado’s legislature routinely labels tax increases as “fees” that do not require voter approval.
One such “fee,” enacted in the summer of 2021, imposed a $0.27 “delivery fee” on each delivery transaction in the state. The “fee” was administered the exact same way as the sales tax — collected at the same time and with the same exemptions applying to it. Sellers were required to list the delivery fee as a separate line-item on invoices.
While $0.27 doesn’t sound like a lot of money, the flat rate applied to even the smallest transactions. What’s more, it had all kinds of wonky consequences for sellers.
For example, many sellers’ websites lacked the capability to separate out the “delivery fee” on their websites, requiring a wholesale redesign of their checkout pages. At the same time, the tax compliance software companies that remote sales tax advocates promised would solve all compliance-related complications (they did not) often do not support compliance for “fees.” Sellers had to go to great lengths just to comply with the rules surrounding this single little fee.
Adding insult to injury, Colorado is a home-rule state, meaning that local jurisdictions administer their own sales taxes. Some of these local jurisdictions announced that because the “delivery fee” was called a “fee” rather than a “tax,” they would tax it as part of the sale for the purpose of their own sales taxes. In other words, these local jurisdictions would charge sales tax on the cost of Colorado’s own mislabeled tax.
While Colorado subsequently amended this law to address some of the most glaring issues, the central structure remains. And rather than seeing this as a cautionary tale for the lengths that state legislators will go to to avoid having to put a tax increase on the ballot, other states are now following suit.
Already, New York is proposing a $0.25 delivery fee to help pay for New York City’s over-budget subway system, while Minnesota is moving forward with a $0.75 delivery fee to pay for an infrastructure package. Should states continue to take up this hollow excuse for revenue-raising, it’ll just be another headache for remote sellers with more than enough of those already.
There’s little justification for special taxes on delivery transactions — user fees for the cost of infrastructure such as gas taxes and tolls are already paid by the delivery companies themselves. States should resist the urge to try and sneak new backdoor taxes past taxpayers.
