The Direct Marketing Association (“DMA”) has filed suit against Colorado‘s amendment to its tax laws requiring e-commerce sites and out-of-state retailers to file information on Colorado residents‘ purchases.
Colorado‘s new law, which took effect March 1, 2010, requires larger out-of-state retailers (i.e. retailers with more than $100,000 in annual sales that do not already collect Colorado state sales taxes) to notify their Colorado customers that they owe a Colorado state tax on their purchases. Such retailers must also send an annual report to customers each January detailing their purchases during the prior year and the amount of Colorado sales tax on those purchases. Failure to comply will result in penalties on a per violation basis.
The DMA ‘s suit alleges that the Colorado law interferes with interstate commerce based on a U.S. Supreme Court decision that prevents state governments from requiring retailers to collect state sales and use taxes unless they have a substantial physical presence in the state. According to the DMA, such a presence provides the connection (or “nexus”) necessary to make a state‘s sales and use tax compliance requirements apply and for a sate to impose regulatory obligations such as the reporting and notification requirements. Interestingly, in its lawsuit, the DMA also alleges that “there is a real risk that sensitive, personal information” of consumers will become public because the law does not establish data security standards for the Colorado Department of Revenue‘s collection of purchase information, nor are funds allocated to do so. The DMA seeks an injunction against enforcement of the law and that it be declared unconstitutional.
However, the DMA is not the only party challenging the constitutionality of recent amendments to state tax law. It will be recalled that New York requires online retailers that use in-state affiliates to collect New York sales and use tax. Amazon has sued over this requirement and its suit is presently before a New York state appellate court. In addition, Amazon has sued North Carolina over that state‘s demand that Amazon submit information on purchases by North Carolina state residents going back to 2003. Notably, the ACLU has joined Amazon in the suit against North Carolina, which is currently pending in federal court.
Questions should be directed to Charles H. Helein of the firm. He asks anyone receiving this to let him know of their concerns regarding how these recent changes to state tax law will affect their business.