Use tax law
The use tax provisions, adopted in 2010, require sellers that do not collect tax on sales to Colorado purchasers to adhere to three reporting requirements:
- Inform a buyer at the time of the purchase that use tax may be due and that Colorado requires purchasers to file returns and pay use tax directly to the state
- Provide each Colorado purchaser with a statement by January 31 of each year showing the general types and volume of purchases made during the prior year and stating that the buyer may owe use tax on such purchases
- File an annual report by March 31 with the Department showing the name and address of each Colorado purchaser and the general type and volume of purchases made by such customer
The party requesting the preliminary injunction, the Direct Marketing Association (DMA), had previously obtained a permanent injunction in federal court. The federal court issued an injunction—that subsequently was lifted after a three-judge panel for the U.S. Court of Appeals for the Tenth Circuit held that the Tax Injunction Act barred a taxpayer from seeking a ruling on the constitutionality of Colorado’s use tax reporting requirements in federal district court. After DMA’s loss in federal court, it re-filed suit in state court.
State court injunction
In the order issuing the preliminary junction, the state court judge cautioned that his conclusions were preliminary, were not “written in stone,” and may be “very different” after he has had more time to contemplate the issues.
The judge also noted that he disagreed with the federal court’s conclusion that the use tax reporting requirements were akin to a tax and went further to opine that the bright-line physical presence standard articulated in Quill did not apply to the imposition of the regulations.
Nevertheless, the judge determined that the reporting requirements appeared to be facially discriminatory because they apply only to retailers that do not collect and remit Colorado sales and use tax. In the judge’s view, the only retailers that do not collect and remit sales taxes are out-of-state retailers; thus, the reporting requirements are facially discriminatory.
In reaching this conclusion, the judge rejected the state’s argument that because in-state retailers must collect sales tax, the reporting requirements place out-of-state retailers at no more competitive disadvantage than in-state retailers. Collecting and remitting sales taxes is a different burden than reporting use tax information and, as such, the judge determined the two cannot be compared. The judge also cautioned that the state unlikely will be able to defeat a finding that the statute is per se invalid by proving that its legitimate interests cannot be adequately served by any reasonable, non-discriminatory means.
Having determined that the use tax reporting statute appeared to be facially unconstitutional, the judge declined to address whether the statute placed undue burdens on interstate commerce. He did, however, express doubt that DMA would prevail on the issue based on the current record.
Another concern he expressed was that the current evidence on the costs and benefits lumped the three reporting requirements together. In the judge’s view, the three requirements must be analyzed separately and he requested “counsel to present a clearer picture . . . about the costs and benefits of each requirement independent of the other two.”
The judge mandated that the parties hold a status conference by March 18, 2014, to discuss various procedural issues, including whether the case can proceed on summary judgment motions or whether it is necessary to conduct a trial.
In the interim, affected retailers will not need to comply with the reporting requirements pending the outcome of the litigation.
For more information, contact a KPMG State and Local Tax professional: