Colorado’s “Amazon Tax” Has Been Enjoined

United State District Judge Robert Blackburn issued a preliminary injunction today barring the Colorado Department of Revenue from enforcing a new Colorado law that would require retailers that generate more than $100,000 in gross annual product sales to customers in Colorado, but do not collect and remit Colorado sales tax on those transactions, to report certain information about the customers’ purchases from the retailer to each customer and to the Colorado Department of Revenue:

First, such retailers must notify their Colorado customers that the retailer does not collect Colorado sales tax and, as a result, the purchaser is obligated to self-report and pay use tax to the DOR (Transactional Notice).

Second, such retailers must provide to each of their Colorado customers [who spend more than $500 in the calendar year] an annual report detailing that customer’s purchases from the retailer in the previous calendar year, informing the customer that he or she is obligated to report and pay use tax on such purchases, and informing the customer that the retailer is required by law to report the customer’s name and the total amount of the customer’s purchases from that retailer to the DOR (Annual Purchase Summary). . . .

Third, such retailers must provide the DOR with an annual report concerning each of the retailer’s Colorado customers stating the name, billing address, shipping addresses, and the total amount of purchases from the retailer by each of the retailer’s Colorado customers (Customer Information Report).

[Paragraph breaks added.]  In short, it was an attempt to tax all on-line purchases by Colorado consumers. 

The Direct Marketing Association (“DMA”) challenged the new law and associated regulations as violating the Commerce Clause of the United States Constitution, and filed a motion for preliminary injunction to temporarily block their enforcement.

A motion for preliminary injunction typically asks the court to freeze the status quo until the case can be fully tried.  It is temporary – lasting only until the verdict at trial or other final decision – but often has a huge impact on the overall outcome of the case.  It is also provides a relatively quick path to an appeal, albeit one under the preliminary injunction standard rather than one that is more authoritative. 

The first issue to be decided when considering a motion for preliminary injunction is whether the plaintiff has established “a substantial likelihood that it is likely to prevail on the merits of the substantive claims that are the basis for its motion.”  They don’t have to win; but they must prove a reasonable probability of success.

The DMA first argued that the Act DMA alleges that the Act discriminates against out-of-state retailers because the it imposes notice and reporting obligations on those retailers that are not imposed on Colorado retailers.  Since in-state retailers are subject to are subject to civil and criminal penalties if they fail to collect and remit Colorado sales tax, and almost all of them do so, the court held that the plaintiff had “shown a substantial likelihood that it will succeed in showing that the Act and the Regulations are discriminatory because, in practical effect, they impose a burden on interstate commerce that is not imposed on in-state commerce.”

The DMA also alleged that the Act imposes an improper and burdensome regulation of interstate commerce.  The Supreme Court has held that there is a “bright line” rule that creates a “safe harbor for vendors whose only connection with customers in the [taxing] State is by common carrier or the United States mail” under which “vendors are free from state-imposed duties to collect sales and use taxes.”  Therefore, the court held that the DMA had a reasonable probability of winning under this theory as well.

Often, the remaining factors for a preliminary injunction receive more detailed attention, but here the court was able to move quickly through them to conclude that an injunction should be issued. 

The insidious thing about laws such as this is that the voting public is generally not aware — and not adequately informed by the media — of the huge impact they will have.  Because the immediate reporting burden is on retailers, those who are the targets of a massive new tax on on-line transactions are generally not aware of what the legislature is plotting until it’s too late.

It will be interesting to watch this case go up on appeal.  If affirmed, it will be left to the federal government to determine whether on-line transactions with out-of-state retailers can be taxed by the states.

Via Complete Colorado.

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Published in: on January 27, 2011 at 4:37 pm  Comments (2)  

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2 CommentsLeave a comment

  1. After reading HB 10-1193, it doesn’t seam like it would apply to Amazon. “CONTROLLED GROUP OF CORPORATIONS, AND THAT CONTROLLED GROUP HAS A COMPONENT MEMBER THAT IS A RETAILER WITH PHYSICAL PRESENCE IN THIS STATE, THE RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX IS PRESUMED TO BE DOING BUSINESS IN THIS STATE.” Am I missing something?

    • I think so, Paul. The statute at issue has been enacted, and is codified at Colo. Rev. Stat. 39-29-112(3.5). It uses a more basic definition of retailer.


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