Supreme Court lets Colorado’s use tax notification requirement stand
- Sales and Use Tax
- December 12, 2016 | Gail Cole
The Supreme Court of the United States (SCOTUS) today denied a petition to reconsider the legality of Colorado’s use tax notification requirement. This decision could have enormous implications in the battle over states’ right to tax sales by remote sellers.
It’s also a very rare instance of the Supreme Court letting stand a state law that imposes a burden on out-of-state sellers. This could lead other states to impose similar use tax reporting requirements, as indeed several (e.g., Kentucky, Louisiana) have already done. It could also renew Congressional interest in the matter.
Colorado’s use tax notification requirement applies to out-of-state businesses that sell taxable goods to Colorado residents but don’t collect Colorado sales or use tax. It requires non-collecting businesses making at least $100,000 in total gross annual sales to:
- Inform Colorado customers that they may be subject to Colorado use tax
- Send an annual purchase summary to Colorado customers who purchase more than $500 in taxable goods in one year, along with a reminder of their use tax obligation
- Provide the Colorado Department of Revenue with annual customer information (names, addresses, and amount of purchases)
Shortly after its adoption in 2010, the Direct Marketing Association (DMA) challenged the policy on the grounds that it discriminates against interstate commerce and unduly burdens out-of-state businesses. It’s been embroiled in legal battles ever since.
This is the second time the Supreme Court has been asked to weigh in on this case. Back in March 2015, SCOTUS ruled that the Tax Injunction Act did not bar the Tenth Circuit Court of Appeals from hearing the case and sent it back to the district court for resolution. The District Court then ruled that the Colorado law doesn’t discriminate against interstate commerce or unduly burden interstate commerce.
DMA asked the Court of Appeals to reconsider the case, but it denied the request in April 2016. Then in August, DMA petitioned the Supreme Court to review the Appeal’s Court decision. Shortly thereafter, the Colorado Department of Revenue filed a Conditional Cross-Petition for Writ of Certiorari, asking the Supreme Court, “Should Quill be overturned?” (The 1992 Supreme Court decision, Quill Corp. v. North Dakota, upheld an earlier ruling that a business must have a physical presence, or substantial nexus, in a state in order for a state to impose a tax collection burden.)
Re-energize the internet sales tax debate
Today, the Supreme Court denied both requests to reconsider the Colorado case. Last July, a bill seeking to codify the physical presence requirement upheld in Quill and permanently ban states from taxing remote sales was introduced in Congress. It could now gain traction among lawmakers opposed to letting states tax remote sales. Likewise, the recent action by the Supreme Court could invigorate those lawmakers who support states’ right to tax remote sales, many of whom have been urging consideration of remote sales tax legislation in the current Lame Duck session.
Someone else decide
However, letting someone else decide has been a common thread in the remote sales tax debate. Back in 1992, the Supreme Court opinion in Quill stated that “Congress may be better qualified to resolve” the issue of remote sales tax. Yet in spite of multiple attempts reaching back at least to 2000, Congress has failed to resolve it.
Similarly, Justice Kennedy wrote in 2015 that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill… [a] case questionable even when decided” (Supreme Court: Let lawsuit over Colorado’s internet tax law proceed). And yet, today SCOTUS rejected Colorado’s plea to reconsider Quill.
Although Colorado has done nothing to enforce the use tax notification requirement since its adoption, out-of-state businesses selling taxable goods to Colorado consumers should be prepared to comply with the state’s use tax notification requirement.
Alternatively, remote businesses can opt to voluntarily collect and remit tax on Colorado transactions, as Amazon.com has been doing since February 1, 2016.
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