Colorado’s new tax law raises questions for online retailers
December 15, 2016 04:38 PM
Online-only retailers that sell in Colorado have a new law to follow, one that requires them to turn over the names and online purchase information of state residents, but retailers don’t know how the law will be executed or enforced, and Colorado officials aren’t yet saying.
The Colorado Department of Revenue will have to implement the law and let companies know what to do, and it hasn’t done so, says Steve Kranz, a tax lawyer and partner with the law firm McDermott, Will & Emery.
The U.S. Supreme Court this week declined to hear an appeal from the Data & Marketing Association seeking to overturn the Colorado law, which was passed in 2010 but is not being enforced. The law requires online retailers, even those with no physical presence (or nexus) in Colorado, to send a notification to shoppers living in the state who spend more than $500 annually with them, and the law requires the retailers to file an annual report with the state’s Department of Revenue with customers’ names, purchase amounts and addresses so that the state knows the “use tax” owed by consumers. Use taxes are levied by states in lieu of sales taxes.
Representatives from the Colorado Department of Revenue did not return multiple requests for comment on when or how the department intends to enforce the law and what retailers will have to do to comply with it.
“The Colorado Department of Revenue has so far indicated only that it is evaluating the effect of the Supreme Court’s ruling; it has not indicated what approach it expects to take with respect to enforcement of the law. We expect further developments in the coming days,” says Matthew Schaefer, a partner at law firm Brann & Isaacson who served as co-counsel for the DMA on this case. “We are disappointed, as are retailers potentially affected by the Colorado notice and reporting law, that the U.S. Supreme Court decided not to grant review the 10th Circuit’s decision upholding the Colorado law, which we believe, as did the federal district court, discriminates against interstate commerce by treating out-of-state retailers differently from their in-state competitors.”
A spokesman for the DMA, which in October changed its name from the Direct Marketing Association, says the association hasn’t given up its legal fight in Colorado just yet. “We will be consulting with our membership to determine the path forward on this challenge,” he says.
Colorado’s law, once enacted, will have a domino effect that may impact shoppers in at least one state—Vermont. Vermont has passed a bill titled H.873 similar in nature to Colorado’s, which will go into effect either on July 1 or on the first day of the first quarter after the Colorado law takes effect.
“It seems more likely that Vermont’s law will go into effect on either Jan. 1, 2017 or on April 1, 2017,” a spokesman for the National Conference of State Legislatures says. The organization expects more states will look into similar legislation.
“Unlike the federal government, which borrows hundreds of billions of dollars each year, states don’t have the luxury of not passing balanced budgets,” the NCSL spokesman says. “So, when revenues don’t meet projections, states either have to cut vital government programs and services (such as education); raise new revenues (which is never an easy choice); or find alternatives to balance their budgets,” he says in an email.
“While the 2017 legislative sessions have yet to convene, it would not be surprising to see sales tax collection legislation introduced in a couple dozen states, but it’s anyone’s guess on what those pieces of legislation will look like and how many of them will be enacted into law,” the spokesman says.
Kranz says while the law isn’t yet being enforced, online retailers who know they do a significant amount of business in Colorado should begin making changes so they’re prepared when Colorado starts enforcing the law.
The state’s decision to require e-retailers to turn over customer information aims to force companies to collect sales tax, he says. “Assuming that you’re making significant sales into the state of Colorado, you would need to register and begin collecting sales tax in the state of Colorado or develop a data reporting mechanism to comply.”
Several retailers, including Overstock.com Inc., No. 29 in the Internet Retailer 2016 Top 500 Guide, and outdoor gear and apparel retailer evo (No. 430) say they’ve received no guidance from Colorado about the legislation or how to comply.
“This is concerning, as the amount of work it will likely require to develop and implement these systems for 2016 purchases would put an unfair burden on the retailers if they need to accomplish it by year’s end,” says Jonathan Johnson, chairman of the board at Overstock.
Overstock is not alone in its concerns about the potential impact of the Colorado legislation.
Jason Boyce, co-founder and CEO of online sporting goods retailer Dazadi Inc., says he’s not happy about the legislation and expects the matter to reach the Supreme Court again.
“What if I do not hand over my customers' private and personal information to the State of Colorado?” he says. “Are they going to expect us to show up in court in Colorado? Good luck with that. In my opinion, this is an unacceptable state government overreach, and it's being supported by dying bricks-and-mortar stores.”
According to the law, failure to provide customer data could result in a fine of $10 per customer whose data a retailer declines to submit. How the law would be enforced is unclear.
Kranz says a number of online-only retailers have begun collecting sales tax in Colorado—even though they are not obligated to because they have no physical presence, or nexus, in the state—rather than face the prospect of turning over customer data to tax collectors. He declines to name those companies.
The leading online retailer, Amazon.com Inc. opened its first facility in Colorado earlier this year and began collecting sales tax from Colorado residents on Feb. 1. Amazon did not return a request for comment on the Colorado law.
So what are the broader implications of the Supreme Court’s decision not to hear the Colorado case?
Kranz says the lobbyists he works with tell him there’s no chance of Congress passing a national online sales tax in the near future.
“The corporate tax world has largely given up on the idea that Congress will solve this problem in the near term,” he says. “Congress’s failure to act is what is driving the states to act on their own. Internet retailers should be evaluating their risk and determining whether they want to begin collecting tax as the states continue to attack this issue.”
States are, indeed, acting on their own.
Earlier this year, South Dakota enacted a law requiring retailers to collect sales tax on online purchases in the state even if they don’t have a physical presence there. Next month, Wyoming will reportedly meet to discuss legislation that would require retailers who sell at least $100,000 annually to Wyoming residents or conduct more than 200 transactions to state residents to collect sales tax on those purchases. The state of Alabama has also enacted a “Simplified Seller Use Tax Remittance Act,” under which retailers with no physical presence in the state pay an 8% tax on all sales they make to Alabama residents. This, Kranz says, could be just the beginning.
“There are probably 10-15 states whose legislative leaders have indicated they will be introducing legislation next year to push the same issue,” Kranz says.
Danny Gavin, director of marketing for Brian Gavin Diamonds, No. 767 in the Internet Retailer 2016 Top 1000, says that despite the online sales tax efforts happening at the state level in Colorado, South Dakota and Alabama, no state revenue agencies have ever reached out to the web-only jeweler about collecting tax or reporting use-tax information on customers. Brian Gavin Diamonds collects sales tax from customers only in Texas, where it is based.
Gavin says he keeps an eye on tax news that may affect the business, but he hasn’t been alarmed by anything he’s seen so far. “Whenever something like this comes out, we’ll look at how many sales we get from that location and whether it is a significant amount of money or not. For example, one of our biggest states for sales is California. If California were to do something, it’d be more urgent. The South Dakota change, for us, wasn’t significant enough to worry about.”
South Dakota enacted a law in the spring that requires retailers without a physical presence in South Dakota to collect sales tax on online orders if they sell at least $100,000 or complete at least 200 transactions annually with South Dakota residents. That decision prompted jewelry e-retailer Blue Nile (No. 82) to stop shipping orders to South Dakota.
Regarding the Colorado law, Gavin says reporting sales data may be less onerous operationally than collecting and remitting sales tax to Colorado tax authorities, but it would still add to the e-retailer’s workload. Brian Gavin Diamonds could write a query to pull Colorado customer data from its database, and send that to the state, Gavin says, and he would consider adding a notice to Colorado customers at checkout or in the terms and conditions regarding the need to report the sale to Colorado’s state revenue authority.
Still, he questions how such a law can be enforceable. “I don’t see how a state can have legislation against a whole country. It’ll be interesting to see how it works,” Gavin says.
Overstock’s Johnson says the Colorado law is too vague and raises concerns about shoppers’ privacy.
“It’s important to note that Colorado has made no distinction as to what information it will require in the yearly reports (that retailers will have to file with the Department of Revenue),” he says. “This means the government may ask for detail about online purchases it cannot ask for with in-store purchases. In other words, states may peer into customers’ personal purchases in a way that they do not allow for in-state sellers.”
Johnson says he’s not opposed to working toward a national solution when it comes to online sales tax collection, but Colorado’s law is a step in the wrong direction.
“We are committed to continue our close work with Congress to develop a solution that is constitutionally sound, does not violate regulations on interstate commerce, and is in the best interests of the customers, not the just government’s tax collectors,” he says.
Internet Retailer’s Allison Enright contributed.