June 18, 2010, 2:52 PM

Sales tax counterattack

The DMA and e-retailers plan to sue over changes to sales tax laws.

Thad Rueter

Senior Editor

Lead Photo

The Direct Marketing Association plans to file a federal lawsuit against Colorado over a law that requires online retailers from outside the state to collect sales tax information from customers.

In a fundraising and membership recruitment letter, the trade group says it plans to act as plaintiff in the lawsuit. Linda Woolley, the association’s executive vice president for government affairs, says that while it is likely the group will act as sole plaintiff, she could not discuss details of the suit because it was being drafted by outside counsel.

The group plans to file the suit before the end of the year, she says.

The Colorado law, enacted March 1, requires out-of-state retailers with more than $100,000 of annual sales in Colorado to send invoices to customers to inform them that sales tax is due for online purchases. Retailers also must send year-end summaries to customers, along with a summary to the state Department of Revenue.

After the law was passed, Amazon.com, No.1 in the Internet Retailer Top 500 Guide, said it would no longer pay its Colorado affiliates for customer referrals. The law does not require online retailers to collect sales taxes, but Amazon said the law is “clearly intended to increase the compliance burden to a point where online retailers will be induced to ‘voluntarily’ collect Colorado sales tax—a course we won’t take.”

Amazon also says the law is unconstitutional because it violates a U.S. Supreme Court ruling that says retailers can be required to collect sales tax only in states in which they have stores or warehouses or other facilities. Amazon in April also filed a complaint in federal court against an attempt by North Carolina to collect names and addresses of Amazon customers. North Carolina says it is conducting a routine audit of Amazon’s compliance with state tax laws. Amazon says the request compromises the privacy of customers and violates the First Amendment.

In Colorado, the law imposes a significant expense on businesses, the Direct Marketing Association says. Based on survey results that are still coming in, the trade group estimates that a business with an annual buyer file of 500,000 customers would spend $4,000 per year for the notifications.

The state’s Department of Revenue has no estimates of how much businesses would have to spend for the notifications, says Mark Couch, the department’s legislative liaison. Penalties for noncompliance range from $5 to $10 per instance, he says. The department employs compliance officers to monitor the programs that fall under its oversight, but Couch could not say how many officers monitor the notifications.

The state’s general sales tax stands at 2.9%, though rates can vary for different products; for instance, there is no sales tax imposed on food for home consumption, Couch says.

Couch had no comment about the Direct Marketing Association’s plans to file a lawsuit, but that the law would be challenged in court is hardly a surprise, he says.

Colorado expects to raise $4.7 million annually from the new sales taxes, according to a state estimate.  The revenue would help fill a budget hole—which is also why other states are taking, or thinking about taking, similar steps.

Woolley dismisses that argument. “There are many ways that states can tackle their budget problems,” she says. “We think this one is a bad idea that will have far-ranging economic consequences.”

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