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Case note: Direct Marketing Association v. Huber
Federal District Court finds Colorado use tax reporting requirements unconstitutional
While it remains to be seen whether the case will be appealed, on the surface the court's analysis appears to be a straight forward application of existing precedent and is likely to be sustained. However, a more detailed look indicates that the court may have overlooked some deeper issues and it is possible, but one cannot say likely, that a higher court might take a different view.
An analysis of the US District Court’s decision
In The Direct Marketing Association v. Huber, No. 10-cv-01546-REB-CBS, (D. Colo. 2012), the United States District Court for the District of Colorado struck down as unconstitutional under the Commerce Clause Colo. Rev. Stat. §39-21-112(3.5), which imposed the use tax reporting requirements on out-of-state retailers that made sales to Colorado customers but did not collect the Colorado sales or use tax.2
The district court found that the Colorado law both discriminated against interstate commerce and placed an undue burden on interstate commerce by imposing an obligation on out-of-state retailers with insufficient contacts with the state under Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
This case was brought by the Direct Marketing Association (‘‘DMA’’), an association of businesses and organizations that market products directly to consumers through catalogues, magazine and newspaper advertisements, broadcast media, and the internet. DMA challenged Colo. Rev. Stat. § 39-21-112(3.5), which, beginning on March 1, 2010, required any retailer with $100,000 or more of sales to customers in Colorado on which it does not collect and remit Colorado sales tax to:
- Notify its Colorado customers that the retailer does not collect Colorado sales tax and that the customer is required to self-report and pay use tax to the Colorado Department of Revenue (‘‘Department’’)
- Provide to its Colorado customers with over $500 in annual purchases an annual report detailing the purchases for the previous calendar year; and
- Provide to the Department an annual report concerning each of the retailer’s Colorado customers, including each customer’s name, billing address, shipping address, and total purchases.
DMA asserted that Colorado’s use tax notice and reporting obligations violated the Commerce Clause of the United States Constitution because they either: (i) discriminated against interstate commerce, or (ii) imposed an undue burden on interstate commerce.3
By Alex Meleney of Deloitte Tax LLP, originally published in Bloomberg BNA "Tax Management Weekly State Tax Report" on April 27, 2012
2 For purposes of this article, the term ‘‘out-of-state retailer’’ refers to a retailer that does not have sufficient nexus with a state to be subject to the requirement to collect and remit the state’s sales or use tax under Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
3 The Commerce Clause authorizes the U.S. Congress to “regulate Commerce…among the several States.” The Direct Marketing Association v. Roxy Huber, No. 10-CV-01546-REB-CBS (D. Color. Mar. 30, 2012), slip. Op. at 5, citing U.S. Const. art. 1, § 8. The Commerce Clause has been interpreted as having a ‘‘negative’’ or ‘‘dormant’’ application as well, prohibiting ‘‘certain state actions that interfere with interstate commerce’’ (The Direct Marketing Association, slip. op. at 5, quoting Quill v. North Dakota, 504 U.S. 298, 309 (1992)), and denying ‘‘States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce’’ (The Direct Marketing Association, slip. op. at 5, quoting South Carolina State Highway Dept. v. Barnwell Brothers Inc., 303 U.S. 177, 185 (1938)).