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Online Retailers' Supreme Court Win on State Taxation Fight May Be Short-Lived

March 30, 2015

A March 2015 United States Supreme Court case delivers a short-term victory to online retailers who do not collect sales taxes in Colorado, while at the same time sending a clear warning about the future viability of the practice.

Out-of-state retailers without a physical presence in a state have not been required to collect sales taxes under a nearly 50-year-old Supreme Court case involving a catalog retailer, Quill Corp. v. North Dakota. In an effort to remove the sales tax advantage enjoyed by many online retailers, Colorado enacted a statute in 2010 requiring non-tax-collecting online retailers whose gross sales in Colorado exceed $100,000 to collect and report information to the Colorado Department of Revenue on their Colorado customers. The object of the law was to help the Department of Revenue collect use taxes–the state's substitute for sales taxes for purchases made from out-of-state retailers, which are generally required to be paid directly to the state by the customers.

In Direct Marketing Association v. Brohl, a trade group representing online and catalog retailers convinced a federal district court that Colorado's information collection and reporting requirements were unconstitutional. The Court of Appeals later held that the district court did not have jurisdiction over the case, but the recent Supreme Court opinion allows the challenge to Colorado's law to continue by deciding that the case could be heard in federal court.