Colorado Ruling May Hamstring E-Commerce Tax Collection Efforts

U.S. District Judge Robert Blackburn has upheld a permanent injunction on a Colorado law that would have required out-of-state online retailers to report their in-state customers’ purchases to Colorado tax authorities and notify those customers of the resulting sales tax owed to the state.

The reporting requirement was a violation of the commerce clause in the Constitution, the judge ruled. It discriminated against out-of-state retailers because it did not make the same requirement of in-state retailers.

The Colorado Department of Revenue can appeal the decision if it wants to, but it has not said whether it will.

End of States’ Grab for Online Sales Tax Revenues?

Etailers hoping this decision would provide some pushback against states’ increasingly aggressive measures to collect online sale taxes will be disappointed, however.

The ruling is not significant in the big scheme of things, Dan Dixon, state tax attorney at Reed Smith, told the E-Commerce Times.

The Click-Through Nexus Argument

It won’t impact the so-called click-through nexus argument that many states are making to force online retailers — most notably Amazon — to the table, he said.

Briefly, online retailers that don’t have a physical presence in a state have been able to escape collecting sales taxes from customers for a decade or more. The click-through nexus argument, put forth first by New York, maintains that if a retailer has a third-party affiliate relationship with a party in the state, nexus has been established, and therefore the state can compel the retailer to collect sales taxes.

Amazon and Overstock.com have challenged New York’s requirement with some success, although the matter is still pending. However that has not stopped other states — most recently, Georgia — from adopting similar rules.

The nexus argument is not addressed in Colorado decision, said Carol Kokinis-Graves, senior state tax analyst for CCH.

It was the reporting and notification requirements that were found to run afoul of the Constitution, not the nexus argument, Kokinis-Graves told the E-Commerce Times.

“The law required out-of-state retailers to report on who bought what in Colorado and to notify those customers what they owed the state,” she said. “That is what has been enjoined. Colorado has a click- through nexus provision that is still in effect.”

The states that clearly will be affected by the judge’s decision are those that have implemented or are considering implementing similar reporting and notification requirements, Stewart Weintraub, attorney at Chamberlain Hrdlicka, told the E-Commerce Times.

There have been only a few states that have implemented such regulations, he said, one of which is Vermont, which included an unusual trigger to its requirement.

“Their law calls for 15 other states to adopt similar reporting and notification rules before theirs goes into effect,” Weintraub noted.

Why Nexus Is at Risk

Still, it is possible the Colorado ruling could impact the click-through nexus argument.

“I do think this has the potential to have a chilling effect on the Amazon click-through nexus reporting requirements, at least,” Peter Stathopoulos, a CPA and attorney at Bennett Thrasher, told the E-Commerce Times.

“They are slightly different issues, but the fact is that the Colorado reporting statute was similar in scope and intent to these laws, which are aimed at out-of-state companies and getting them to comply with sales tax reporting requirements even if they don’t have nexus,” he explained. The nexus statutes create a presumption of tax reporting requirements.

Colorado’s Recourse?

Colorado can appeal the decision if it chooses, Dixon said. It can also try to rewrite the law to conform to the judge’s findings. For example, it could rewrite the statute so the reporting-and-notification requirements would be imposed on in-state retailers as well.

“I don’t know if Colorado — or any state considering a notification and reporting law — would want to try that, however,” he said. “They are not trying to catch that particular fish — that is, their own retailers.”