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Colorado Loses Internet Sales Tax Battle


UPDATE: 5/1/2012. The Colorado Department of Revenue is appealing Blackburn's injunction, according to Tax Analysts. The Department is making the appeal to the U.S. Court of Appeals for the Tenth Circuit.

Colorado Supreme Court Judge Robert E. Blackburn issued an injunction against the Colorado laws requiring out-of-state retailers to submit reports for use tax purposes.

The ruling represents the culmination of a process that began in 2010 when the Direct Marketing Association asked for an injunction against Colorado Act 39-21-112(3.5)* and regulations 201-1:39-21-112.5, which required out-of-state retailers to make the following reports:

  1. Transactional Notice: notification to customers that they must pay use tax, since the companies do not collect sales tax.
  2. Annual Purchase Summary: report to customers who spent more than $500 the previous calendar year, informing them of their purchases, obligation to pay use tax, and obligation of companies to give their names and purchase lists to the Colorado Department of Revenue.
  3. Customer Information Report: report to Department of Revenue including the information from the Annual Purchase Summary.

The Direct Marketing Association claimed that these requirements violated a long-standing interpretation of the Commerce Clause of the U.S. Constitution, which places restrictions on state actions that might hamper interstate commerce. According to the Association, the Colorado Act and regulations violated the Commerce Clause because they discriminated against out-of-state retailers and put "undue burdens on interstate commerce."

Judge Blackburn found in favor of the Association on both claims. He ruled that the Colorado Department of Revenue is "permanently enjoined and restrained" from enforcing the Acts and regulations that out-of-state retailers provide the notices and reports listed above.

The Denver Post reports that Blackburn's opinion states, "I conclude that the veil provided by the words of the act and the regulations is too thin to support the conclusion that the act and the regulations regulate in-state and out-of-state retailers even-handedly."

*Open "Colorado Revised Statutes" folder and search by statute number.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Will Frei
Avalara Author Will Frei
Will Frei covers sales tax news including best practices, legislation and sales tax technology. He is the Social Media Manager at Avalara.