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Mary Bernard
Mary Bernard

Colorado's out-of-state-retailer reporting law ruled unconstitutional

State's "Amazon" law discriminates against out-of-state retailers, unfairly burdens interstate commerce, court holds.

April 26, 2012
by Mary F. Bernard, CPA

In February 2010, Colorado Gov. Bill Ritter signed a package of tax bills that included H.B. 1193, which imposed notice and reporting requirements on out-of-state retailers that do not have a physical presence in Colorado but make sales to Colorado residents. The new law, which quickly became known as the “Amazon law,” would require retailers not collecting sales tax to notify Colorado purchasers that sales/use tax is due on all purchases made from the retailer and inform them that the filing of a sales/use tax return is required.

The noncollecting retailer would also be required to provide all Colorado customers (who made purchases of more than $500 during the calendar year) with a summary of their total purchases, indicating the amount of Colorado sales/use tax due. In addition, each noncollecting retailer would be required to provide the state with an annual listing of all Colorado customers and the amount of each customer’s purchases for the year. Retailers with less than $100,000 of sales in Colorado would be exempt from the law’s requirements.

The preliminary injunction

Shortly after passage of the Amazon law, the Direct Marketing Association (DMA) challenged the law in U.S. district court and sought an injunction to block the imposition of this law, which was scheduled to be effective Jan. 31, 2011. The DMA’s suit claimed that the law violated the Commerce Clause of the U.S. Constitution by discriminating against interstate commerce through the imposition of an improper reporting burden on only out-of-state retailers, not on in-state retailers.

On Jan. 26, 2011, the district court granted a preliminary injunction based on the following conclusions: (1) There was a substantial likelihood that the DMA would prevail in its challenge; (2) failure to issue the injunction would cause irreparable harm; (3) the threatened injury to the DMA outweighed the harm that would be caused to the state; and (4) the injunction was in the public interest.

The preliminary injunction restrained the Colorado Department of Revenue (DOR) from enforcing provisions of the law that required notification to purchasers of the obligation to self-report sales/use tax and the amount of tax owed, as well as the notification to the state of purchasers’ sales/use tax obligation. In granting the injunction, the court concluded that there was a substantial likelihood that the DMA would succeed in its claims that the law violated the Commerce Clause by discriminating against, and placing an undue burden on, interstate commerce. The injunction was effective until modified or rescinded by order of the court.

The court’s decision
On March 30, 2012, the district court held that the Amazon law was unconstitutional and permanently enjoined Colorado from enforcing the law against retailers who have no physical presence in Colorado (Direct Marketing Ass’n v. Huber, No. 10-cv-01546-REB-CBS (D. Colo. 3/30/12)).

The court explained that a state law is unconstitutional per se when it directly regulates or discriminates against interstate commerce or when the effect of the law is to favor in-state economic interests over out-of-state interests. Because the law here distinguished between in-state and out-of-state retailers and applied different requirements to them, the court concluded that it “discriminates patently against interstate commerce.” As the record contained no evidence that the state’s interests could not be adequately served through “reasonable nondiscriminatory alternatives,” the court concluded that the DMA was entitled to summary judgment on its discrimination claim.

In considering whether the law placed an undue burden on interstate commerce, the court noted that while out-of-state retailers were not required to collect sales tax on transactions involving Colorado customers, the law required those retailers to “gather, maintain, and report information, and to provide notices to their Colorado customers and the DOR.” Such burdens were “inextricably related in kind and purpose to the burdens condemned in Quill [v. North Dakota, 504 U.S. 298 (1992)]” (the imposition of a sales/use tax burden on a retailer with no physical presence). Accordingly, the court granted summary judgment to DMA on the undue burden claim as well.

Having found the law unconstitutional, the court permanently enjoined Colorado from enforcing the provisions of H.B. 1193 against retailers who have no physical presence in the state of Colorado. However, because of the previous preliminary injunction, the ruling should have no immediate impact. The state is currently precluded from imposing the reporting requirements during any appeal. The significance of this decision is that, although prior Commerce Clause decisions dealt only with the requirement to collect sales taxes, this decision equates the Colorado law’s reporting requirement with the requirement to collect and remit the tax “condemned in Quill.

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Mary F. Bernard, CPA, is director—income/franchise tax, at the Dallas-based tax services firm of Ryan LLC. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, R.I.-based Kahn, Litwin, Renza & Co., Ltd.