Court Strikes Down Colorado E-Fairness Law

Last week, a U.S. District Court struck down as unconstitutional a sales tax fairness law in Colorado. HB10-1193 required out-of-state retailers to either collect and remit sales tax for purchases made by Colorado residents or inform their Colorado customers that they owe use tax on any purchase they have made. The law also called for out-of-state retailers to report general purchase data to the state so it could assess use tax owed by consumers. The Direct Marketing Association had brought the challenge to HB10-1993.

In his ruling, Judge Robert Blackburn wrote: “The state cannot require out-of-state retailers, retailers with no physical presence in the state, to collect and remit sales tax on sales those retailers make to residents of Colorado.... Seeking to enhance enforcement of the use tax on those who make purchases from out-of-state retailers, a state understandably looks to the out-of-state retailers for key information that can enhance enforcement…. Such a system imposes a differential burden on out-of-state retailers because the different burden is imposed precisely because the retailer is an out-of-state retailer entitled to the protection of Quill. Quill creates the in-state versus out-of-state distinction, and the dormant Commerce Clause prohibits differential treatment based on that distinction.”

“The court’s ruling is an unfortunate one for Colorado’s Main Street businesses,” said ABA CEO Oren Teicher. “The judge refers to a differential burden placed on remote retailers, but ironically, it is the remote retailers who are working without this burden because sales tax laws are being enforced only on in-state businesses. That said, this ruling makes it plain why, as we’ve stated all along, a federal solution — or in the absence of that, state laws that clarify state sales tax laws to require remote retailers with affiliates, warehouses, or subsidiaries in the state to collect and remit — are more effective ways of leveling the playing field for Main Street retailers. And thus far, these state affiliate nexus laws have withstood constitutional challenges in district court.”

Amazon.com challenged an affiliate nexus law passed in New York State in 2008 and has since lost its challenge twice: at the lower court and in the appellate court, with both courts ruling the law to be facially constitutional. Amazon.com is currently appealing the appellate court ruling.

At the federal level, there are two bills in Congress that would give states the right to require remote retailers to collect and remit sales tax on purchases made by in-state residents: the Marketplace Fairness Act in the Senate and the Marketplace Equity Act in the U.S. House of Representatives.