Colorado hit with online sales tax suit

The DMA challenges the validity of a law enacted in March.

Thad Rueter

The Direct Marketing Association today filed a federal court lawsuit against Colorado that challenges the constitutionality of a law that requires online retailers from outside the state to collect sales tax information from customers. The association said earlier this month it would file suit.

The trade group names as the defendant Roxy Huber, executive director of the Colorado Department of Revenue. The department oversees the tax program, which took effect on March 1.

“Thousands of DMA members with no physical presence in Colorado are purportedly subject to the unconstitutional notice and reporting requirements of the act, which, in turn, directly implicate the privacy and free speech rights of the members’ Colorado customers,” the trade group says in the lawsuit.

The suit claims the Colorado law discriminates against interstate commerce; gives state regulators too much authority over out-of-state retailers; violates the privacy of Colorado consumers; infringes upon the free speech and due process rights of consumers and retailers; and risks the disclosure of confidential consumer data.

The law, known as House Bill 10-1193, requires out-of-state retailers with more than $100,000 of annual web sales in Colorado to notify customers they have to pay sales taxes for online purchases. Retailers must send year-end summaries of online purchases, broken down by category, to the state’s  Department of Revenue.

“Retailers that have no office, store, property, employees or other physical presence in Colorado are not obligated under Colorado law, and are protected by the commerce clause of the United States Constitution from being required to collect Colorado sales tax on retail sales to Colorado consumers,” the lawsuit says.

The state’s Department of Revenue declined comment today. A department spokesman has previously said penalties for retailers who fail to comply with the law range from $5 to $10 per instance, he says. The state has estimated it could raise $4.7 million from the tax. The state’s general sales tax stands at 2.9%, although the rate varies with the type of merchandise.

Amazon.com, No.1 in the Internet Retailer Top 500 Guide, also has taken action against the Colorado law, and did so based on similar arguments. The retailing giant said it would stop paying its Colorado affiliates for customer referrals. Though the state does not require online retailers to collect sales taxes, Amazon says 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 Colorado law violates a U.S. Supreme Court ruling that says retailers must collect sales tax only in states in which they have stores, warehouses or other facilities.

The suit lists George Isaacson and Matthew Schaefer of the Maine law firm Brann & Isaacson as attorneys for the Direct Marketing Association. DMA, a trade group for companies that sell directly to consumers, had been soliciting member companies to participate in the suit, but disclosed earlier this month that it likely would be the sole plaintiff in the lawsuit.


Amazon.com, Colorado, Direct Marketing Association, sales tax, U.S. Supreme Court