State Tax Snapshot: Use Tax Notification Requirements in Doubt After Colorado Law Struck Down

In Direct Marketing Association v. Huber, No. 1:10-CV-01546-REB-CBS (D. Colo. March 30, 2012), 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. The decision could provide ammunition for remote sellers to challenge use tax notice requirements imposed by other states.

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.

Under the Colorado 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
  •  file with the department with an annual report containing the name, billing address, shipping address, and the total amount of purchases by each of the retailer's Colorado customers.

    Other states have enacted statutes requiring remote vendors to notify customers of their use tax obligations. But the requirement can be satisfied in these states with a general notice. These states include:

    Oklahoma: Remote sellers with over $100,000 in gross sales must provide general notice of use tax liability to Oklahoma customers and annually file a written report of such sales to the state. [Okla. Stat. Ann. tit. 68, §1406.1; Okla. Admin. Code § 710:65-21-8(b)]

    South Carolina: A remote vendor with a distribution facility in the state that meets certain requirements must notify South Carolina customers of use tax liability on purchases. [S.C. Code Ann. § 12-36-2691(E)(1)]

    Vermont: Retailers without nexus that are not currently registered to collect and remit Vermont sales and use tax who make sales of tangible personal property, services, and products transferred electronically from a place of business outside Vermont to be shipped to Vermont for use, storage, or consumption are required to provide notice to Vermont purchasers that use tax is due on nonexempt purchases. [Vt. Stat. Ann. tit. 32, §9783(a), (b)]

    South Dakota: A remote vendor or online auction website that is not registered to collect and remit sales and use tax is required to notify South Dakota buyers that they must pay and report use tax on their taxable purchases of tangible personal property, services, and electronically transmitted products for use in the state. [S.B. 146, South Dakota 86th Legislative Assembly, 2011 Regular Session (March 10, 2011)].

    It is unclear if the general notice requirement adopted by these states rises to the level of the Colorado notification regime that the federal district court held to be “improper and burdensome regulations on interstate commerce.” But remote sellers subject to the general notice requirements in these states can certainly argue, as the Direct Marketing Association did in Colorado, that these jurisdictions are imposing unique and discriminatory burdens on out-of-state retailers.

    By Steven Roll
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