Colorado and the "amazon Tax"-recent History
| Publication year | 2012 |
| Pages | 43 |
| Citation | Vol. 41 No. 6 Pg. 43 |
2012, June, Pg. 43. Colorado and the "Amazon Tax"-Recent History
June 2012
Vol. 41, No. 6 [Page43]
Tax Law articles are sponsored by the CBA Taxation Law Section to provide timely updates and practical advice on federal, state, and local tax matters of interest to Colorado practitioners.
Coordinating Editors
Adam Cohen, Denver, of Holland and Hart LLP-(303) 295-8000, acohen@hollandhart.com; Steven Weiser, Denver, of Foster Graham Milstein and Calisher, LLP-(303) 333-9810, sweiser@fostergraham.com
About the Authors
Tyler Murray is President of The Law Offices of Murray and Wright, P.C., a Denver-based tax law firm-tyler.murray.esq@gmail.com. Eric J. Zinn concentrates on the practice of tax law at the Denver law firm of Krendl Krendl Sachnoff and Way Professional Corporation-ejz@krendl.com.
This article discusses Colorado's attempt at imposing an "Amazon tax" through use tax reporting requirements for online retailers, and the recent court injunction stopping the enforcement of that law.
The Internet has become a market of choice for many Coloradans purchasing tangible personal property. Nevertheless, in buying such goods from out-of-state online retailers, Colorado consumers often avoid having to pay Colorado sales and use taxes on their initial purchases, because the out-of-state retailers from whom they make such purchases do not collect the tax. Legally, the Colorado consumer must pay a consumer's use tax on those purchases of tangible personal property that have not been subject to tax.(fn1) Rarely, though, does this happen.
Sensing a loss of revenue, Colorado, like other states, has tried to settle on a way to get out-of-state online retailers either to collect use taxes from their Colorado purchasers or to report information to the state about those online purchases by Colorado residents. New York was one of the first states to force the collection of its use taxes on out-of-state online retailers. It did so through the imposition of an "Amazon tax."(fn2)
This article examines the recent history behind House Bill (HB) 10-1183, Colorado's Amazon tax law, enacted in 2010. In that regard, this article first provides a brief overview of Colorado's sales and use taxes. It then discusses the federal constitutional constraints on a state's power to force an out-of-state retailer to collect its sales and use taxes. A discussion of the first type of Amazon taxes imposed by New York and other states follows. The article then addresses Colorado's enactment of HB 10-1993, which represents a second and different form of Amazon tax. The Direct Marketing Association (DMA), the nation's largest trade association of businesses and nonprofit organizations that market directly to consumers, filed suit in the U.S. District Court for the District of Colorado to enjoin the enforcement of the notice and reporting provisions of HB 10-1193, arguing those provisions were constitutionally infirm. This article also examines the grounds of that suit and the recent decision of the Colorado District Court. Finally, HB 11-1318, a bill repealing HB 10-1193, is discussed.
Colorado Sales and Use Taxes
Colorado employs sales and use taxes as primary sources of raising tax revenues. Colorado imposes its sales tax on purchases of retail sales, leases, or rentals of tangible personal property, and certain taxable services, all of which are either purchased or performed within Colorado.(fn3) Colorado retailers generally must collect the taxes from purchasers of those retailers' goods at the time those goods are purchased.(fn4) The retailers then remit the collected taxes to the state.(fn5) In this regard, the Colorado retailer is said to have a "nexus" with Colorado due to the physical presence of the retailer in the state and, therefore, is required to collect Colorado's sales tax.
Because Colorado's sales taxes raise the costs of goods to purchasers in Colorado by the amount of those taxes, Coloradans may attempt to avoid those higher prices by purchasing goods from retailers that do not have a nexus with Colorado and, therefore, are not obligated to collect Colorado's sales taxes. To deter Coloradans from purchasing goods from retailers without a nexus to Colorado, Colorado has enacted use taxes.
Colorado employs two forms of use taxes: the retailer's use tax and the consumer's use tax. Colorado's retailer's use tax is collected and remitted by a business located outside Colorado that engages in business, or is deemed to have nexus, in Colorado.(fn6) By collecting retailer's use taxes on taxable sales, collectors relieve their Colorado customers from having to remit sales taxes or consumer's use taxes on those purchased items. Colorado's consumer's use tax is due from a Colorado consumer in the event that a Colorado sales or retailer's use tax has not been collected on a retail purchase of tangible personal property or a taxable service, either of which is used, stored, distributed, or consumed in Colorado.(fn7) Colorado's use taxes serve a complementary purpose to its sales tax by evening the playing field between Colorado businesses that must collect the state's sales tax and out-of-state competitors that do not.
As mentioned earlier, for a retailer, the responsibility for collecting and remitting either Colorado's sales tax or its retailer's use tax depends on the extent to which that vendor has nexus or is "doing business in this state" as defined by Colorado law and limited by federal constitutional law. Under Colorado law, "doing business in this state" means the selling, leasing, or delivering into Colorado of tangible personal property by a "retail sale" for use, storage, distribution, or consumption within Colorado.(fn8) This phrase includes, but is not limited to, the following acts or methods of transacting business:
1) maintaining within Colorado, directly or indirectly or by a subsidiary, an office, distributing house, salesroom or house, warehouse, or other place of business; and
2) soliciting, either by direct representatives, indirect representatives, manufacturers' agents, or by distribution of catalogues or other advertising, or by use of any communication media, or by use of the newspaper, radio, or television advertising media, or by any other means whatsoever, business from persons residing in Colorado, and as a result thereof receiving orders from, or selling or leasing tangible personal property to, Coloradans for use, consumption, distribution, and storage in Colorado.(fn9 )
If a retailer is doing business as defined by paragraph (1) above, that retailer must have a Colorado sales tax account.(fn10) If a retailer is doing business as defined by paragraph (2) above, that retailer must have a retailer's use tax account.(fn11)
The Constitutional Boundaries of Collectability
Numerous cases from the U.S. Supreme Court provide the federal constitutional boundaries of nexus for purposes of requiring a retailer to collect another state's use taxes. Those cases include Scripto, Inc. v. Carson;(fn12)National Bellas Hess, Inc. v. Dep't of Revenue of Illinois;(fn13) Complete Auto Transit, Inc. v. Brady;(fn14) and, most important,Quill Corp. v. North Dakota.(fn15)
The Quill Case-Facts
Quill was a Delaware corporation with offices and warehouses in Illinois, California, and Georgia. None of its employees worked or lived in North Dakota, and its ownership of tangible property in North Dakota was either insignificant or nonexistent. Quill sold office equipment and supplies and solicited business through catalogs and flyers, advertisements in national periodicals, and telephone calls. For the years in issue, Quill's annual national sales exceeded $200 million, of which almost $1 million was earned from about 3,000 customers in North Dakota. For the years in issue, Quill was the sixth-largest vendor of office supplies in North Dakota. It delivered all of its merchandise to its North Dakota customers by mail or common carrier from out-of-state locations.(fn16)
As a corollary to its sales tax, North Dakota, like Colorado, imposes a use tax on property purchased for storage, use, or consumption within that state. In this regard, North Dakota required every "retailer maintaining a place of business in" North Dakota to collect the tax from the consumer and remit it to the state.(fn17) In 1987, North Dakota amended the statutory definition of the term "retailer" to include "every person who engages in regular or systematic solicitation of a consumer market in the state."(fn18) North Dakota revenue regulations in turn defined "regular or systematic solicitation" to mean three or more advertisements within a twelve-month period.(fn19) Thus, since 1987 but before the Supreme Court's Quill decision, mail-order companies that engaged in such solicitation were presumably subject to the collection of North Dakota's use tax, even if those companies maintained no property or personnel in North Dakota.
Quill took the position that North Dakota did not have the power to compel it to collect from its North Dakota customers that state's use tax. Consequently, North Dakota, through its Tax Commissioner, filed an action requiring Quill to pay taxes (as well as interest and penalties) on all of its North Dakota sales made after July 1, 1987.
The North Dakota trial court ruled in Quill's favor, finding the case indistinguishable from Bellas Hess, an earlier Supreme Court decision that required an out-of-state retailer to have a physical presence in a state before that state could impose on the retailer collection responsibility for the state's sales and use taxes.(fn20) Specifically, it found that because North Dakota had not shown that it had spent tax revenues for the benefit of the...
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