Use tax reporting: is Colorado back in business?

• Author: Yesnowitz, Jamie

OVER THE PAST FEW YEARS, MUCH ACTIV-ity and discussion has addressed remote sales tax collection and the revenue loss to states as a result of e-commerce. As all state tax professionals know, states cannot require a remote retailer to collect and remit tax on sales made to in-state customers unless the retailer has nexus in the state. For sales and use tax purposes, to establish nexus, a retailer must have some physical presence in the particular state'--either the retailer's own physical presence or the physical presence of an affiliate or third party that enables the retailer to establish and maintain a market in the state. (2)

Many states have considered and enacted various legislative measures aimed at asserting nexus over remote, primarily internet-based retailers based solely on their relationships with other entities--sometimes affiliated, sometimes not--that have nexus in the state. At the same time, many states (and "Main Street" retailers) have been hoping for a federal solution, specifically, congressional legislation that would overturn the Quill decision. While various iterations of such legislation have been introduced and languished in past Congresses, supporters of a federal solution were dealt a significant victory in May when the Senate approved the Marketplace Fairness Act (MFA) of 2013. (3) The MFA, which would grant certain states the authority to require remote sellers to collect and remit sales and use taxes on sales into the state, is currently in the House, where its fate remains uncertain. (4)

With all this activity, many may have forgotten that more than three and a half years ago, Colorado lawmakers adopted a unique approach to address the loss of revenue associated with e-commerce and the corresponding failure of the Colorado citizenry to comply with the state's use tax laws. The state's answer to these persistent problems was to impose use tax reporting requirements on retailers that do not collect sales tax on goods sold to Colorado purchasers.

The reporting requirements were quickly challenged on a number of grounds, and, in March 2012, at the request of the Direct Marketing Association (DMA), a federal district court judge permanently enjoined the Colorado Department of Revenue from enforcing the law. (5) Nearly 17 months later, the Tenth Circuit Court of Appeals held that the injunction was in-valid. (6) In the court's view, the Tax Injunction Act (7) (TIA) precluded the DMA from obtaining an injunction against enforcing the requirements. In light of these recent developments and in anticipation of further proceedings, this column revisits the issues presented by DMA's suit and the history thus far.

Background

On Feb. 24, 2010, Colorado House Bill 1193 was signed into law, adopting certain information reporting requirements for retailers that do not collect Colorado sales tax. (8) Specifically, noncollecting retailers were required to comply with three separate reporting requirements:

* Effective beginning March 1, 2010, retailers were required to inform the purchaser at the time of the purchase that use tax may be due and that Colorado requires purchasers to file returns and pay use tax directly to the state.

* Retailers were required to provide each Colorado purchaser with a statement by Jan. 31 of each year showing the general types and volume of purchases made during the prior year on which tax was not collected and stating that the purchaser may owe use tax on such purchases.

* Retailers were required to file an annual report with the Department of Revenue (DOR) by March 1 each year identifying the name and address of each Colorado purchaser and the general type and volume of purchases made by such purchaser. (9)

Shortly after the law's enactment, the DMA filed suit in federal district court in Colorado seeking to enjoin enforcement of the reporting regime. The DMA is a group of businesses and organizations that market products via catalogs, advertisements, broadcast media, and the inter-net. According to a press release issued by the DMA, the organization viewed Colorado's law as "an unprecedented invasion of consumer privacy" and as a law that "unfairly discriminates against...