Colorado – Injunction Regarding Reporting Requirements for Out-of-State Retailers Lifted

SALT Report 2900 – On August 20, 2013 the U.S. District Court of Appeals-10th Circuit ruled that a lower federal court overstepped its jurisdiction last year when it declared as unconstitutional, and issued a permanent injunction against, the enforcement of a Colorado statute and regulation regarding online retailers.

Originally passed in 2010, Colorado’s law required out-of-state retailers who were not required to collect Colorado sales tax to notify their customers that they are obligated to self-report and pay use tax to the State.  In addition, the law required online retailers to provide their Colorado customers with an annual report detailing the customer’s purchases from the seller, and provide the Colorado Department of Revenue with a report that included the name, address, and total amount of purchases made by Colorado customers each year.

In response to this law, the Direct Marketing Association, a group of businesses and organizations that use catalogs, advertisements, broadcast media and the Internet to market their products, took the Colorado Department of Revenue to court. In its lawsuit, the DMA challenged the constitutionality of Colorado’s sales and use tax notice and reporting requirements for out-of-state retailers claiming that they are in violation of the Commerce Clause.

In 2012, U.S. District Judge Robert Blackburn determined that the Direct Marketing Association was correct in its claim that Colorado’s law violated the Commerce Clause and was unconstitutional. As a result, Judge Blackburn imposed a permanent injunction and blocked Colorado from enforcing this law claiming that it placed an “undue burden on interstate commerce.”  In response to this ruling, the Department of Revenue filed an appeal in the U.S. Court of Appeals.

In this most recent ruling, the Appeals Court judge declined to rule on the merits of the DMA’s claims against Colorado and remanded the case back to the federal district court for dismissal of the permanent injunction.  In it’s decision, the Judge referred to the Tax Injunction Act, which states that federal courts do not have jurisdiction over cases that wish to enjoin, suspend, or restrain any state tax assessments or collections if the issue can be resolved in a lower court.

Specifically, the Court stated that, “the broad language prohibits federal courts from interfering with state tax administration through injunctive relief, declaratory relief, or damages awards.   Therefore, we … have no jurisdiction to reach the merits of this appeal.” As a result of this ruling, the Court ordered “the district court to dismiss the DMA’s Commerce Clause claims for lack of jurisdiction and dissolve the permanent injunction entered against the Department.”

Once the district court lifts the injunction, all retailers who sell to Colorado customers and do not collect sales tax will once again be required to provide a notice to their customers and to the Department under Colorado statute. Therefore, online retailers should be aware of their potential liabilities, both moving forward and retroactively, once this occurs.

As of today, there has been no response from the Direct Marketing Association regarding their next step. However, by law they have 14 days to request an “en banc” hearing from the appeals court or to file an extension.

For Further Information

United States Court of Appeals, Tenth Circuit – Docket #12-1175

Tax Injunction Act – 28 USC §1341