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Appeals Court Approves Colorado Internet Sales Tax Law

by Mike Godfrey, Tax-News.com, Washington

29 February 2016


The US Court of Appeals for the Tenth Circuit, in its opinion in Direct Marketing Association (DMA) v. Brohl (No. 12-1175), has upheld Colorado's law on notice and reporting requirements for internet purchases, and may have provided a means by which other states could also collect more sales taxes.

Absent action by Congress to pass the Marketplace Fairness Act, which would allow US states to impose sales taxes on internet purchases made from online retailers outside their borders but which has been delayed by political opposition, the only legal source of guidance on this issue remains the 1992 pre-internet sales boom ruling by the US Supreme Court in the "Quill" case. That case established the "physical presence" test, where retailers are only required to collect sales tax in states where they also have bricks-and-mortar stores, and also decided that only Congress has the authority to regulate interstate commerce under the Commerce Clause of the US Constitution.

In an attempt to circumvent the Quill decision, Colorado enacted a law in 2010 that imposes three obligations on retailers that do not collect sales taxes – "non-collecting retailers."

Under the law, online retailers have to send a "transactional notice" to Colorado purchasers informing them that they may be subject to Colorado's sales tax. Additionally, online retailers must send an "annual purchase summary" to those who buy goods from the retailer totaling more than USD500, listing dates, categories, and amounts of purchases, to remind them of their obligation to pay sales taxes on those purchases.

In addition, online retailers are required to send the state government an annual "customer information report" listing their customers' names, addresses, and total amounts spent.

However, DMA filed a challenge to the Colorado law and convinced a district court that it violates the Commerce Clause because it discriminates against, and unduly burdens, interstate commerce.

The Appeals Court has now challenged the district court decision and decided, to the contrary, that the Colorado law does not contravene Quill. It held that "the notice and reporting requirements of the Colorado Law do not constitute a form of tax collection," and there is no evidence that "the requirements for non-collecting out-of-state retailers are more burdensome than the regulatory requirements in-state retailers already face."

It is now likely that Colorado will go ahead and enforce the law's requirements in the expectation that tax compliance will improve and the state will be provided with additional revenue. If successful, other states could be tempted to enact their own versions of the law.

TAGS: court | compliance | tax | sales tax | tax compliance | commerce | law | internet | e-commerce | United States | retail

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