Colorado - Action filed in state court to enjoin use tax reporting requirements 

December 17:  A federal district court dissolved a previously ordered injunction prohibiting the Colorado Department of Revenue from enforcing certain required reporting by sellers for Colorado’s use tax purposes. Direct Mktg. Ass’n v. Huber, No. 10-cv-01546-REB-CBS (D. Colo. December 10, 2013).

The federal district court acted on a remand from the Tenth Circuit, which held that the Tax Injunction Act bars this action in federal court.


The matter is now pending before a state trial court.

Background

A three-judge panel for the U.S. Court of Appeals for Tenth Circuit in August 2013 held that the Tax Injunction Act bars a taxpayer from seeking a ruling on the constitutionality of Colorado’s use tax reporting requirements in federal district court. Read TaxNewsFlash-United States: Colorado - Tenth Circuit reverses district court in case challenging use tax reporting requirements


After a request for a rehearing en banc was denied, the case was remanded to the federal district court.

Colorado’s use tax reporting rules

Under Colorado’s use tax reporting statute and regulations, enacted in 2010, sellers that are not required to collect tax on sales to Colorado purchasers are required to adhere to three reporting requirements:


  • Effective beginning March 1, 2010, inform the 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*

*Implementing regulations adopted by the Department of Revenue limited these reporting requirements to sellers with over $100,000 in sales in Colorado. Also, Colo. Code Regs. § 39-21-112.3.5 provides that the January report is provided only to customers with $500 or more in purchases from the seller in the preceding year. Absent the injunction, the first annual statements would have been due on January 1, 2011, and the first annual reports to the Department would have been due on March 31, 2011.


Shortly after these rules were enacted, the Direct Marketing Association (DMA) filed suit in federal district court seeking to enjoin enforcement of the reporting regime.


Eventually, a federal judge permanently enjoined the Department from enforcing the use tax reporting rules. Upon review, however, the Tenth Circuit concluded that the Tax Injunction Act barred DMA from bringing its suit in federal court.

What’s next?

DMA is now seeking relief in state court. On January 7, 2014, a Denver trial court will hear DMA’s motion for a preliminary injunction to stop enforcement of the reporting requirements. It may be that the state court would rule on this motion fairly quickly.


At this point, the Department has not announced any plans to begin enforcing the reporting requirements. Nevertheless, a key concern for affected non-collecting retailers is that the due date for the annual reports is January 31—which is approaching quickly. If the state court declines to grant DMA’s requested injunction, the Department can ostensibly require taxpayers to file the reports due by January 31.


Another concern is that the Department could require reports and statements to be filed retroactively.



For more information, contact a KPMG State and Local Tax professional:


Stephen Metz

(303) 382-7177


Rod Martinez

(303) 382-7703




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