Retailers Mobilize to Challenge Colorado Online Sales Tax Law

Two organizations of direct-to-consumer marketers are putting together a war chest to fund a federal court challenge to a new Colorado law that requires online retailers to notify the state of all purchases made by Colorado residents. A separate consumer challenge on privacy grounds could also be in the works.

 

The Direct Marketing Association is coordinating the legal fight against the Colorado law, and has engaged George S. Isaacson, a state tax expert and senior partner in the Lewiston, ME, law firm of Brann & Isaacson, according to a letter to members of the American Catalog Mailers Association from ACMA president and executive director Hamilton Davison.

An informal group of companies concerned about the issue is discussing whether to go forward with the litigation, Isaacson says. “There’s very strong sentiment in the industry that there are serious constitutional questions about this legislation,” he says.

 

Davison explains in his letter that the Colorado law, which took effect March 1, requires all out-of-state online retailers that do not collect sales tax on purchases made by Colorado residents to report to the state each year the name, address and amount purchased for each Colorado customer. The retailer must also send each Colorado customer by Jan. 31 a letter by first class mail outlining that consumer’s purchases during the prior tax year and informing the consumer of his obligation to pay state sales taxes on his own.

 

Davison notes that California and Tennessee are considering similar laws. He asks in his letter that association members consider contributing $5,000 or more to fund the legal challenge. He also notes that the push to collect sales tax on online purchases stems from states being short of revenue. “Out of state companies who do not use any state services and who do not elect state politicians are easy targets,” he says.

 

Legislation similar to Colorado’s could spread, as the Multistate Tax Commission, an organization that coordinates state government policies on taxing companies that operate across state lines, is considering offering the Colorado bill as a model for other states to follow, says Steve Delbianco, executive director of e-commerce trade group NetChoice. “That makes it vital to challenge the Colorado approach before other states try to copy a flawed law,” he says.

 

Besides supporting the DMA initiative, Delbianco says his group is in discussions with unnamed organizations about a possible challenge to the Colorado law on privacy grounds. “The state is collecting data on where its citizens are buying sensitive items, such as books, video and even medications,” Delbianco says. “That information, if lost or leaked, could jeopardize your insurability or employability. That privacy invasion needs to be discussed now, rather than in January of 2011 when Colorado consumers realize for the first time the data the state is collecting on their purchasing.”

 

He notes that California is considering an even more invasive law that would require retailers to provide quarterly reports of the items each individual purchases, not just the dollar amount of the purchases.

 

Isaacson says it’s possible that retailers could take up the question of the invasion of consumer privacy in their lawsuit, or that there could be a separate class action lawsuit brought by consumers. Besides raising privacy issues, he says, the Colorado law could be challenged as violating the Commerce Clause of the U.S. Constitution that grants Congress the right to regulate interstate commerce.

 

“The notice and reporting obligation being imposed on out-of-state retailers selling to in-state customers carries with it discrimination against interstate commerce,” Isaacson says. Also at issue is whether the Colorado law is legal under the U.S. Supreme Court’s 1992 decision in a case known as Quill Corp. v. North Dakota, in which the high court ruled that retailers that do not have a physical presence in a state do not have to collect and remit sales taxes in that state.

 

Another organization discussing support for the DMA action is the Electronic Retailing Association, which represents some 400 companies, many selling directly to consumers via television infomercials and the web. “What is going on in Colorado is of great concern to the ERA and the industry,” says Bill McClellan, vice president of government affairs.

 

The proposed challenge to Colorado’s law follows a series of skirmishes between e-retailers and state governments seeking to tax online purchases. Amazon.com Inc. this month sued North Carolina after the state sought to force Amazon to disclose the names of North Carolina residents who made purchases on Amazon.com as part of an audit of whether Amazon is complying with state sales tax laws. While the U.S. Supreme Court has freed out-of-state web retailers from collecting state sales tax, North Carolina, New York and other states have passed laws that require retailers to remit sales taxes if they work with online affiliates based in those states.