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Colorado Amazon Tax Law Back in Effect

The Tenth Circuit Court of Appeals has re-energized Colorado’s unique “Amazon Law,” an attempt to enforce tax-reporting requirements on vendors. The law, passed in 2010 but long frozen in a legal battle, requires out of state, non-collecting vendors to report the amount of use taxes due on Colorado customer’s purchases where no sales tax is collected.

What is use tax?

Use tax is the corollary to sales tax and is imposed on purchases made where no sales tax is collected. Actual collection of use taxes is a subject for another post, but the obligation to pay the use tax is a law in Colorado and in every other sales tax state.

How does Colorado’s Amazon Law regulate use tax?

The Colorado ‘Amazon Law’ and its implementing regulations impose three obligations on non-collecting retailers whose gross sales in Colorado exceed $100,000:

  1. Provide transactional notices to Colorado purchasers of use tax due;
  2. Send annual purchase summaries to Colorado customers; and
  3. Annually report Colorado purchaser information to the Department of Revenue.

What is the legal controversy surrounding Colorado’s law?

The law’s three obligations are at the core of the legal battle. In March 2012, a US District Court ruled the law was unconstitutional. The basis for that decision was that the reporting and notice requirements of the law would unduly inhibit interstate commerce, a serious Constitutional no-no. The District Court issued an injunction, a legal order to the state of Colorado to cease enforcement of the law. In response, the supporters of the law, primarily the state of Colorado, appealed the injunction to the Tenth Circuit Court of Appeals.

On Tuesday of last week, the US Tenth Circuit Court of Appeals issued its decision on Colorado’s appeal of the District Court’s injunction. The Tenth Circuit dissolved the injunction and further ordered the lower court to dismiss the challenging lawsuit.

Bottom line: Colorado is no longer prevented from enforcing the law.

Does this mean Colorado’s law is constitutional?

Warning: law geek-speak to follow: This week’s decision is not based on the merits of the District Court’s opinion that the law inhibits interstate commerce. Instead, the Appeals Court relied on a federal law named “The Tax Injunction Act.” The Tax Injunction Act provides that “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” (28 U.S.C. § 1341).

State and Local Tax Attorney Jordan M. Goodman puts it this way:

“The Court of Appeals' opinion did not in any way address the underlying issues of the constitutionality of Colorado's law. Rather it really just reinforced the notion that it is very difficult to litigate any state tax issue in Federal Court because of the reach of the Tax Injunction Act.”

What’s the bottom line for businesses?

According to State and Local Tax Attorney Marilyn A. Wethekam, “The lifting of the preliminary injunction raises a number of practical administrative questions including whether the notice and reporting requirements will be retroactively applied. Thus, placing additional administrative requirements on taxpayers.”

The Appeals Court concludes its decision by outlining alternatives for non-collecting retailers that don't wish to provide use tax notices and information: either collect and remit the sales tax and then submit a refund request to Colorado DOR; or ignore the law and challenge the penalties that are sure to accrue in Colorado state court.

Will the decision of the Appeals Court ever be reversed?

It remains to be seen what strategy opponents of the law will take going forward.

Goodman offers the following analysis: “We believed that the DMA's case had a chance, as did the district court, because it challenged the Colorado notice provisions not the imposition of the tax.  Unless the DMA quickly refiles its complaint in the Colorado District Court and obtains a preliminary injunction, remote sellers into Colorado will be forced to comply with the notice requirements or start collecting Colorado state tax.”

Read the Tenth Circuit decision.

photo credit: StockMonkeys.com via photopin cc

Avalara Author
Shane Ratigan
Avalara Author Shane Ratigan
Shane began his career as a self-employed business owner. After 10 years in the motorcycle business, he returned to college to gain a Bachelor's in accounting and a Bachelor's in Business Adminstration. He went on to earn his Juris Doctorate at Syracuse University of College of Law in New York and his LLM Master's of Taxation at the University of Washington in Seattle. Shane has spent several years counseling small business owners on tax and succession planning. He is a licensed attorney in Oregon and Washington. Shane currently works in sales tax law and sales tax compliance with Avalara.