Colorado Law Requiring Out of State Sellers to Report on Colorado Customers Who May Owe Use Tax Upheld by Tenth Circuit

Normally in this venue we discuss federal tax matters, but in this case the applicability of a Constitutional provision (or perhaps lack of a provision, given the issue is the Dormant Commerce Clause) may have a broad impact.  The case in question is a challenge to a Colorado provision requiring out of state sellers to report to the state customers who are residents of the state to assist in collection of use tax from those individuals (Direct Marketing Association v. Brohl, CA10, Case No. 12-1175).

Specifically the challenged Colorado law provided for the following:

To assist the state in collecting use tax from in-state purchasers, most seemingly unaware of their tax responsibility,3 the Colorado legislature passed a law in 2010 that imposes three obligations on retailers that do not collect sales taxes -- “non-collecting retailers”: (1) to send a “transactional notice” to purchasers informing them that they may be subject to Colorado’s use tax, see Colo. Rev. Stat. § 39-21-112(3.5)(c)(I); 1 Colo. Code Regs. § 201-1:39-21-112.3.5(2);5 (2) to send Colorado purchasers who buy goods from the retailer totaling more than $500 an “annual purchase summary” with the dates, categories, and amounts of purchases, reminding them of their obligation to pay use taxes on those purchases, Colo. Rev. Stat. § 39-21-112(3.5)(d)(I); 1 Colo. Code Regs. § 201-1:39-21-112.3.5(3); and (3) to send the Department an annual “customer information report” listing their customers’ names, addresses, and total amounts spent, Colo. Rev. Stat. § 39-21-112(3.5)(d)(II); 1 Colo. Code Regs. § 201-1:39-21-112.3.5(4).

The Direct Marketing Association challenged this requirement, claiming that the imposition of this requirement violated the Supreme Court’s decision in the case of Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  Quill dealt with the state of North Dakota’s attempt to require a mail order office supply vendor to collect taxes on its sales to residents of the state despite having no physical presence there.

Specifically, as the opinion notes “DMA argues the Colorado Law unconstitutionally discriminates against and unduly burdens interstate commerce.”

However, the Tenth Circuit panel did not find this case governed by Quill, nor did it find that the law unconstitutionally discriminates against and burdens interstate commerce.  The Court noted that the Supreme Court has generally not expanded upon Quill beyond the situation of forced collection of sales and use taxes for businesses not having a physical presence in the state.

The Court notes that this provision does not give in-state sellers a competitive advantage over out-of-state sellers, since in-state sellers must actually collect and pay over a sales tax.  In fact, as Judge Gorsuch notes in a concurring opinion:

If anything, by asking us to strike down Colorado's law, out-of-state mail order and internet retailers don't seek comparable treatment to their in-state brick-and-mortar rivals, they seek more favorable treatment, a competitive advantage, a sort of judicially sponsored arbitrage opportunity or “tax shelter.” Quill, 504 U.S. at 329 (White, J., concurring in part and dissenting in part).

The concurring opinion goes on to note that, assuming this position is adopted by other circuits, many states will move to impose reporting obligations on out-of-state sellers:

It is a fact—if an analytical oddity—that the Bellas Hess branch of dormant commerce clause jurisprudence guarantees a competitive benefit to certain firms simply because of the organizational form they choose to assume while the mainstream of dormant commerce clause jurisprudence associated with West Lynn Creamery is all about preventing discrimination between firms. And the plaintiffs might well complain that the competitive advantage they enjoy will be diluted by our decision in this case. Indeed, if my colleagues and I are correct that states may impose notice and reporting burdens on mail order and internet retailers comparable to the sales and use tax collection obligations they impose on brick-and-mortar firms, many (all?) states can be expected to follow Colorado’s lead and enact statutes like the one now before us.

Taxpayers who make out of state sales will need to keep abreast of developments in this area.  At the very minimum it would appear that businesses in state subject to the Tenth Circuit’s jurisdiction will need, at least for now, to respect the Colorado rule (along with Colorado, they include Kansas, New Mexico, Oklahoma, Utah and Wyoming).