U.S. Court of Appeals Upholds Colorado’s Use Tax Reporting Requirements

On February 22, 2016, the U.S. Court of Appeals for the Tenth Circuit issued its opinion in Direct Marketing Association v. Brohl and reversed the district court’s order granting summary judgment. The Court of Appeals held that Colorado’s use tax reporting requirements legislation for out-of-state retailers did not violate the Commerce Clause because the reporting requirements neither discriminated against, nor unduly burdened, interstate commerce. Additionally, the Court of Appeals held that the application of Quill v. North Dakota is narrowly limited to sales and use tax collection. The court held that the law does not discriminate against interstate commerce because it imposes differential treatment based on whether the retailer collects Colorado sales or use taxes, not whether the vendor is located in-state or out-of-state. The court also considered whether the reporting requirements law unconstitutionally discriminated by favoring in-state economic interests over out-of-state interests. The court stated that the party claiming discrimination must show that the state law benefits local actors and burdens out-of-state actors, and the result must alter the competitive balance between in-state and out-of-state firms. The court noted that the reporting requirements for out-of-state sellers do not violate the Commerce Clause because Colorado customers are required to pay sales or use tax when they purchase goods from a collecting or non-collecting retailer. As a result, the reporting requirements do not give in-state sellers a competitive advantage. The court also noted that equal treatment requires that those similarly situated be treated alike. Out-of-state retailers and in-state retailers are not similarly situated because the in-state retailers are required to comply with tax collection and reporting requirements. It is expected that DMA will appeal the decision. Questions that we will monitor include will Colorado continue its stay on the reporting requirement until a final decision, if Colorado is successful at the end of the process will it change the effective date to a current or prospective date or are companies at risk going back to 2010 when it was first enacted. Many in the state tax community are expecting other states to introduce similar legislation in the current sessions – we’ll watch for these and bring them to your attention.

The reporting requirements legislation requires non-collecting retailers who make sales to Colorado purchasers but do not collect sales or use tax to file reports with the Colorado Department of Revenueas well as notify customers of their use tax obligation. Retailers are also prohibited from indicating no tax is due. Penalties will apply for failure to comply with both requirements. Note that a “non-collecting retailer” does not include a retailer whose sales in Colorado are de minimis. For purposes of this regulation, the Department will presume that a retailer that makes less than $100,000 in total gross sales in Colorado in the prior calendar year and reasonably expects total gross sales in Colorado in the current calendar year will be less than $100,000 is a retailer whose sales in Colorado are de minimis. In addition, a non collecting retailer does not include a retailer that makes sales solely by means of download of digital goods or software.

Non-collecting retailers must give notice to all Colorado purchasers that Colorado sales or use tax is due on all purchases that are not exempt from sales tax. This notice must be provided with respect to each transaction. A non-collecting retailer may not display or imply that no tax is due on any Colorado purchase (which includes an invoice line labeled Sales Tax with an amount of $0), unless such a display is accompanied by the required notice each time the display appears. The notice must contain the following information: The non-collecting retailer does not collect Colorado sales or use tax; The purchase is not exempt from Colorado sales or use tax merely because it is made over the Internet or by other remote means; and the State of Colorado requires that a Colorado purchaser (A) file a sales or use tax return at the end of the year reporting all of the taxable Colorado purchases that were not taxed and (B) pay tax on those purchases. This notice must be clearly legible, reasonably prominent, and located in close proximity to the total price. It will be sufficient if the non-collecting retailer provides a prominent linking notice that reads as follows: “See important sales tax information regarding the tax you may owe directly to your state”, if such linking notice directs the Colorado purchaser to the principal required notice. The non-collecting retailer shall pay a penalty of $5 for each sale to a Colorado purchaser with respect to which the required notice does not appear.

In addition,annual reports are required to be issued to Colorado customers as well as with the Department of Revenue. These reports must include the following information: The name of each Colorado purchaser; The billing address of each Colorado purchaser, if the information was provided; The shipping address of each Colorado purchaser, if the information was provided; and the total dollar amount of Colorado purchases made by each Colorado purchaser during the prior calendar year. No other information about the purchase shall be provided. If the non-collecting retailer has more than one Colorado billing address or more than one Colorado shipping address for a Colorado purchaser, then the non-collecting retailer shall provide all such addresses of the Colorado purchaser. The notice must be sent by January 31st of each year summarizing purchases made for the prior calendar year. The notice must be sent by January 31st of each year summarizing purchases made for the prior calendar year. These notices have similar requirements as the issuance of Federal 1099 notices and must be followed. The non-collecting retailer shall pay a penalty of $10 for each notice that is not sent by the non-collecting retailer to the Colorado purchaser.

UPDATE: On April 6, 2016, the U.S. Court of Appeals for the Tenth Circuit denied a petition for rehearing of the February 2016 ruling.

UPDATE: On August 29, 2016 the Direct Marketing Association filed a petition for review with the U.S. Supreme Court, asking it to overturn the April ruling by the U.S. Court of Appeals for the Tenth Circuit.

UPDATE: On December 12, 2016, the U.S. Supreme Court declined to review the ruling of the U.S. Court of Appeals for the Tenth Circuit that upholds Colorado’s use tax notice and reporting requirements. The Court also denied a cross-petition for certiorari filed by Colorado, which urged the Court to address whether the physical presence standard in Quill v. North Dakota should be overruled. Colorado is now free to enforce the use tax notice and reporting requirements legislation. This means that out-of-state sellers making sales into Colorado must notify in-state customers of their responsibility to remit use tax, and sellers must provide the Department with the required customer information. Failure to fulfill these obligations will result in a $10 per violation fine. Colorado has not yet indicated when the provisions will be deemed effective. We will continue to monitor this and update as more information is made available. In the meantime, all sellers who make sales into Colorado should prepare to comply with the notification and reporting requirements.

For our previous news item on this case, see U.S. Supreme Court Rules that Federal Court has Jurisdiction Over Challenge to Colorado Reporting Requirements Law.

For an update on this news item, see Colorado Use Tax Notice and Reporting Requirements Become Effective July 1, 2017.

(Direct Marketing Association v. Brohl, Case No. 12-1175 (10th Cir. Feb. 22, 2016); Direct Mktg. Ass’n v. Brohl, U.S., 15A1259, petition for certiorari review 8/29/16)

Posted on February 25, 2016