United States Supreme Court Effectively Upholds Colorado Internet Sales Tax Law

by Esther van Mourik

When you buy a present for your friend at a store in Colorado, the retailer collects the sales tax on that purchase and remits that amount to the Colorado Department of Revenue. If you buy the same item online from a retailer that does not have a brick and mortar store in the state, you are personally responsible for paying the same amount of tax (now called a use tax instead of a sales tax) to the Department of Revenue. Generally speaking this is because of the United States Supreme Court’s interpretation of the United States Constitution: To protect interstate commerce, a state can’t require retailers that don’t have a brick and mortar presence in the state to collect sales tax on its behalf. Instead, the responsibility for getting the tax money to the state falls to individual purchasers.

Because many people aren’t aware of the responsibility to pay the use tax, Colorado is missing out on a lot of tax revenue. And because the economy is rapidly changing so that more people are buying presents (and other “tangible personal property”) online from retailers without brick and mortar stores in the state, the lost revenue effect is even greater. Estimates indicate that the state’s annual lost revenue due to online sales exceeds $150 million.

In 2010, the General Assembly passed House Bill 10-1193, the so-called “Amazon law,” a reporting requirements statute that compels retailers who are not collecting sales tax to report a number of things to both the Department of Revenue and their Colorado customers. The law was immediately challenged in court and has been in litigation for the past six years. A state court also enjoined the enforcement of the new law while it was being litigated in federal court.

On February 22, 2016, the 10th Circuit Court of Appeals issued an opinion upholding the constitutionality of House Bill 10-1193. On Friday, December 9, 2016, the United States Supreme Court declined to hear an appeal of the Court of Appeals decision. By declining to hear the appeal, the Supreme Court effectively affirmed the constitutionality of the law. This means that the Department of Revenue can start enforcing the requirements in House Bill 10-1193. Many news agencies have reported on this decision. You can read some of those articles here, here, here, and here.

House Bill 10-1193 requires retailers who do not collect Colorado sales tax to do three things:

  1. Notify Colorado purchasers that sales or use tax is due on certain purchases made from the retailer and that Colorado requires the purchaser to file a sales or use tax return;
  2. Send notice to all Colorado purchasers by January 31 of each year showing certain information that the Department of Revenue will require by rule, including the total amount the purchaser paid for Colorado purchases in the previous calendar year. The notice must include, if available, the purchase dates, the purchase amounts, and the category of each purchase, including, if the retailer knows, whether the purchase is exempt or not exempt from taxation. This notice must also state that Colorado requires the purchaser to file a sales or use tax return and pay the sales or use taxes on certain Colorado purchases that the purchaser made from the retailer.
  3. File an annual statement with the Department of Revenue by March 1 of each year for each Colorado purchaser that shows the total amount the purchaser paid for Colorado purchases in the last calendar year.

If the retailers who do not collect Colorado sales tax fail to do the three things listed above, those retailers are subject to fines for each failure. The Department of Revenue is trying to determine when the law will take effect. Hampering that decision is the fact that the state court injunction is still in place and must be vacated before the Department of Revenue can enforce the law. Many articles in the media that discussed House Bill 10-1193 appeared to argue that the law was intended to compel retailers who do not collect sales tax to voluntarily start collecting. While that intention is not clearly established in the law, it remains to be seen how retailers will respond when the law takes effect.

There are efforts by other states, particularly in South Dakota, to require retailers that do not collect tax on internet sales to start collecting. Legislation of this type is a direct challenge to the United States Supreme Court’s constitutional interpretation that states cannot require out-of-state retailers to collect sales tax. So while the United States Supreme Court’s decision not to hear the Colorado case represents movement on this issue of online sales taxation, many questions remain to be answered. Stay tuned!