Direct Marketers Win Round 1  in Tax Collection Case

By George S. Isaacson

On Jan. 26, a United States District Court Judge in Denver entered a preliminary injunction against the Colorado Department of Revenue in the lawsuit that the Direct Marketing Association (DMA) brought challenging Colorado's new notice and reporting law, H.B. 10-1193. This controversial legislation — the enforcement of which is now suspended by the court's order — imposes three sets of obligations on out-of-state retailers that don't have nexus in the state and don't collect Colorado sales tax.

First, the law requires that remote sellers give notice to their Colorado customers, in connection with each separate internet or catalog transaction, that they must self-report Colorado use tax (i.e., the "Transactional Notice"). Second, retailers must send to all customers that purchased more than $500 worth of goods for delivery to Colorado during 2010 a summary of their purchases for the year via First Class mail by Jan. 31 (i.e, the "Annual Purchase Summary"). Third, out-of-state merchants must submit a report to the Colorado Department of Revenue by March 1, listing the name, billing and shipping addresses, and total amount of purchases of all customers who purchased goods for delivery to Colorado (i.e., the "Customer Information Report").

The court ruling enjoins the Department of Revenue from enforcing all of the requirements of H.B. 10-1193 effective immediately, including the Transactional Notice, Annual Purchase Summary and Customer Information Report provisions, which would have required turning over individual customer purchase history information to the Department of Revenue.

As counsel for the DMA in this litigation, I argued that H.B. 10-1193 violates the Commerce Clause of the United States Constitution by imposing discriminatory obligations upon out-of-state retailers that don't apply to in-state Colorado companies, and unduly burdening interstate commerce in violation of the clear principles set forth by the Supreme Court in its famous 1992 Quill decision. The District Court accepted these arguments in finding that the DMA had a likelihood of  succession in both of the Commerce Clause counts.