Status of Sales Tax Notification Laws for Non-Collecting Retailers

In July 2010, Direct Marketing Association (“DMA”) challenged the constitutionality of Colorado’s sales tax notification laws that require out-of-state retailers with no physical presence and no obligation to collect sales / use tax to notify Colorado customers of their use tax liability and to report certain information concerning these sales to the Department of Revenue. Other states, including Kentucky, Oklahoma, and South Carolina have also enacted similar notification and reporting laws for out-of-state “non-collecting retailers.” These laws are specifically designed to compel online retailers, like, to notify their customers of the possibility they owe sales and use tax.

The U.S. District Court for Colorado originally issued a permanent injunction barring Colorado from enforcing the reporting requirements under the notification law. The U.S. Court of Appeals for the Tenth Circuit, however, ruled that the District Court lacked jurisdiction pursuant to the Tax Injunction Act (“TIA”). On July 1, 2014, the U.S. Supreme Court announced that it will hear Direct Marketing Ass’n v. Brohl, 10th Cir. Ct. of App., No. 12-1175 (Aug. 20, 2013). The issue before the U.S. Supreme Court is jurisdictional as to “whether the TIA bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the informational notice and reporting requirements of a state law.” Oral arguments are scheduled for December 8, 2014.

In the interim, DMA filed a similar action in Colorado state court and obtained a preliminary injunction enjoining the Colorado Department of Revenue from enforcing both the notification and reporting aspect of the law. The injunction noted that the law appeared to be facially discriminatory since non-resident retailers are burdened with compliance, while resident retailers are not required to comply. Direct Marketing Ass’n v. Dep’t of Revenue et al., District Court, City and County of Denver, Case No. 13CV34855 (Feb. 18, 2014).

For questions regarding whether you may need to comply with “non-collecting retailer” laws, Contact us.