On Monday, December 12, the U.S. Supreme Court refused to hear a case regarding the constitutionality of Colorado’s use tax law. The law, which was challenged by the Direct Marketing Association (DMA) in 2011, requires out-of-state retailers to collect and remit sales tax for purchases made by Colorado residents or to inform their Colorado customers that they owe use tax on the purchases they have made.
The law applies to remote retailers that have gross sales of $100,000 or more in Colorado and, according to numerous media reports, to residents who purchase more than $500 in goods or services with a retailer.
Due to its reporting requirements, the Colorado law is decidedly different from sales tax fairness legislation passed in several other states to address online retailers’ in-state business affiliates. The first of these “affiliate nexus laws” was passed by New York State in 2008. Affiliate nexus laws require remote retailers with a broad network of online affiliates acting as sales agents in the state to collect and remit sales tax. The New York affiliate law was challenged by Amazon.com and Overstock.com, but two lower courts upheld the law. Ultimately, the companies asked the U.S. Supreme Court to consider the case but the court declined to hear the lawsuit.
Colorado’s use tax law has led to further clarification of what constitutes nexus in the digital age.
In March 2015, the U.S. Supreme Court issued a ruling that sent the DMA’s challenge to the Colorado use tax law back to the 10th Circuit on what was termed a technical ruling. The appeals court upheld the state law on the basis that “the Colorado law does not discriminate against nor does it unduly burden interstate commerce,” the Denver Business Journal reported. However, it was a concurring decision in that Supreme Court ruling by Justice Anthony Kennedy that became the headline, as reported by Bookselling This Week.
In his opinion, Justice Kennedy wrote that it was time to reconsider the 1992 Quill vs. North Dakota Supreme Court decision, which opponents of e-fairness usually cite when arguing that states have no right to require remote sellers to collect and remit sales tax unless those sellers have a physical presence in the state. “Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill,” Kennedy wrote. “A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.”
In June 2014, while its use tax was in the midst of the legal challenge, Colorado passed a revised sales tax law, the Marketplace Fairness and Small Business Protection Act, a bill that requires remote retailers with nexus in the state to collect and remit sales tax on purchases made by Colorado residents. The law clarifies Colorado’s sales tax laws and stipulates that remote sellers that have an office, distribution facility, salesroom, warehouse, or storage place in Colorado are required to collect and remit sales tax to the state. Amazon began collecting sales tax in Colorado as of February 1, 2016.
On December 15, Tennessee Gov. Bill Haslam’s proposed regulation that would require remote retailers to collect sales tax from customers in Tennessee passed the Joint Government Operations Committee, a key first step for the rule, as reported by Times Free Press. The law would apply to out-of-state internet retailers and catalog sellers with sales exceeding $500,000 annually. Alabama and South Dakota have passed similar laws.
The proposed sales tax rule will now become part of an omnibus bill, which means opponents will have to remove it from the bill in respective House and Senate Government Operation Committees, the article explained, and then have this action approved on both the House and Senate floors.
Haslam stated publicly that he understands that if this rule is passed it would likely be challenged in federal court. Given Justice Kennedy’s statement about rethinking the Quill decision, Tennessee, along with Alabama and South Dakota, is trying to force the point by implementing laws that might ultimately be considered by the U.S. Supreme Court, thereby giving the justices a chance to clarify what constitutes nexus in the digital age, the Times Free Press noted.
In Utah, Gov. Gary Herbert announced on December 7 that Amazon.com will collect sales tax on Utah purchases beginning January 1, as reported by the Deseret News. Herbert made the announcement while discussing the proposed $16.1 billion state budget, which calls for “aggressively” pursuing taxes owed on online purchases.
“News flash: Amazon has agreed,” the governor told the Deseret News and KSL editorial boards. “We have been working to get a voluntary agreement with Amazon, and it looks like we’ve done that now.”
Utah State Tax Commission spokesman Charlie Roberts said the state’s agreement with Amazon is similar to deals the company has made with other states, the News reported.
As to whether this means Amazon will be the beneficiary of tax subsidies, Roberts told the Salt Lake Tribune that the online retailer would be “treated just like everybody else.”
Jonathan Johnson, Overstock.com’s chairman of the board, however, contends it is unlikely that Amazon has agreed to collect and remit sales tax without getting something in return. “As for Amazon’s ‘voluntary’ tax collection, I would question if there’s another shoe to drop on this story,” Johnson told the Tribune. “Historically, Amazon has cut a tax deal only when they plan to create a physical presence in a state and they have extracted tax incentives from a state. So I’m suspicious. It would surprise me if the governor’s office isn’t giving Amazon a large tax subsidy.”
As for what the state expects in terms of additional sales tax revenue, it is still unclear. “Everyone’s eager to know what it might mean in terms of specific dollars. We have not been apprised of the specific dollars,” Paul Edwards, Herbert’s spokesman, told the Salt Lake Tribune. “It’s more than $50, and it’s not the full $200 million of owed but unpaid sales-and-use tax that has been estimated and probably doesn’t come close to that.”
That said, added Edwards, “It’s a big retailer. Everyone is anxious to see how this helps with state finances. But right now we would just be speculating.”