As Shop.org’s tagline goes, we are the digital division of the National Retail Federation (NRF). This means that we have access to some amazing resources from NRF including Maureen Riehl, a vice president in NRF’s government relations department and an expert on Internet sales tax.  The recent law passed in Colorado related to this topic has raised many questions.  Below are some very helpful thoughts from her on what this means to digital retail.

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First and foremost, since the Colorado law is now on the books, and unless and/or until it is officially challenged in court or repealed by the legislature, each company that sells into Colorado should be seeking company-specific legal counsel in the interim.

For general purposes, the following is a description of the provisions of concern in the Colorado law.  Starting on May 1, 2010, the law requires retailers that do not have to collect Colorado’s sales tax to do three things:

(1) put a lengthy message on their web sites and on all invoices sent to Colorado customers informing the customers of their obligation to pay Colorado use tax on their purchases ($5 penalty for each failure);

(2) send to each Colorado customer an annual statement, similar to a Form 1099, describing each purchase that the customer made during the year, including the date of purchase, amount of purchase, and whether each purchase is or is not subject to Colorado sales tax ($10 penalty for each failure); and

(3) annually send to the Colorado Department of Revenue a list of the name, address, and detailed purchase information for each Colorado customer who made a purchase from that seller during the year ($10 penalty for each failure).

The law does not compel tax collection from non-nexus sellers, but it is certainly intended to “encourage” just that (and this decision goes to needing company-specific legal counsel).  One way to avoid the onerous reporting requirements is to simply collect and remit the tax for the state.  Another big question remains: does that include the local sales tax, too?  (BTW, there are more than 280 local taxing jurisdictions in CO, each with their own ability to set rates and bases).  As Anne asks, to “wait and watch” – absent an active lawsuit or a bill to repeal this new law before the legislature adjourns for the year on May 11 – is dangerous. 

NRF opposes the Colorado approach for the reasons below:

1. Affiliate nexus statutes of this nature are, most likely, unconstitutional and therefore will not serve their intended purpose of compelling remote collection of use tax. 

2. This reaches far beyond the New York-type approach, and is an audit and compliance nightmare.  Most troubling is the requirement in the Colorado law that companies without nexus are required to send tax notices to their customers and to provide their customers’ names and addresses, along with specific information about their purchases, to the state Department of Revenue, or face penalties.  Again, this is most likely unconstitutional and an enormous invasion of a customer’s personal privacy.  However, even if the provision is valid, this could affect Colorado’s in-state retailers, too.  Some multi-state retailers may be structured in a way that they have one subsidiary that operates stores in Colorado, but another remote selling subsidiary that has no presence in Colorado (i.e. does not collect tax for purchase made into CO).  The Colorado law imposes onerous reporting requirements on the company’s out-of-state subsidiary, which will now have to collect tax. Even though there is no constitutional obligation to collect, the subsidiary may find it preferable to start tax collection rather than do the record keeping and reporting.  

3. While NRF supports the concept of a level playing field for tax collection for all sellers, the ends do not justify the means.  The Colorado law will – or similar bills in other states could – trample on the constitutional rights of certain retailers and is still unlikely to produce much new revenue for the state.  The U.S. Supreme Court has said that this is a Federal issue that must be addressed by Congress.  The appropriate way for this to happen is through the Streamlined Sales Tax Project (SST).

NRF Recommendation to Sellers:  Seek legal counsel, and stay tuned!

NRF Recommendation to States:  There is no short cut to leveling the playing field for comprehensive sales and use tax collection.  Rather than the Colorado approach with its questionable constitutionality and onerous reporting requirements, if a state is serious about requiring remote sellers to collect its use tax, then we encourage that state to become full members of the Streamlined Sales Tax Agreement and work toward Federal legislation that provides for simplicity and uniformity among all states’ sales and use tax laws, and provides a meaningful collection reimbursement to all sellers who collect the states’ sales and use tax.