Wayfair LLC, the defendant in the landmark 2018 ruling that created the standards for economic nexus, has filed suit in Colorado to challenge the nexus standards of the state and its home rule cities, arguing that the state’s tax regime violates the US constitution and the standards laid out in the 2018 case.
The city of Lakewood, a home rule jurisdiction in Colorado, issued a notice of deficiency to Wayfair LLC for sales tax, interest, and penalty on sales made to customers in the city between May 2018 and July 2021. In its complaint, Wayfair asserted that the city’s imposition of sales tax on their business, which did not have physical locations in the city, violated the constitution’s Commerce Clause by placing an undue burden on out of state sellers. Because the city’s rules imposed a registration requirement on out of state sellers who exceeded the state’s economic nexus standards, the city was requiring out of state sellers to register in the city in circumstances where businesses based in Colorado would not have had the same obligation. The complaint also argues that the director of the Colorado Department of Revenue, in failing to create rules and policies that simplify this collection process, has also violated the terms of commerce clause by placing an undue burden on out of state businesses selling in Colorado. With more than 70 home rule cities authorized to impose their own sales tax and impose their own set of rules and exemptions, and additional state administered jurisdictions, the complaint argues that the costs of following these rules and remaining compliant with the jurisdictions in Colorado is a burden on out of state sellers.
As states implemented economic nexus laws in the years since the original Wayfair decision, historic sales tax systems in states like Colorado, Louisiana, and Alabama have encountered difficulty reconciling their rules for city tax collection with out of state seller filing requirements. Though Colorado has recently updated its laws to restrict home rule cities from requiring out of state sellers to register for sales tax and has implemented the SUTS central filing system to simplify home rule tax collection, filing in Colorado as an out of state seller remains a complex process. Because the original Wayfair decision allowed states to impose economic nexus as long as they did not discriminate against out of state sellers or cause an undue burden to taxpayers, it remains to be seen if challenges to other state’s out of state seller rules are on the horizon, and if any of these challenges have greater effects on how state economic nexus laws are treated in the future. (Wayfair LLC v. City of Lakewood et al., case number 2022CV30710, Jefferson County District Court, August 5, 2022)