Supreme Court holds challenge to Colorado reporting requirements can go forward.

• Author: Beavers, James A.

Reversing the Tenth Circuit, the Supreme Court held that the Tax Injunction Act did not bar a suit that sought to enjoin the state of Colorado from enforcing a law requiring out-of-state sellers to notify Colorado customers of their use tax liability for purchases and report tax-related information about the purchases to the customers and the Colorado Department of Revenue.

Background

Colorado has a complementary sales-and-use tax regime imposing a 2.9% tax on sales of tangible personal property within the state and an equivalent use tax for any property stored, used, or consumed in Colorado on which a sales tax was not paid to the retail seller (retailer) of the property. Retailers with a physical presence in Colorado must collect the sales or use tax from purchasers at the point of sale and remit the proceeds to the Colorado Department of Revenue (DOR). However, under the Supreme Court's negative Commerce Clause precedents, as expressed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and other cases, Colorado may not require retailers who lack a physical presence in the state to collect these taxes on behalf of the department. Therefore, since the state cannot force these retailers to collect the sales tax due on sales to Colorado residents, Colorado law requires its residents who purchase tangible personal property subject to sales tax for which the seller did not collect sales tax to fill out a use tax return and remit use tax on the purchase to the DOR directly.

Because the DOR has no practical way to enforce this requirement to report and pay use tax, few taxpayers voluntarily file a return and pay the use tax they owe. This fact, combined with the rapidly increasing number of purchases by Colorado residents from internet retailers, who typically are not required to collect Colorado sales tax, has led to Colorado's losing an ever-growing amount of sales and use tax revenue. Like all the other states in this position, Colorado was and continues to be very unhappy about this state of affairs.

Colorado, however, decided to quit complaining about the revenue loss and do something about it. The state enacted legislation in 2010 imposing notice and reporting obligations on out-of-state retailers that did not collect Colorado sales tax (noncollecting retailers) whose gross sales in Colorado exceed $100,000. The legislation (Colo. Rev. Stat. [section]39-21-112(3.5)) required noncollecting retailers to:

* Notify Colorado purchasers during...