Legal Matters: How Colorado’s Tax Law Affects Cross-Channel Retailers, and What’s Being Done About It

On June 30, the Direct Marketing Association (DMA) filed a lawsuit in U.S. District Court in Denver against the executive secretary of the Colorado Department of Revenue challenging the constitutionality of Colorado's new consumer notice and reporting law that's targeted at out-of-state retailers who don't collect Colorado sales tax. While the Act and its regulations are complicated in their details — retailers should consult with their legal counsel to determine if the law is applicable to them — it imposes three onerous obligations on so-called "noncollecting retailers."

First, in connection with every sale to a Colorado purchaser, retailers must provide a notice informing the customer of their obligation to self-report sales tax. Second, certain customers, based upon their past year's purchase amounts, must be sent a report via First Class mail summarizing their prior year purchases and again reminding them to report the tax. Third, and most problematic, the new law requires that remote sellers must annually turn over consumer transaction information to the state's Department of Revenue, including names, addresses and total amounts of purchases made during the prior year.

While the new law contains certain exceptions, its provisions are broadly applicable to catalog retailers and electronic merchants throughout the country.

The DMA lawsuit contends that the Colorado law violates the Commerce Clause of the U.S. Constitution by imposing discriminatory and burdensome obligations solely on out-of-state retailers. The DMA complaint also alleges that the Act violates consumer privacy rights. There's little question that a major objective of the legislation is to place pressure on remote sellers to waive their constitutional protections and agree to collect state sales tax rather than confront the angry reaction from customers who object to the disclosure of purchasing history information to government officials.

Indeed, the director of tax policy for the Colorado Department of Revenue has been widely quoted in the press as stating that he believes most retailers would simply choose to collect the tax to avoid the unpleasant option of having to comply with the law.

In its lawsuit, the DMA is seeking an injunction barring state officials from enforcing the new law. It's currently anticipated that a court hearing on the request for an injunction will take place before the end of this year. That would put it prior to the time that the annual purchase summaries must be mailed to Colorado customers and the customer infomation reports must be delivered to Colorado's Department of Revenue, both of which have deadlines in early 2011.

George S. Isaacson is a senior partner at Brann & Isaacson, a law firm specializing in direct marketing (gisaacson@brannlaw.com).