Colorado Sales Tax Exemption Certificate

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A sales tax-exempt certificate is a document that releases a business or organization from having to pay state or local sales tax on the items that it purchases. In the United States,  the Internal Revenue Service is mandated to issue tax-exempt status to certain business entities working in a not-for-profit manner.

 In Colorado, the Colorado Department of Revenue determines which organization qualifies for tax exemption.

This article is therefore meant to break down what being sales tax-exempt in Colorado state means, the process through which an organization or business acquires a sales tax-exempt certificate, and highlights some of these organizations that are tax-exempt.

If you are in a Hurry, here is some information directly from the Colorado Department of Revenue Site.

Colorado sales tax exemption certificate application process

Colorado state applies a sales tax of 2.9% to most transactions. However, there are certain items that may be exempt from taxation to all consumers, not just tax-exempt purchasers. These include groceries, prescription drugs, certain medical devices, and any leases of tangible property in terms of three years or less.

The process of acquiring a sales tax certificate involves different stages. These include;

  • Applying to the Secretary of State

Make an application to the secretary of state. This application includes a unique business name that is reviewed against a state database. The review is to prevent infringement on other businesses and organizations. Provide the founders’ personal information which is used for identification as well as creating an initial board of directors for the organization.

Provide the organization’s mailing address and articles of incorporation. Both the organization’s mission statement and the by-laws should demonstrate a charitable purpose and governance.

  • Obtaining a tax identification number

Once your application for a business entity has been approved by the secretary of state, the business receives a state entity paperwork. This approval paperwork includes the articles of organization for LLCs and articles of incorporation for corporations. These documents allow the founders to get a TIN from the Internal Revenue Service website.

Complete Form SS-4 to get your Employer Identification Number, EIN either online or on paper. Online applications expedite the processing giving you a number immediately. Faxed applications take up to two weeks, while paper applications can take up to five weeks.

  • Applying for tax-exempt status

Once you have obtained your company documents and EIN information, apply for tax-exempt status. Determine which exempt organization status you are applying for. This may include charitable organizations, religious organizations, or government agencies. In order to hasten the process, ensure all information and required attachments are included with the application. These include bylaws, financial statements, and directors’ information.

It is important to submit a complete application otherwise expect to have more time added to the expected 90-day approval timeline. The Internal Revenue Service through the Colorado Department of Revenue will then send you an approval letter. This letter becomes part of the company bylaws and should be maintained with the EIN, and other relevant information. Once your business or organization has been approved as a tax-exempt entity, it is part of a public records database that allows consumers to confirm public information. You may be required to provide your organization’s financial records upon public request.

Types of tax-exempt organizations in colorado

Through the Colorado Department of Revenue, a qualified organization is issued with a certificate of exemption that authorizes it to purchase items and services without paying state-administered local sales taxes. 

Your entity must be organized and operated exclusively for exempt purposes and none of its earnings paid to any private shareholder or individual. It must not be an action organization or participate in any campaign activity against or for a political candidate. 

Some organizations that are tax-exempt in Colorado include;

  • Charitable organizations

Generally, an organization qualifies for sales tax-exempt status if it is organized and operates exclusively charity work. However, the performance of charity work by an organization does not automatically qualify that organization for the colorado sales tax exemption. It has to meet certain other requirements and be approved by the Colorado Department of Revenue.

Charity includes relief of the poor, lessening the burdens of government, combating community deterioration, and lessening neighborhood tension. The goals of a charitable organization are usually informed by philanthropy meant to better the lives of the community at large.

Organizations that qualify as charitable organizations include churches and church associations, educational organizations, hospitals, and organizations dedicated to medical research and organizations supporting universities and colleges.

  • Political organizations

Subject to Section 527, a political organization is a committee, association, fund, or party that is organized and operated mainly for the purpose of directly or indirectly receiving contributions or making expenditures for an exempt function. These federal organizations are usually created to try to influence the selection, nomination, election, or appointment of candidates.

Political organizations are tax-exempt as long as they do not engage in political activity. They may engage in some lobbying but they can not spend a “substantial part” of their activities on lobbying. The prohibition includes directly or indirectly intervening in an election for a candidate vying a public office.

  • Private foundations 

A private foundation is typically dedicated to carrying out a charitable mission. It is funded and controlled by a corporation, family, or individual thus has a single major source of funding. A private foundation’s primary activity is making grants to other charitable organizations and to individuals, rather than the direct operation of a charitable program. They are tax-exempt organizations.

However, a private foundation must comply with IRS rules to ensure that it enjoys the tax-exempt status whilst their expenditure benefits the public. A private foundation is thus required to make an annual distribution equivalent to around 5% of its prior year’s average net investment assets. Such distributions include reasonable administrative costs and grants to charities

Final word

In Colorado, sales tax exemption certificates do not expire. However, the registration permit for your business or organization does. Although you are not required to replace your certificate, you need to get new documentation to maintain the validity of the certificate so as to comply with the Colorado Department of Revenue laws on tax-exempt status.

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