April 4, 2012, 4:56 PM

A federal judge rules Colorado’s online tax law unconstitutional

Colorado can’t require out-of-state e-retailers to report sales to tax authorities.

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A Colorado law that required online retailers without a physical presence in the state to inform Colorado customers of their use tax obligations and also report that information to the state’s Department of Revenue has been ruled unconstitutional by a federal court judge.

The Colorado law, passed in 2010 but never enforced, required retailers with $100,000 or more in annual sales to Colorado residents to provide those consumers with a report of their past year’s purchases and notify them of their responsibility to pay use tax—essentially the equivalent of the state sales tax—on those purchases. The law also required the retailers to provide the state with an annual report listing the names, billing addresses, shipping addresses and the total amount of purchases for each of their Colorado customers.

In his ruling late last week, Judge Robert Blackburn, of the U.S. District Court for the district of Colorado, wrote that the Colorado law placed unique burdens on out-of-state retailers and were discriminatory. “The Act and the Regulations [of the Colorado law] directly regulate and discriminate against out-of-state retailers and, therefore, interstate commerce,” wrote Blackburn. His ruling cited a 1992 U.S. Supreme Court decision from which was born a requirement that states can’t tax online purchases from e-retailers that don’t have a physical presence in those states.

The Direct Marketing Association, which filed the suit against the Colorado Department of Revenue, says the ruling is a win for direct marketers. “This is a significant victory for DMA and its members,” says Jerry Cerasale, the trade group’s senior vice president of government affairs. “Our actions in Colorado have halted efforts in other states to copy the law. We now are preparing to defend this victory in the U.S. Court of Appeals for the 10th Circuit as we expect Colorado to fight against this win.”

A spokesman for the Colorado Department of Revenue said today the department is reviewing the ruling.

The ruling comes as cash-strapped states try to find ways to collect tax on online sales. For instance, a bill introduced in the U.S. Senate in November would make it easier for more states to collect sales tax from e-retailers. It remains under review.

Jonnell Quarrie, tax director at Drugstore.com and Stephen Kranz, partner at Sutherland Asbill & Brennan LLP, will discuss the online tax issue at the Internet Retailer Conference & Exhibition 2012 in Chicago in June in a session titled “The new urgency for developing a state sales tax strategy.”

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