E-retailers win tax ruling in Colorado

A federal judge blocks a law requiring online retailers to report online purchases.

Paul Demery

Colorado isn’t going to get the help it hoped for from online retailers in collecting sales taxes on web purchases made by state residents, at least not now.

A federal judge in Denver has granted a preliminary injunction against parts of a Colorado law that require Internet and catalog retailers to provide the state with information including an annual report providing the amount of sales to individual Colorado residents. The ruling came in a lawsuit filed by the Direct Marketing Association, a trade group for direct-to-consumer retailers and marketing companies.

The law, which Colorado put into effect last spring, was designed to assist the state in collecting “use” tax from residents on items they purchase from out-of-state Internet and catalog retailers that don’t collect sales tax in Colorado. Like other states facing budget shortfalls, Colorado is looking to Internet sales and use taxes to recoup revenue. In Colorado and other states that have a sales tax, consumers are expected to pay their own use tax whenever a retailer fails to collect sales tax, but few consumers ever do.

The Colorado law requires retailers with $100,000 or more in annual sales to Colorado consumers to provide those consumers with a report of their past year’s purchases and notify them of their responsibility to pay use tax on those purchases; the law also requires the retailers to provide the state with an annual report listing the name, billing address, shipping addresses and the total amount of purchases for each of their Colorado customers.

The DMA, in a lawsuit filed in U.S. District Court in Denver last year against the Colorado Department of Revenue, contends, among other things, that the law discriminates against interstate commerce, violates the privacy of consumers and risks the disclosure of confidential consumer data.

“We argued that H.B. 10-1193 violates the commerce clause of the United States Constitution by imposing discriminatory obligations upon out-of-state retailers that do not apply to in-state Colorado retailers, and unduly burdening interstate commerce under principles set for by the [U.S.] Supreme Court in Quill Corp. v. North Dakota,” says George Isaacson, a partner at law firm Brann & Isaacson who represents the DMA in the case.

The presiding judge in the case, Robert E. Blackburn, Thursday granted the DMA’s motion for a preliminary injunction, which bars the state from enforcing parts the law related to providing customer data for an indefinite period.

Retailers applauded the court’s decision. "We not only thought the Colorado law was a huge invasion of customer privacy," says Jonathan Johnson, president of Overstock.com, "but that the law clearly violated the U.S. Constitution by plainly discriminating against out-of-state retailers. Other state legislatures considering copycat legislation should take note that this type of law is not legal." Overstock.com is No. 28 in Internet Retailer's Top 500 Guide.

In his ruling, a copy of which was obtained by Internet Retailer, Judge Blackburn gave several reasons for granting the preliminary injunction, including:

●  The DMA has shown a “substantial likelihood” that it will succeed in showing the law discriminates against out-of-state retailers and imposes a burden on interstate commerce;

●  It is unlikely that the state would not be able to implement nondiscriminatory alternatives to collecting use tax;

●  Retailers impacted by the law would be subject to “irreparable injury.” Noting that the Colorado Department of Revenue estimated first-year compliance costs under the law of about $3,100 to $7,000 for the smallest retailers, the judge pointed out that if the law was eventually found to be unconstitutional, the affected retailers would be unable to recover these compliance costs;

●  The preliminary injunction would not substantially impair the public’s interest. “At most, the state may suffer some delay in implementing its new technique for enforcing its use tax laws, if the [law is] upheld against the DMA’s challenge,” Blackburn wrote.

In a statement, the DMA said it “will continue to press forward in the lawsuit to have the law definitively declared unconstitutional.” The DMA also asserts that the Colorado law violates other provisions of the Constitution, including the privacy rights of Colorado residents, and such grounds will be the subject of further proceedings in the case, Isaacson says.

Mark Couch, legislative liaison for the Colorado Department of Revenue, said the state had no official comment on the injunction. “Our staff will be consulting with the attorney general’s office about the next steps as the case goes on,” he says.



Colorado tax, Direct Marketing Association, legal battle, legal/regulatory, Overstock.com Inc., sales tax debate, SST, state tax, tax battle, tax collection