Judge Strikes Down Colorado ‘Amazon Law' Reporting Rule on Constitutional Grounds

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

 DENVER—A federal judge in Colorado struck down as unconstitutional the state's reporting requirements imposed on out-of-state vendors that sell to Colorado consumers but do not collect and remit state sales and use taxes. [Direct Marketing Association v. Huber, D. Colo., No. 1:10-CV-01546-REB-CBS, 3/30/12]

Judge Robert E. Blackburn of the U.S. District Court for the District of Colorado said that Colorado's 2010 “Amazon” law, so called for one of the online retailers it ostensibly targets, violated the dormant Commerce Clause of the U.S. Constitution and the U.S. Supreme Court ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that a state can impose a sales tax collection requirement only on vendors with a physical presence in that state.

The law, approved by the 2010 Colorado General Assembly (H.B. 1193), requires out-of-state vendors that do not collect state sales and use taxes to notify consumers they may have an obligation to pay taxes on remote purchases. The law also requires the vendors to report certain information about such transactions to the Colorado Department of Revenue.

Permanent Injunction

Blackburn's ruling permanently enjoins the Colorado Department of Revenue from enforcing the act and its related regulations against retailers who sell to Colorado customers but do not have a physical presence in the state.

The Direct Marketing Association (DMA) in January 2011 won a motion for preliminary injunction barring enforcement of the act. The latest ruling came on cross motions for summary judgment filed by DMA, the plaintiff in the case, and the Colorado Department of Revenue, the defendant.

“This is a significant victory for DMA and its members,” Jerry Cerasale, the association's senior vice president for government affairs, said in a statement. “Our actions in Colorado have halted efforts in other states to copy the law.”

DMA is preparing to continue its case against the law in the U.S. Court of Appeals for the Tenth Circuit “as we expect Colorado to fight against this win,” Cerasale said.

Mark Couch, spokesman for the Colorado Department of Revenue, said the department was reviewing the ruling and did not have further comment.

Act's Requirements

Under the act, retailers that do not collect sales and use taxes were required to:

  • notify their Colorado customers that they do not collect Colorado sales tax and, as a result, the purchaser is obligated to self-report and pay use tax to the department;
  • provide an annual report to each of their Colorado customers, detailing their purchases in the previous calendar year, informing the customer that he or she is obligated to report and pay use tax on such purchases and that the retailer is required, by law, to report to the department the customer's name and the total amount of purchases; and
  • provide the department with an annual report concerning each of their Colorado customers, stating the name, billing address, shipping addresses, and the total amount of purchases by each of the retailer's Colorado customers.

Discrimination Against Interstate Commerce

In determining whether Colorado's act and regulations impermissibly discriminate against interstate commerce in violation of the dormant Commerce Clause, the court found the provisions directly regulate and discriminate against out-of-state retailers and, therefore, patently discriminate against interstate commerce.

While the Colorado act did not facially distinguish between in–state and out–of–state retailers, focusing instead on retailers who do not collect sales tax, the court noted that Quill prohibits the state from imposing obligations to collect and remit sales tax on out–of–state retailers with no physical presence in state. Colorado's imposition of reporting requirements on non–collecting retailers imposed a unique burden on out–of–state businesses and, therefore, discriminated against them.

Such discrimination triggers the “virtually per se rule of facial invalidity.” Given the facial invalidity of Colorado's reporting requirements, the state was required to show that the act and regulations serve legitimate state purposes that cannot be served adequately by reasonable and nondiscriminatory alternatives, the court explained. This the state failed to do. Accordingly, the court held that the provisions were unconstitutional under the dormant Commerce Clause.

Undue Burden on Interstate Commerce

With regard to DMA's second claim, the court held that the reporting requirements imposed an undue burden on interstate commerce because they impermissibly imposed a tax burden on an out–of–state retailer with no physical presence in the state. Under the Quill standard, a state law that imposes a use tax collection burden on a retailer with no physical presence causes an undue burden on interstate commerce.

The court determined that “the burdens imposed by the Act and the Regulations are inextricably related in kind and purpose to the burdens condemned in Quill” and, therefore, were prohibited under Commerce Clause.

The text of the determination is available on the internet at http://docs.justia.com/cases/federal/district-courts/colorado/codce/1:2010cv01546/120402/105/0.pdf?ts=1333188346.

By Tripp Baltz and Christine Boeckel