On February 22, the U.S. Tenth Circuit Court of Appeals decided that a Colorado law requiring remote sellers to inform Colorado purchasers annually of their purchases and send the same information to the Colorado Department of Revenue is constitutional. While this decision does not completely resolve the lack of federal action on remote sales tax legislation, it certainly marks a positive development in the long-standing effort by state and local governments to collect taxes on remote or online sales.
When Colorado enacted its law in 2010, the primary objective was to address use tax non-compliance. As in most other states, Colorado cannot compel out-of-state retailers that are not physically located in the state to collect taxes. Colorado requires purchasers themselves to calculate and remit use taxes on their purchases from out-of-state retailers. But most states requiring this remittance of use taxes have found that compliance is extremely low. By collecting the information from remote sellers, Colorado sought to implement a mechanism to allow greater enforcement of their use tax without violating current law, which has been in place since Quill Corp. v. North Dakota was decided in 1992.
In Quill, the U.S. Supreme Court basically reaffirmed a 1967 decision in another case by holding that states cannot require retailers without any in-state physical presence to collect use tax. Both decisions, however, were made well before the Internet became the dynamic retail market we see today. The Direct Marketing Association (DMA) sued Colorado in federal court, claiming the law was unconstitutional under Quill.
In Direct Marketing Association v. Brohl, the Tenth Circuit disagreed, concluding that Quill “applies narrowly to sales and use tax collection.” The Tenth Circuit noted that neither the Supreme Court nor the Tenth Circuit has extended Quill “beyond the realm of sales and use tax collection.” The Tenth Circuit further concluded the Colorado law doesn’t discriminate against interstate commerce because DMA was unable to point to any evidence that the notice and reporting requirements imposed on out-of-state retailers are more burdensome than the sales tax collection and administration requirements imposed on in-state retailers.
Prior to this decision, in March 2015 the U.S. Supreme Court held unanimously that the Tax Injunction Act does did not bar the Tenth Circuit from deciding the Direct Marketing Association case. The State and Local Legal Center (SLLC), a group that the National Association of Counties (NACo) is a member of, filed an amicus brief discussing the devastating impact Quill has had on state and local governments in light of the rise in internet purchases, Congress’s failure to pass the Marketplace Fairness Act and states’ need to improve use tax collection through statutes like Colorado’s. Justice Kennedy wrote a concurring opinion, which appeared to rely on the SLLC’s brief, stating that the “legal system should find an appropriate case for this Court to reexamine Quill.”
The SLLC also filed an amicus brief in the Tenth Circuit making the same policy arguments that it made in the U.S. Supreme Court. The brief also argued that Quill does not apply to the Colorado law and that the notice and reporting requirements aren’t discriminatory.
The Tenth Circuit began its opinion by noting the difficulty states and local governments face collecting use tax in an e-commerce economy. The opinion cited the SLLC brief, which provided an estimate of the very low rate of use tax compliance, and quoted Justice Kennedy’s recent criticism of Quill.
At least three other states have similar notice and reporting requirements: Oklahoma, South Dakota and Vermont. NACo will continue to monitor developments as they occur.