Court Enjoins Colorado Ecommerce Reporting Law

Last year Colorado passed a law requiring retailers who do not collect Colorado sales and use taxes to–

  1. “notify Colorado customers that the customer is required to pay use tax on the purchase;
  2. send an annual statement to each Colorado customer, summarizing the customer’s total annual purchases from the e-tailer; and
  3. file an annual information report with the Colorado Department of Revenue showing the total amount of sales made to each customer in Colorado.”

Colorado could then use this information to monitor residents’ compliance with state laws requiring reporting and payment of use taxes.  E-Commerce Times reports that the Direct Marketing Association challenged the sale on the grounds that it discriminates against out-of-state retailers and burdens interstate commerce.  Last month a federal court in Denver issued a preliminary injunction preventing the state from enforcing the law until its validity can be determined at trial.

More Sales Tax News

Something I’ve been predicting in Internet law for at least five years is happening.  (Predict something long enough and you may eventually be correct.  A friend put all of his money into cash after predicting the market’s collapse.  In 1995.)   A March 18th WSJ article titled States Pressure E-Tailers to Collect Sales Tax reports on the number of states looking to collect taxes Internet sales.  The opportunity is there:  the article notes a University of Tennessee study estimating “that uncollected Internet sales taxes would cost state and local governments more than $11 billion a year by 2012.”   In addition to Colorado, noted in the prior post, and New York, which in 2008 amended its tax laws to target Amazon and similar retailers, North Carolina, Rhode Island, Maryland, and Connecticut have passed or are considering passing laws to capture taxes on sales to out-of-state retailers.  The article quotes Amazon, which objects to the complexity of piecemeal state-by-state legislation:  “We aren’t opposed to collecting sales tax within a constitutionally permissible system applied even-handedly.”  Amazon reportedly favors the Streamlined Sales Tax Project (see

Sales Tax News

Colorado recently amended its tax law to require Internet retailers to collect sales tax on sales to Colorado residents or give the state information about such sales so the state can collect use taxes from purchasers.  Amazon responded by canceling its relationships with all Colorado-based participants in its associates program:  “As a result of the new law we have decided to stop advertising through associates based in Colorado.”  Unlike other states that have changed its sales tax laws to target Internet sales, Colorado did not characterize a retailer’s relationships with affiliates as a nexus, the legal trigger for an out-of-state retailer to collect taxes on in-state sales..  Severing relationships with them does not change Amazon’s responsibility to collect and remit sales taxes or track and remit sales information, leading some to characterize it’s action as a “political maneuver:”  “‘This action to fire business associates as retaliation amounts to corporate bullying,’ said Alec Harris, an economist with the nonpartisan Colorado Fiscal Policy Institute in Denver. ‘Firing these guys is a huge political statement and a pretty rough one—but it doesn’t change [Amazon’s] legal obligation under this bill.'”  Amazon described the regulations as “burdensome,” unlike those enacted by other states, and “clearly intended to increase the compliance burden to a point where online retailers will be induced to ‘voluntarily’ collect Colorado sales tax—a course we won’t take.”  According to the linked Wall Street Journal article, Amazon’s Colorado affiliates earned about $37.5 million from Amazon-affiliated sales in 2007.

NY Online Sales Tax Fallout

Amazon continues to challenge NY’s recent law requiring the online retailer to collect and remit NY state sales taxes on sales to customers in the state, but meanwhile it will comply with the law when it becomes effective on June 1. New York asserts that Amazon’s New-York-based “affiliates,” third-party websites that link to Amazon and receive commissions in exchange for generating sales, establish the nexus with the state required by the US Supreme Court in its 1992 decision Quill Corporation v North Dakota. has taken the opposite tack, canceling relationships with its 3,400 New-York-based affiliates.

The New York law puts an Internet-specific spin on the issue addressed by Quill. The California Court of Appeal upheld the state’s collection of sales taxes from out-of-state Internet retailer Borders Online based on its agency relationship with Borders, Inc. in Borders Online v State Board of Equalization. Borders, Inc. had a number of stores in California and, notwithstanding its separate corporate governance, engaged in cross-promotional activities with Borders Online and gave cash refunds for merchandise purchased from Borders Online. This agency relationship was more pervasive than the commission-for-referral affiliate relationships employed by Amazon and, but the question remains whether changes in the manner of commerce require updating the commerce clause and due process tests articulated in Quill. This commentary–which I’m not prepared to endorse–presents an argument why the New York law is unconstitutional under Quill.

Amazon Challenges “Amazon Tax”

Amazon has filed a lawsuit in a New York state trial court challenging New York’s recent law requiring Internet retailers to collect and remit sales taxes on sales to New York residents. According to an article in today’s NY Times the New York law redefines the nexus–the in-state presence–required for an out-of-state retailer to be liable for collecting and remitting sales taxes by “includ[ing] any Web site based in the state that earns a referral fee for sending customers to an online retailer.” In other words those New York-based websites that link to Amazon’s goods create the 21st century equivalent to a sales force traveling the hinterlands to drum up sales. The Times article reports that Amazon is challenging the constitutionality of the law, presumably on due process and commerce clause grounds but also as a violation of the 14h Amendment’s equal protection clause. Its complaint alleges that the law is known as the “Amazon Tax” and” was carefully crafted to increase state tax revenues by forcing Amazon to collect sales and use taxes.”

Internet Sales Taxes

The effort to collect sales taxes on Internet transactions gained momentum recently. Last week the New York legislature passed a bill that would require Internet retailers doing more than $10,000 a year in business to collect and remit taxes on sales to customers in New York. This article in the New York Times addresses the issue, noting that since 2003 New York’s state income tax form has contained Line 59, on which taxpayers are required to list unpaid sales taxes on Internet sales from non-New York retailers. In 2006 five percent of New York taxpayers included information on Line 59, with an average tax owed of $95.36. I expect that most taxpayers are unaware that they are required to pay in-state use taxes on out-of-state purchases that were untaxed at the time of purchase because, for instance, the taxpayer had the item shipped from the store to their home. The requirement to pay use taxes has been around for some time–since the 1960s in New York, via Line 56 on older tax forms–but the only enforcement I recall involved disgraced Tyco CEO Dennis Kozlowski’s evasion of sales tax on a multi-million dollar purchase of paintings. Kozlowski purchased the paintings in London and had them shipped to his home in New York via Tyco’s headquarters in sales-tax-free New Hampshire, for the purpose of avoiding New York sales tax. New York indicted Kozlowski for tax evasion but ultimately dismissed the charges. New York expects to collect about $50 million a year from the new law.