The U.S. District Court, District of Colorado has issued a permanent injunction against the enforcement of a statute and regulations that impose notice and reporting requirements pertaining to use tax on out-of-state sellers, declaring them unconstitutional. For details on the notice and reporting requirements, click here to see our previous news item. The Direct Marketing Association filed the suit, alleging that the notice and reporting requirements violated the Commerce Clause of the U.S. Constitution by discriminating against and imposing an undue burden on interstate commerce. The court noted that the law did not treat in-state and out-of-state sellers in an impartial manner because the notice and reporting burden was only imposed on out-of-state sellers. The state argued that the bill does not discriminate because sellers can choose to comply with the law or voluntarily collect and remit sales and use tax, but the court rejected this argument. The court also invoked Quill Corp. v. North Dakota, finding that Colorado may not “condition an out-of-state retailer’s reliance on its rights on a requirement that the retailer accept a different burden, particularly when that burden is unique to out-of-state retailers.” The court concluded that the statute and regulations directly regulated and discriminated against out-of-state retailers and interstate commerce. The state did not demonstrate that its interests in collecting sales and use tax could not be adequately served by reasonable nondiscriminatory alternatives. The court also held that the statute and regulations violated the safe harbor established in Quill Corp. v. North Dakota because they improperly burdened interstate commerce by imposing a use tax collection burden on a retailer with no physical presence in the state. While the burden of the notice and reporting requirements is different than the burden of collecting and remitting tax, the sole purpose of the statute and regulations was the collection of use tax in instances where sales tax cannot be collected. (Direct Marketing Association v. Huber, U.S. District Court, D. Colorado, Dkt. 10-cv-01546-REB-CBS, March 30, 2012)
For an update on this news item, see Colorado Use Tax Notice and Reporting Requirements Become Effective July 1, 2017.