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Could Colorado’s (Failed) Amazon Tax Become MFA Alternative?

author photo of Jerry Donnini

Colorado has taken a unique approach to sales tax laws as they pertain to online retailers over the past few years. In short, Colorado was attempting to pass legislation that required online retailers, such as Amazon, to adhere to extensive reporting requirements. In late February, Judge Morris Hoffman issued a preliminary injunction to stop the law in its tracks. He relied heavily on the Commerce Clause and ruled such a law placed an undue burden on out of state online retailers.

For purposes of brief background, the United States Commerce Clause requires that a company have some physical presence in a state to be required to collect sales and use tax in that state. Contrary to popular belief, if a company does not collect the tax and it sells a taxable item to a customer, then the obligation is on the customer to report and pay a use tax to their state. As one can imagine very few actually respect this law and states do not have the resources to come after individual customers for use tax obligations. Conversely, it is much easier for a state to look to a central vendor, with thousands of customers to collect its sales and use tax.

In response to this problem many states have enacted what are known as “Amazon Laws” or “Amazon Taxes.” The genesis of this name relates to the online retailer Amazon. Amazon does not have a physical presence in many states. As such, states have enacted creative laws and creatively interpreted existing laws to require online companies, such as Amazon, to collect its state tax.

Rather than creatively forcing Amazon to charge, collect, and remit tax, Colorado took a different approach. In 2010, Colorado attempted to enact legislation that required online companies to report extensive information about its customers rather than collect tax. The information would give Colorado the ability to contact certain customers to collect tax directly from them. While the law seems like a fair resolution, the issue is whether Colorado could force companies like Amazon (with nothing in Colorado) to abide by its laws.

Since 2010, the Direct Marketing Association (“DMA”) has been fighting to stop this law. Most recently, the DMA was successful in federal district court and the Judge agreed that Colorado could not even force out of state companies to report customers to Colorado. Judge Hoffman agreed with DMA in that such a law burdens interstate commerce which runs contrary to the Constitution. It has since been reported that Colorado legislators are attempting to revive a similar bill to get the law through.

It is worth pointing out that this type of law may be the solution to the ongoing Amazon debate. While the United States Supreme Court has yet to rule on a sales tax since Quill in 1992, perhaps the Colorado approach is a more feasible alternative for federal legislation. Rather than striking down creative state nexus laws with no new alternative, or enacting a problematic Marketplace Fairness Act, perhaps the federal government can take a Colorado type approach to the perceived Amazon problem. It is worth noting that while a state cannot enact a reporting requirement on out of state companies, the federal Congress has broad authority to make laws relating to interstate commerce.

About the Author: Mr. Donnini is a multi-state sales and use tax attorney and a shareholder in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog .

Questions? If you have any questions please do not hesitate to contact him via email at JerryDonnini@FloridaSalesTax.com or call 954-642-9390.

Other recent “Sales Tax Nexus” posts by Jerry Donnini:

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Comments

3 Responses to Could Colorado’s (Failed) Amazon Tax Become MFA Alternative?

  • Posted by Affiliate on April 2, 2014 11:00pm:

    [...] Sales Tax Issues; the list of issues involved is extensive. Different proposals, such as the recent Colorado ruling, are surfacing about how to keep the tax burden minimal.  New Jersey and Hawaii have revealed [...]

  • Posted by Val on March 30, 2014 11:26pm:

    Colorado is twisting the arm to force collection of tax as it would be the easier alternative. This reporting process is a slippery slope. If states don't simplify their laws, the reporting process will carry the same reporting complexities as consumers will revolt to paying tax on exempt purchases and that revolt will target the retailers because the states will be turn these complaints back on the retailers to force them into better reporting. I really don't think I have a crystal ball on this, just think this through a few years and retailers will be forced into the complexities. Talk to business in the VAT countries and they'll tell you its much easier to collect the VAT than the reporting. And besides, its garbage in / garbage out. You seriously don't think the states will take garbage detail on this reporting process. As my comment started, this is a slippery slope in our world of complex sales tax laws with very fine print.

    • Posted by Author photo of Jerry DonniniJerry Donnini on April 3, 2014 12:10am:

      Thank you both for the comments. No doubt that proposals are surfacing all over the country. However, wouldn't this make more sense to enact at the federal level rather than individual states simply imposing their will on taxpayers?

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