The Implications of the Colorado Internet Sales Tax Ruling

Boulder Business Lawyers of LaszloLaw

Boulder Business Lawyer | LaszloLaw | Boulder Business AttorneyChanges to Colorado’s sales and use tax laws, as applied to out-of-state retailers, were recently addressed by the Tenth Circuit Court of Appeals in Direct Mktg. Ass’n v. Brohl (Aug. 20, 2013). The Tenth Circuit reversed a lower district court decision on grounds that the lower court did not have jurisdiction to decide the case.

In coming to its decision, the lower district court used a bright-line test previously affirmed by the U.S. Supreme Court–namely that state governments cannot constitutionally require businesses without an in-state physical presence to collect and remit sales and use taxes. While the Colorado law does not in fact require businesses to collect and remit taxes, it does place a “burden” on out-of-state retailers through its notice and reporting requirements.

In Colorado, consumers must either pay a 2.9% sales tax on goods purchased in-state or a 2.9% use tax on goods purchased out-of-state for “for the privilege of storing, using, or consuming” the goods in state of Colorado. Colorado retailers are of course required to collect and remit sales taxes, whereas Colorado resident purchasers are to report and pay the use tax on goods purchased out-of-state. However, many states have come to the realization that few taxpayers are in fact declaring such purchases made through the internet primarily and thus not paying these use taxes. States for years have been grappling with ways to enforce such use taxes to “prevent[ ] consumers of retail products from purchasing out of state in order to avoid paying a Colorado sales tax”–as one court so bluntly put it.

In response to residents failing to report internet purchases, in 2010, Colorado enacted laws directed at “non-collecting retailers”–defined as a retailer who sells goods to a Colorado purchaser and does not collect sales or use taxes. The statute imposes three obligations on non-collecting retailers or “out-of state retailers” whose gross sales in Colorado exceed $100,000.

1. Transactional Notices

First, out-of-state retailers must provide “transactional notices to Colorado purchasers.” Mainly, this means that out-of-state retailers must inform Colorado purchasers that the out-of-state retailer has not collected sales or use taxes for the transaction, that the purchase is not exempt from taxes under Colorado law, and that the Colorado purchaser is required to file a sales and use tax return and pay any taxes owed. This notice must be included for all transactions.

2. Annual Notices of Purchase Summaries

Under the second requirement, out-of-state retailers must mail annual notice of purchase summaries to Colorado purchasers who purchased more than $500.00 in goods from the calendar year. The envelope must be marked “Important Tax Documents Enclosed.” The annual summary must also tell purchasers, again, that they have a duty to “file a sales or use tax return at the end of every year” in Colorado and must inform Colorado purchasers that the retailer is required to report to Colorado the customers’ total purchase amounts from the calendar year. Sounds ominous. According to the Colorado Department of Revenue, the annual summary “arms the consumer with accurate information to facilitate reporting and paying the use tax”–which is quite a positive spin on an additional tax reporting obligation.

3. Annual Reports to Colorado

Finally, under the third requirement, out-of-state retailers must send an annual report to Colorado of the transactions conducted with Colorado purchasers–namely their names, billing addresses, shipping addresses, and total purchase amounts from the calendar year. According to the Colorado Department of Revenue, this “list” allows the Department “to pursue audit and collection actions against taxpayers who fail to pay the tax” and “is designed to increase voluntary consumer compliance with state tax laws because consumers know that a third party has reported their taxable activity to the taxing authority.” Voluntary seems to be an odd choice of words in this context but nevertheless.

If out-of-state retailers do not comply with the notice and reporting obligations they are subject to penalties. To avoid the above requirements, out-of-state retailers can forgo the above notice and reporting requirements by collecting and remitting the sales and use taxes themselves. Direct Marketing Association (“DMA”)—a group of businesses and organizations that market products via catalogs, advertisements, broadcast media, and the internet–challenged the law. The issue on appeal to the Tenth Circuit was whether the Colorado’s notice and reporting requirements for out-of-state retailers violates the Constitution–namely the Commerce Clause. However, instead of deciding that issue the Tenth Circuit held that the court (and the lower district court also) did not have jurisdiction under the Tax Injunction Act (“TIA”) to decide the issue. So the Tenth Circuit did not clearly uphold the law but did not strike it down either. This lawsuit could have interesting implications for the Marketplace Fairness Act currently being decided in Congress.

Boulder Business Lawyers of LaszloLaw

The Boulder business lawyers of LaszloLaw provide counsel to businesses on a variety of legal needs. Contact our Boulder business lawyers today at 303-926-0410 or online to discuss your business’s legal needs.