Chalk one up for Direct Marketers. And a major setback for State sales tax initiatives.
For the past two years there have been an onslaught of States attempting to circumvent the 1992 Quill decision which stated that online retailers did not have to charge sales tax for any state in which they do not have substantial nexus (i.e. physical presence). One of the most aggressive states has been Colorado which wants to tax its residents on their out of state purchases and demanded that online retailers abet that effort through online and mail notification of the tax obligation for specific purchases. First class letters were supposed to be sent by January 31, 2011 to Colorado customers of non-nexus retailers listing the purchases and reminding residents of their tax obligation; the letter was also to let residents know that the same information would be provided to the Colorado Department of Revenue in March.
HOWEVER, the DMA brought a lawsuit against Colorado challenging the constitutionality of the law and last week won a preliminary injunction against it. The ruling is not a final decision, but AT THIS TIME, RETAILERS THAT DO NOT HAVE NEXUS IN COLORADO DO NOT HAVE TO COMPLY WITH THE REQUIREMENTS OF THE SALES TAX LEGISLATION.
The DMA presented information on the preliminary injunction against the Colorado tax law in a conference call on January 28, 2011.
- It confirmed that marketers with no nexus in Colorado do NOT have to comply with any of the notifications delineated in the legislation – no transaction notice at point of sale; no notification to consumers who live in Colorado; no notice to Colorado Department of Revenue.
- It is anticipated that it will be many months (unspecified) before a final ruling and the initial injunction will stand until the final ruling.
- The results of the preliminary hearing are encouraging to the DMA lawyers since the judge seemed persuaded that the law was not constitutional because it discriminated against out-of-state marketers. But it’s not over until it is over.
- Oklahoma has a similar law to Colorado that requires point of sale notification that the buyer owes Oklahoma state tax on his/her purchases. This Colorado ruling does not affect that law. HOWEVER, there are no penalties for noncompliance with the Oklahoma law. And the Oklahoma law does not require customer or State notification of purchases.
- A company that has sent out notification letters already has no obligation to send out letters that let customers know it will NOT be reporting their purchases to the State of Colorado. HOWEVER, it is probably a good idea to build trust with customers to let them know that there has been a preliminary injunction against the legislation and that the company will not be reporting any information to the State of Colorado.
Let us know if you have any questions.
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