Colorado’s "Amazon" Law Requiring Out-of-State Retailers to Report Sales Held to Be Unconstitutional

The U.S. District Court for the District of Colorado has held that the Colorado law requiring out-of state retailers to report information about customers’ purchases to each customer and to the Colorado Department of Revenue (DOR) violated the Commerce Clause of the United States Constitution (Direct Marketing Ass’n v. Huber,  No. 1:10-CV-01546-REB-CBS (D. Colo. 3/30/12)).

The Colorado law (Colo. Rev. Stat. §39-21-112(3.5)) and related regulations would require any retailer who sells $100,000 or more of products to customers in Colorado, but does not collect and remit sales taxes on those products, to:

  • Notify the purchaser that the retailer does not collect Colorado sales tax and that the purchaser is therefore obligated to self-report and pay use tax.
  • Provide each customer who purchases more than $500/year from the retailer with an annual report of the prior calendar year’s purchases and inform the customer that the retailer is required to file an annual purchase summary reporting the customer’s name and total purchases to the Colorado DOR.
  • Provide the DOR with an annual customer information report stating the name, billing and shipping address, and total purchases for each of its Colorado customers.

The Direct Marketing Association (DMA), the plaintiff in the case, is an association of direct marketers that sell products through catalogs, magazine and newspaper advertisements, broadcast media, and the internet. The DMA had earlier in the litigation persuaded the same court to issue an injunction to prevent the law from being enforced.

The court found that the law violated the “dormant Commerce Clause” (the constitutional theory that prohibits state actions that interfere with interstate commerce) because it discriminated against out-of-state retailers by treating them differently from in-state retailers and was therefore invalid on its face. The court further held that the DOR had failed to overcome this finding of facial invalidity because it failed to prove that the law advanced a legitimate local purpose that could not be served by “reasonable nondiscriminatory alternatives.”

On this point, the DMA argued that there were a number of nondiscriminatory ways of achieving the same ends, such as having a line on the state resident income tax return to report use tax. The DOR, apparently believing it would prevail on this issue, did not offer much in the way of possible alternative methods. Thus, the court held that the law violated that Commerce Clause

The court further held that the law violated the Commerce Clause by placing impermissible undue burdens on interstate commerce. This analysis relied greatly on the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that vendors whose only connection with the taxing state is by common carrier or U.S. mail could not be required to collect sales and use taxes. The court noted that the Colorado law differed from that in Quill because the Colorado law did not require the retailers to collect and remit sales and use tax, but that it nonetheless imposed the same undue burdens on out-of-state retailers “condemned in Quill.”

In the final part of the opinion, the court issued a permanent injunction to prevent the law from being enforced, finding that the DMA proved (1) success on the merits, (2) irreparable harm if the injunction is not issued, (3) the threatened injury outweighs the harm the injunction may cause the state of Colorado, and (4) the injunction will not adversely affect the public interest.

The ruling could represent a defeat for the Multistate Tax Commission, which has proposed a model statute that is similar to Colorado’s for its member states to adopt. The AICPA testified against the model statute last year for several reasons:

  • It could undermine collaborative work underway (the Streamlined Sales and Use Tax Project, a multistate effort to simplify and modernize sales and use tax administration).
  • Out-of-state businesses that are not required to collect and remit sales tax should not be required to police individual use tax noncompliance.
  • The costs of compliance with the statute could far outweigh the benefits received by the states.

Jamie Yesnowitz, vice chair of the AICPA’s State and Local Taxation Technical Resource Panel, told the Commission, “It is not clear how receipt of information on thousands of internet purchases will translate into revenue for the states,” noting states may not have the resources to receive and properly analyze such an enormous quantity of reports.



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