A federal district court has issued a preliminary injunction prohibiting Colorado from enforcing remote-seller reporting requirements on out-of-state sellers not obligated to collect Colorado sales tax. The provisions require said sellers to notify Colorado customers of their obligation to self-report and pay use tax, provide their Colorado customers with an annual report that details the customer’s purchases from the seller in the prior year, and provide the Colorado Department of Revenue with an annual report including the name, address, and total amount of purchases for each of their Colorado customers. The court found that there is a substantial likelihood that the statute violates the federal Commerce Clause by discriminating against and imposing an undue burden on interstate commerce. The reporting requirements burden imposed on out-of-state sellers is not imposed on in-state sellers. It is unlikely that Colorado will be able to demonstrate a lack of nondiscriminatory alternatives to the statute. The statute imposes these requirements on out-of-state sellers whose only contact with Colorado is through mail or common carrier. The ruling in the U.S. Supreme Court case Quill Corp. v. North Dakota likely protects the out-of-state retailers from these burdens on interstate commerce. While the burden of the reporting requirements may be different than the burden of collecting and remitting tax (as addressed in the Quill case), the sole purpose of the burden in this case is the collection of use tax when sales tax can’t be collected. The plaintiff in the court case demonstrated that denying the preliminary injunction would cause irreparable injury in the form of compliance costs that they wouldn’t be able to recover if the statute is later declared unconstitutional. While the injunction might delay Colorado’s collection of some use taxes, it would not prevent the collection of those taxes if the statute is upheld. In addition, the plaintiff argued that the enforcement of a law that is likely unconstitutional does not serve the public interest. The Colorado Department of Revenue has informed taxpayers that they are not required to comply with the remote-seller reporting requirements, pending further action by the court. (Release, Colorado Department of Revenue, January 28, 2011; The Direct Marketing Association v. Huber, U.S. District Court for the District of Colorado, No. 10-cv-01546-REB-CBS, January 26, 2011) For more details on the original bill visit our prior News Item here. NOTE: Colorado has struck down the remote seller reporting requirements in this bill. Click here to see the News Item.
For an update on this news item, see Colorado Use Tax Notice and Reporting Requirements Become Effective July 1, 2017.