Update 7.5.17: The Colorado Department of Revenue has posted new information about use tax and Colorado’s new notice and reporting requirements for non-collecting vendors.
Colorado created a use tax notification requirement in 2010 to facilitate enforcement of its consumer use tax, which is owed to the state when sales tax wasn’t collected at the point of sale. The policy was immediately challenged by the Direct Marketing Association (DMA) and has been under dispute ever since, with both the state and the DMA intent on pursuing every recourse to defend their positions. Now the case has been settled, and the reporting requirement will take effect July 1, 2017.
Use tax notification requirement explained
The use tax notification policy requires noncollecting out-of-state vendors that made at least $100,000 in total gross sales during the previous calendar year (and expect to do the same during the current calendar year) to inform Colorado customers that their purchases may be subject to Colorado use tax. Additionally, retailers must send to customers who purchased more than $500 worth of taxable goods in one year an “annual purchase summary” listing purchase dates and amounts, along with a reminder that Colorado consumers are obligated to remit use tax on all untaxed, nonexempt purchases.
Noncollecting vendors must also send the Colorado Department of Revenue an annual customer information report, listing the names, addresses, and total purchases of their Colorado customers.
Legal dispute recap
In 2010, the DMA challenged both the constitutionality of Colorado’s reporting requirement (Section 39-21-112(3.5)(c) & (d), C.R.S.) and the Act’s implementing regulations (1 COLO. CODE REGS. Section 201-1: 39-21-112.3.5 (2010)). Among other arguments, it claimed the policy was burdensome and violated the dormant Commerce Clause of the United States Constitution.
The Colorado District Court for the City and County of Denver ruled in favor of the DMA. On appeal, the Tenth Circuit Court of Appeals determined that it lacked jurisdiction over the case under the Tax Injunction Act, and the case went to the Supreme Court of the United States. The high court ruled in March 2015 that the Tax Injunction Act did not bar the petitioner’s suit, and it sent the case back to the district court for resolution.
In a concurring opinion to its ruling, Supreme Court Justice Robert Kennedy wrote, “There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.” He went on to state, “It is unwise to delay any longer a reconsideration of the Court’s holding in Quill,” referring to the seminal 1992 case Quill Corp. v. North Dakota, 504 U.S. 298, which held that a state could not require a business to collect and remit sales tax unless it had a substantial physical presence in the state.
The second time around (in Feb. 2016), the Tenth Circuit Court of Appeals determined that Colorado’s use tax notification requirements for noncollecting retailers are legal. It ruled that Colorado did not discriminate against interstate commerce and that the law did not unduly burden interstate commerce.
As with the Supreme Court ruling discussed above, there was a notable concurring opinion issued by the Court of Appeals. Judge Neil Gorsuch (now nominated to fill the vacancy in the U.S. Supreme Court) wrote, “The plaintiffs haven’t come close to showing that the notice and reporting burdens Colorado places on out-of-state mail order and internet retailers compare unfavorably to the administrative burdens the state imposes on in-state brick-and-mortar retailers who must collect sales and use taxes.” He went so far as to suggest that the noncollecting retailers challenging Colorado’s policy were seeking “more favorable treatment.”
After the Tenth Circuit Court of Appeals denied a DMA request to reconsider the case, the DMA petitioned the U.S. Supreme Court to review the case. The state then filed its own Conditional Cross-Petition for Writ of Certiorari, asking the high court, “Should Quill be overturned?” In December 2016, the Supreme Court let Colorado’s law stand by denying DMA’s petition. It also denied the state’s request to reconsider the case and re-examine Quill.
Enforcing Colorado’s use tax reporting requirement
The ongoing legal disputes have prevented enforcement of the use tax notification policy for nearly seven years. They’ve also created uncertainty for noncollecting retailers doing business in Colorado. Now that the Supreme Court has refused the requests made by the DMA and the Colorado Department of Revenue, it is time for both parties to settle and move on. The DMA is well situated to make a fresh start, having changed its name to the Data & Marketing Association (still DMA) last fall.
The Department finds “reasonable cause for non-compliance with the Act and Regulations,” and it won’t require noncollecting retailers to comply with them until July 1, 2017. All penalties imposed on retailers for noncompliance prior to July 1 will be waived.
Beginning July 1, 2017, “the Act and Regulations shall be fully implemented and enforced.” Noncollecting retailers must file their first Customer Information Reports with the Department of Revenue by March 1, 2018. Additional details are available in the Settlement Agreement.
Is use tax notification the way of the future?
Colorado’s reporting requirement was the first of its kind, and although it has been under dispute since its inception, it has inspired other states to establish similar policies.
A use tax reporting measure took effect in Oklahoma last November, and another is scheduled to take effect in Louisiana on July 1, 2017. Consumer use tax notification requirements will be required as of July 1, 2017, in Vermont, which is also considering additional requirements for certain noncollecting out-of-state vendors.
Use tax notification and/or reporting requirements are currently under consideration in several states, including:
- Alabama (The Commissioner of Revenue has said her state will push for a measure like Colorado’s)
With tacit support for use tax notification requirements from the U.S. Supreme Court, and much uncertainty about the legality of states’ attempts to tax sales by remote vendors, such policies may be embraced by even more states.
Remote retailers wishing to avoid use tax notification requirements can always register with the state to collect and remit sales and use tax. Tax automation software simplifies sales and use tax compliance for businesses of all sizes in all states. Learn more.
photo credit: torbakhopper CAUTION hard hats required in this area, scott richard via photopin (license)