Hunton Retail Law Resource

This week, the 10th Circuit Court of Appeals upheld a 2010 Colorado law (Colo. Rev. Stat. §39-21-112.3.5) requiring out-of-state retailers that do not collect sales tax from Colorado consumers to report transactions to state taxing authorities, in an effort to boost state “use tax” compliance. The Colorado statute requires out-of-state retailers to (1) remind consumers with each transaction that their purchase may be subject to state “use tax” laws; (2) deliver an “annual purchase summary” to any customers with transactions totaling greater than $500 in any year; and (3) annually report the transaction information to state taxing authorities. There is an exception for "retailers who made less than $100,000 in total gross sales in Colorado in the previous calendar year, and who reasonably expect gross sales in the current calendar year to be less than $100,000."

Under Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Supreme Court has held that states are prohibited from mandating compliance with sales tax laws for retailers without a physical presence in the state as a violation of the “Dormant Commerce Clause” of the U.S. Constitution. Instead, consumers are required to self-report transactions where sales tax is not collected under state “use tax” laws. However, Colorado taxing authorities allege that the vast majority of these types of transactions (up to 96 percent) go unreported and result in the failure to collect over $170 million of tax revenue in the state of Colorado alone, a number that has increased over time as e-commerce has grown in popularity.

Proponents of the law argue that the Colorado law evens the playing field between internet retailers and brick-and-mortar stores without putting an undue burden on interstate commerce. If the Colorado law boosts state “use tax” compliance, other states may be encouraged to pass similar laws and, in the end, could lead to a broader national effort to collect sales tax on all interstate transactions.