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By Tripp Baltz
Two major internet retail companies said they will comply with Colorado’s reporting and notice law, but won’t go further to collect and remit the state’s sales and use taxes on remote sales.
High-ranking executives at the companies—Overstock.com Inc., one of the top 50 online retailers in the country, and Colony Brands Inc., one of the top 200—told Bloomberg BNA they wouldn’t be coerced into collecting and remitting sales and use taxes in Colorado, a state where they have no physical presence. Some interests had thought the reporting requirement might motivate companies to go ahead and collect the taxes as well, but the executives said otherwise.
Under the 1992 U.S. Supreme Court decision Quill Corp. v. North Dakota, a state can’t compel an out-of-state vendor to collect and remit taxes if it doesn’t have a physical presence in that state.
In 2010, the Colorado General Assembly approved a reporting and notice law (H.B. 10-1193) that e-commerce retailers say was designed to force them to collect and remit taxes. The law, which hasn’t taken effect yet because of an injunction in the state district court—but which was affirmed in February 2016 by the U.S. Court of Appeals for the Tenth Circuit—requires out-of-state retailers with sales reaching a certain threshold to report to the state Department of Revenue information about consumer purchases, as well as notify consumers of their obligation to pay taxes ( Direct Mktg. Ass’n v. Brohl , 10th Cir., No. 12-01175, 2/22/16 ).
“Overstock will not be voluntarily collecting and remitting in a state where we don’t have physical presence,” Jonathan Johnson, chairman of the board at Overstock.com, told Bloomberg BNA Jan. 19. “We’ll report to the state and give notice. We’re not going to do something voluntarily that we think is wrong.”
“It’s pretty black and white to us this is blatantly unconstitutional, and flies in the face of the interstate commerce clause,” said Don Hughes, chief financial officer at Colony Brands Inc. in Monroe, Wis. “We’re not going to comply with taxation without representation.”
The cost of meeting the reporting and notice requirements probably will be “about the same as” collecting and remitting taxes, Johnson said, but “it’s less predictable. We see a lower administrative burden to reporting,” he said. “And we have more control over mistakes. Collecting is a large burden, and it’s complex. The tax folks love to say, ‘there’s an app for that,’ but I tell you, when the software gets something wrong, it gets it wrong one way.”
When retailers undercollect, they have to go back to the customers and say, “I’m sorry, we undercollected, we need to charge your credit card another two pennies,” Johnson said. “When we overcollect because the software doesn’t work, we end up calling every single one of our customers where we overcollected and explaining to them why they are getting a refund.”
Every time Overstock has to place a phone call like that, it’s a $5 cost, Johnson said. “So we’re going to avoid all that by doing something we have a better job controlling, and that’s reporting.”
Also, he said, “we’re not excited about exposing Overstock to another state audit, and by voluntarily collecting, we’d be exposing ourselves to audits by the state of Colorado.”
“Candidly, I’d be surprised if there are many companies out there that will do what the National Conference of State Legislatures and tax collectors think is going to happen: start collecting taxes,” he said.
Johnson and Hughes said consumers may raise concerns about their privacy and confidentiality if the state’s reporting law goes into effect.
“It gives the state visibility into what retailers are selling into Colorado, but also what consumers are buying,” he said. “They’ll learn things about an individual’s health, their political leanings, financial status and personal taste. There are no protections in the law for confidentiality.”
Lynn Granger, spokeswoman for the Colorado Department of Revenue, told Bloomberg BNA the department “routinely receives sensitive and private taxpayer information, which it has been entrusted to compile, secure and maintain.” The department already keeps very sensitive information—such as Social Security numbers, dependents, medical expenses, investment, assets, gambling debts and gains, and charitable contributions to religious organizations—confidential.
Johnson said remote sellers are beginning to work with legislators in the state General Assembly “to get a bill in the queue” to repeal the 2010 law.
“We’re going to let them know which of their legislators to contact,” he said. “The repeal of this tattle-tale bill will be to the benefit of their own constituents who will suffer the privacy concerns” if the law takes effect, he said.
Granger said the reporting and notice law was a response to the “growing problem” of uncollected sales and use taxes on remote sales. The law gives out-of-state retailers a choice: collect the tax, or comply with the reporting requirements.
The requirements are threefold, she said. First, sellers must tell consumers they owe the tax; second, they must provide an annual purchase summary to consumers who buy more than $500 from the retailer in a year; and third, they must send the annual report to the department on customer purchases. The latter report is limited in scope in that it includes only name, billing and shipping addresses, and total dollar amount of purchases made, she said. Retailers with less than $100,000 in total gross sales are exempt from the reporting requirements.
When the bill was being debated in the General Assembly in 2010, state Department of Revenue personnel told lawmakers “they fully expected it would motivate them to collect taxes,” Steve DelBianco, executive director of NetChoice in Washington, told Bloomberg BNA Jan. 19. Companies are now saying “they won’t collect because the Interstate commerce clause doesn’t require them to.”
DelBianco said that in the notice companies will provide customers they will likely state they aren’t required to collect Colorado sales taxes on customer purchases. However, companies will inform customers the state law requires them to send the Colorado Department of Revenue a year-end summary of all purchases. The reports will include consumers’ billing and shipping addresses and total amounts spent on online purchases.
The notices probably will also include a statement to the effect that a “purchase is not exempt from sales or use tax merely because it is made over the internet or by other remote means,” he said. It will encourage consumers to contact their state representative if they have privacy questions or concerns, he said.
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Text of H.B. 10-1193 is at http://src.bna.com/lB8.
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