Knowledge Center

Thursday, August 22, 2013

HMB Analysis of Colorado's "Amazon Law"

Memo to Clients and Friends

On August 20, 2013, the United States Tenth Circuit Court of Appeals vacated the March 30, 2012 injunction issued by the District Court for the District of Colorado enjoining the state from enforcing the sales and use tax notice and reporting obligations imposed on out-of-state retailers selling products to customers in Colorado.  In 2010, Colorado adopted CRS 39-21-112(3.5). The Act and subsequent regulations require retailers that sell products to customers in Colorado, but do not collect and remit Colorado sales tax on those
transactions, to report certain information about the customers' purchasers from the retailer to each customer and to the Colorado Department of Revenue.  The plaintiff argued, and the district court agreed, that the law violated the Commerce Clause of the United States Constitution, as it burdens interstate commerce.  The district court consequently permanently enjoined the Department of Revenue from enforcing the Act.

Vacating the judgment of the district court, the Tenth Circuit did not reach the merits of the
plaintiff's claims.  Instead, the court looked to the federal Tax Injunction Act, which prohibits federal district courts from enjoining, suspending, or restraining the assessment, levy, or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.  Stretching the meaning of the Tax Injunction Act perhaps beyond its logical limits, the court concluded that the suit sought to prevent the state from exercising its sovereign power to collect revenues, and was thus prohibited by the Tax Injunction Act.  Finally, the Court noted that although its decision was based on the Tax Injunction Act, the doctrine of comity also favored the state.  The doctrine of comity is intended to "restrain federal courts from entertaining claims for relief that risk disrupting state tax administration." 

As a result of this recent decision, retailers outside Colorado who do not collect sales tax and make sales in Colorado which exceed $100,00 must: (1) provide transactional notices to Colorado purchasers, (2) send annual purchase summaries to Colorado customers, and (3) annually report Colorado purchaser information to the Department.  We believe that the district court's opinion was correct, and that the Tax Injunction Act should not have deprived the district court of jurisdiction, as the plaintiff did not seek to restrain the assessment, levy, or collection of a tax.  However, the more expansive doctrine of comity
would remain a significant hurdle for the plaintiff.  In any event, it is highly unlikely that such a decision will be heard, let alone reversed, by the US Supreme Court.  Thus, until a state court rules in favor of a plaintiff challenging the tax, non-collecting retailers will be required to comply with the notice and reporting requirements, or else subject themselves to harsh penalties.

HMB Comment

To date, the only court to address the merits of the Act found it to be unconstitutional. While the Act does not impose a tax collection responsibility on out of state sellers, the obligations can be fairly onerous. Thus, retailers selling into Colorado should consider challenging the notice and reporting requirements established by CRS 39-21-112(3.5) as unconstitutional. Please contact an HMB SALT attorney if you have any questions regarding how this recent development in Colorado may affect you.


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