On February 24, 2010, the governor of Colorado signed into law H.B. 10-1193, which requires retailers not having a physical presence in Colorado (such as Internet and catalog sellers) and that do not otherwise collect Colorado state sales taxes on sales to Colorado residents (which is likely to be most out-of-state retailers) to notify Colorado customers that the customers owe the Colorado tax on their purchases. The law applies to retailers with more than $100,000 in annual sales.
Although the Supreme Court’s 1992 decision in Quill v. North Dakota means that retailers with no physical presence in a state are not required to collect state sales tax on sales to residents in such state, in most states the residents still owe the state tax – typically through a “use tax” that is parallel to the sales tax. Apart from the case of registration of motor vehicles purchased out-of-state, where states can collect use tax at the time of registration, use taxes tend to be widely ignored or even unknown.
States ever hungrier for tax revenue have been setting their sights on online and catalog sales to their residents, with such purchases generally being sales-tax-free. Such attempts must deal with the constitutional limitations of Quill. Quill essentially held that the commerce clause of the U.S. Constitution prohibits a state from imposing a sales tax on a retailer with no “nexus” with the state, and that “nexus” exists only where the retailer has some kind of physical presence in the state. For many years physical presence was viewed as requiring a store, warehouse, office, distribution center or other facility of the retailer itself. Recently New York, North Carolina and Rhode Island have enacted taxes that treat “affiliates” of retailers (such as utilized by Amazon.com, Overstock.com and other Internet retailers) as providing the requisite physical presence. The validity of the New York statute is currently the subject of litigation. Other states, including California, Connecticut, Hawaii, Illinois, Iowa, Maryland, Minnesota, New Mexico, Tennessee, Vermont, Virginia and Wisconsin, have considered and – for the time being – rejected such “Amazon” taxes.
While originally drafted in a fashion similar to the New York law, the enacted version of Colorado's law takes a different approach in that it is formally structured as primarily a notice and reporting regime rather than a direct tax collection regime. Out-of-state retailers need not collect sales taxes on sales to Coloradans, but must (i) include a notice on each invoice to Colorado customers informing them that their purchase is subject to Colorado sales tax (unless otherwise exempt under Colorado law), and (ii) send a report to customers in January of each year detailing all of their purchases in the preceding year and the amount of sales tax owed. The notice must state that the retailer is not obligated to (and does not) collect Colorado sales taxes, the purchase is not exempt merely because it is made over the Internet (or by other remote means), the State of Colorado requires that sales or use tax be paid on the purchase (unless otherwise exempt under Colorado law) and that the retailer is obligated to provide a year-end summary to its Colorado customers to assist them with filing their tax returns. In addition, out-of-state retailers must also provide the purchaser’s information annually to the Colorado Department of Revenue. Failure to comply with the customer notice requirement will result in a fine of $5 per violation. Failure to comply with the Colorado Department of Revenue notice requirement will result in a fine of $10 per violation, with an additional penalty of $10 per customer omitted from the notice. Regulations recently issued under H.B. 10-1193 provide that due to the short period of time between enactment and the March 1, 2010 effective date, if a retailer begins to provide notices by May 1, 2010, it will not be subject to penalties for prior failures.
Wholly apart from the compliance burdens raised by H.B. 10-1193, there are unsettling privacy considerations. The notice that out-of-state retailers must provide to the Colorado Department of Revenue includes specific information about their customers’ purchases. The State will now know that particular individuals have purchased items that many consumers would view as highly sensitive.
Why it matters: Colorado has implemented an unusual approach to the battle over collecting sales taxes from out-of-state retailers. While it does not yet appear that anyone has brought a legal challenge to H.B. 10-1193, but a challenge seems almost certain. As states continually seek new sources of revenue, it seems likely that Colorado will not be the last to make an aggressive attempt to tax remote purchases.