Supreme Court Considers Colorado Use Tax Reporting Law

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On Monday, December 8, the U.S. Supreme Court considered a challenge brought by the Direct Marketing Association (DMA) regarding a 2010 Colorado use tax law, which requires out-of-state retailers to either collect and remit sales tax for purchases made by Colorado residents or to inform their Colorado customers that they owe use tax on the purchases they have made.

In its Supreme Court challenge, DMA argued that the use tax law violates the Commerce Clause of the Constitution because it forces remote businesses to comply with state law, as reported by Forbes.

“The fact that [the Colorado use tax law is] one of a kind gives me some pause,” said Justice Scalia, as reported by the New York Times. “This is certainly a very important case because I have no doubt that if we come out agreeing with you, every one of the states is going to pass laws like this.”

Due to its reporting requirements, the Colorado law is decidedly different from sales tax fairness legislation passed in several other states to address online retailers’ in-state business affiliates. The first of these “affiliate nexus laws” was passed by New York State in 2008. Affiliate nexus laws require remote retailers with a broad network of online affiliates acting as sales agents in the state to collect and remit sales tax. The New York affiliate law was challenged by and and two lower courts upheld the law. Ultimately, the companies asked the U.S. Supreme Court to consider the case but the court declined to hear the lawsuit.

In 2011, a judge granted DMA a temporary injunction staying enforcement of the law while its challenge was heard. In 2012, a U.S. District Court struck down the law as unconstitutional. However, in 2013, a federal appeals court ruled that the court had overstepped its jurisdiction and that a sales tax matter should be decided by a lower court, as reported by the Denver Post. In February 2014, Denver District Court Judge Morris Hoffman temporarily blocked the law.

In June 2014, Colorado passed a revised sales tax law, the Marketplace Fairness & Small Business Protection Act, a bill that requires remote retailers with nexus in the state to collect and remit sales tax on purchases made by Colorado residents. The law clarifies Colorado’s sales tax laws and stipulates that remote sellers that have an office, distribution facility, salesroom, warehouse, or storage place in Colorado are required to collect and remit sales tax to the state. The law went into effect on July 1, 2014.

Arguing before the Supreme Court, Colorado Solicitor General Daniel Domenico stressed that the Colorado law on appeal only allows the state to determine what its citizens owe in order to collect the taxes due, and an injunction would prevent it from doing so, according to Forbes.