Colorado Notice and Reporting Requirements Declared Unconstitutional

By James A. Beavers, J.D., LL.M., CPA, CGMA


State & Local Taxes

A district court held that a law, which imposed notice and reporting requirements on retailers that do not collect and remit sales tax on sales to Colorado customers, was unconstitutional because it violated the Commerce Clause.


The Supreme Court held in Quill Corp. v. North Dakota , 504 U.S. 298 (1992), that under the Commerce Clause, a state cannot require retailers that have no physical presence in the state (out-of-state retailers) to collect and remit sales tax on sales made to residents of the state. The state of Colorado, frustrated by this prohibition on forcing out-of-state mail-order and internet retailers (in particular, internet retailing giant to collect and remit sales tax on sales to Colorado residents, in 2010 passed a new notice and reporting statute (the Amazon law) designed to indirectly force out-of-state retailers to do so. The Amazon law and the regulations under it impose three requirements on retailers that sell products to Colorado customers but do not collect and remit sales tax. First, such retailers must 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 Colorado Department of Revenue (DOR).

Second, retailers must provide each of their Colorado customers an annual report detailing that customer’s purchases from the retailer in the previous calendar year, informing the customer that he or she is obligated to report and pay use tax on such purchases, and informing the customer that the retailer is required by law to report the customer’s name and the total amount of the customer’s purchases from that retailer to the DOR. However, a retailer is only required to provide the report to a customer if the customer makes purchases of more than $500 in a calendar year from the retailer.

Third, retailers must provide the DOR with an annual report concerning each of the retailer’s Colorado customers, stating the name, billing address, shipping addresses, and the total amount of purchases from the retailer by each of the retailer’s Colorado customers. The law exempts retailers with less than $100,000 in gross annual sales in Colorado from this requirement.

Challenge by the Direct Marketing Association

The Direct Marketing Association (DMA) is an association of businesses and organizations that market products directly to consumers via catalogs, magazine and newspaper advertisements, broadcast media, and the internet. Because the Amazon law would unfavorably affect many of its members, the DMA brought suit, seeking to have the law invalidated because it violates the Commerce Clause of the Constitution. While the Commerce Clause expressly authorizes Congress to “regulate Commerce with foreign Nations, and among the several States,” the courts have held that a negative reading of the clause prohibits the states from acting in ways that interfere with interstate commerce. This negative power of the Commerce Clause commonly is called the dormant Commerce Clause. The DMA claimed that the Amazon law violates the dormant Commerce Clause in two ways: by discriminating against interstate commerce and by imposing undue burdens on interstate commerce.

The District Court’s Decision

The district court held that the Amazon law violated the dormant Commerce Clause and granted the DMA’s request for a permanent injunction against the state from enforcing the law. The court held that the law violated the dormant Commerce Clause under both the discrimination and the undue burden arguments advanced by the DMA.

Discrimination claim: To analyze the DMA’s discrimination claim, the court used the two-tier test set out by the Supreme Court in Brown-Forman Distillers Corp. v. New York State Liquor Auth. , 476 U.S. 573 (1986). Under the first tier, the court looks at whether the statute discriminates against interstate commerce. If the court finds that the law does not discriminate against interstate commerce in favor of intrastate commerce, it will uphold the law. If the court finds the law does discriminate against interstate commerce, the court moves to the second tier of the test, in which it performs a balancing test of the legitimate state interests advanced by the law against the burden on interstate commerce. If the law does not advance a legitimate local purpose that the state could not advance by reasonable nondiscriminatory alternatives, the law will be found invalid.

With respect to the first tier of the discrimination test, Colorado argued that by its plain language the Amazon law did not discriminate against out-of-state retailers because it applied to all retailers regardless of their location. The court concluded that although the law applied to all retailers, because other provisions of Colorado law required in-state retailers to collect sales tax, and collecting sales tax nullified the law’s reporting requirements, only out-of-state retailers that the Quill decision exempted from collecting Colorado sales tax would be subject to the law’s reporting requirements. Finding that it was undisputed that compliance with the reporting requirements would impose burdens on out-of-state retailers, and that the law would not impose this burden on in-state retailers, the court found that the law discriminated against interstate commerce.

Colorado also argued that the law did not discriminate because the reporting requirements would not apply if the out-of-state retailers voluntarily chose to collect and remit sales tax, which in-state retailers were required to do. According to the court, viewed this way, the law was requiring the out-of-state retailers to give up a valuable right they currently possessed or undertake a new burden. Because in-state retailers did not have to make this choice, the law discriminated against out-of-state retailers by imposing it on them.

With respect to the second tier of the discrimination test, the DOR gave three interests that the Amazon law protected: the DOR’s ability to recover sales and use tax revenue due to the state; fair distribution of the cost of government; and respect for and compliance with the tax laws.

The DMA argued that there are at least three reasonable nondiscriminatory alternatives to serve these purposes. First, the state could, as have other states, include a line on their resident income tax returns on which residents report use tax due. Second, the DOR could increase audits of business consumers. Third, the DOR could use consumer education and notification programs to increase compliance with use tax obligations.

The court agreed that interests given by the DOR were legitimate state interests and purposes. However, citing Hughes v. Oklahoma , 441 U.S. 322 (1979), the court stated that where a law was found discriminatory under the first tier of the test, the burden was on the state to prove that the interests it claimed a law supported were legitimate and that they could not be met by alternative nondiscriminatory means. Apparently, because it was confident that the law would not be found to be discriminatory under the first tier of the test, the DOR had introduced little evidence on the issue. Therefore, the court found that the DOR had failed to meet its burden of proof under the second tier of the test, and the law unconstitutionally discriminated against interstate commerce.

Undue burden claim: The court also addressed the DMA’s undue burden claim. The DMA contended that under Quill , for purposes of sales and use taxes, a tax law will pose an undue burden if it requires out-of-state sellers that do not have a physical presence in a state to collect and remit sales tax. The DOR conceded that this was true, but it argued that the courts had refused to apply the physical presence requirement outside sales and use tax. According to the DOR, because the Amazon law required information collection, not the collection and remission of sales and use taxes, the physical presence limits of Quill did not apply to the Amazon law.

The court did not accept the DOR’s argument. The court found that although the burden of the notice and reporting requirements was different than the burden of collecting and remitting sales taxes, the sole purpose of the notice and reporting requirements was the ultimate collection of use tax in cases where the DOR could not compel the collection of sales taxes. Therefore, the court concluded that the notice and reporting requirements imposed on out-of-state retailers with no physical presence in Colorado by the law were “inextricably related in kind and purpose” to the collection and remission of sales taxes, so the limitations in Quill applied. Consequently, it found that the law placed an undue burden on out-of-state retailers that did not have a physical presence in Colorado.


The court correctly treated the reporting and notice requirements in the Colorado law the same as a requirement to collect and remit sales tax. Clearly, Colorado has little desire to try to collect use tax from individual residents and businesses; instead, it came up with a scheme so burdensome that virtually all out-of-state retailers would have simply found it easier and less expensive to collect and remit sales taxes than to comply with the notice and reporting requirements. While there may be good arguments that out-of-state-retailers should be required to collect and remit sales tax, until Quill is definitively overruled, states should not be able to use indirect means to force them to do so.

Not surprisingly, the Colorado DOR has not yet given up on the issue. It filed a notice of appeal of the district court’s decision with the Tenth Circuit on April 27, 2012.

Direct Marketing Ass’n v. Huber, No. 1:10-CV-01546-REB-CBS (D. Colo. 3/30/12)


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