Taxation: Colorado court blocks internet tax law

The law went further, requiring out of state retailers to provide to the Colorado Department of Revenue an annual list of sales to Colorado purchasers, to again notify their customers of the liability to tax and of the fact that their information was being passed to the authorities, says internet retailer, Overstock.Com

"We not only thought the Colorado law was a huge invasion of customer privacy," said Jonathan Johnson, President of Overstock.com, "but that the law clearly violated the U.S. constitution by plainly discriminating against out-of-state retailers. Other state legislatures considering copycat legislation should take note that this type of law is not legal."

The action against the law was brought by the Direct Marketing Association.

According to Overstock.Com "The court's injunctive decision cites constitutional grounds as the basis for its order, noting the Colorado law's discriminatory effect on out-of-state retailers—those the law targeted for compliance. The law was heavily lobbied [for] in the waning days of the last legislature by local brick-and-mortar retailers.

The court buttressed its ruling by citing [two] long-standing decisions by the U.S. Supreme Court supporting the principal that a state may not impose on out-of-state retailers burdens not imposed similarly on in state retailers. Citing these decisions, the court observed that "out-of-state retailers that do not have a physical presence in Colorado generally are not obligated to collect and remit sales tax on their sales in Colorado."

Overstock.com points out that the efforts to impose on out-of-state internet retailers tax collection obligations began in 2008, when New York passed a law that made doing business with New York's internet advertisers a basis to force out-of-state retailers to collect sales tax. It backfired: Overstock.com and other retailers reacted by terminating contracts with New York advertisers and Overstock.com sued in New York state court.

Although a New York trial court ruled in favour of the state, the company is confident that it will ultimately succeed and has pressed on through appeals, citing the Supreme Court cases as were relied upon by the U.S. District Court in its decision yesterday. Ultimately, Overstock.com believes that when Federal Courts examine the question, all these types of laws will be found unconstitutional.