Earlier this month, the U.S. Supreme Court issued a closely watched decision in the Colorado “Amazon tax” case, Direct Marketing Association v. Huber. Marketing associations, affiliate marketing groups, online sellers, and officials from multiple states have been following this case since it was originally filed. The outcome may affect whether online resellers have to collect sales tax or report sales to states when they do not collect the tax.
Sales Tax History
To understand the case, one needs to understand how sales tax works. In states with sales tax, the retailer typically collects the tax on all sales and remits it to the state. This creates a system where the state or local government does not have to collect sales tax from individuals but can rely on retailers to be the tax collector, which helps ensure that the state will actually receive the money. In some states, the retailer can retain a portion of the sales tax collected for administrative costs.
When retail businesses were comprised mainly of brick-and-mortar stores, this system worked well. To be required to collect sales tax, a company had to have “nexus” in a state – i.e., employees, a physical location, or a large number of independent contractors in the state. By having a brick-and-mortar location in the state, nexus was automatically created.
Enter Catalogues, Phone Orders
However, as technology and retail practices progressed, companies offered products through catalogues and later by phone orders. Through rulings on both state and federal levels, sales tax collection by the seller for such purchases was only required if nexus was established. This created a situation where states saw a small decline in revenue, but not enough to panic.
It is important to note that even if a retailer doesn’t collect sales tax from a purchaser, the purchaser is still required to remit sales tax to the state — something that rarely occurs.
The Rise of Ecommerce
Then, in 1995, Amazon.com and Ebay were launched. With the click of a button, a buyer could purchase an item for significantly less than she could in a physical store and have it delivered within days. People started buying everything from clothes to paper towels online. States started to see a decline in sales tax revenue and elected officials started to have worried brick-and-mortar retailer in their districts complain that part of the reduced cost of online products, and thus their allure, was no sales tax was paid on such items.
Then, in 1995, Amazon.com and Ebay were launched. With the click of a button, a buyer could purchase an item for significantly less than she could in a physical store and have it delivered within days.
States tried to institute what would become known as “Amazon taxes” – attempts to find a way to create nexus between the state and Amazon (and other online retailers, although Amazon in many cases was the main target of such legislation).
At least eight states have passed an Amazon tax in some form. Some, like California, reached deals with Amazon to collect sales taxes as Amazon does have a presence in the state. In others, like Maine and Vermont, Amazon stopped allowing any individuals or businesses from those states to participate in the Amazon affiliate program.
Colorado’s Attempt at Sales Tax Collection
All of this brings me to the Colorado law, which was passed in 2010. This law, HB 10-1193, requires online retailers to either collect sales tax from Colorado residents or report the online sales information to Colorado so it could go after residents who didn’t remit the sales tax to the state directly. This law is similar to many other state laws, but is one of the first to make it through the court systems and have such a large opposition to it.
One of those opposing groups was the Direct Marketing Association. In 2011, following the implementation of the law, the DMA brought suit in federal district court to challenge the validity of the statute. The statute stated that retailers who do not collect Colorado sales tax (primarily out of state online retailers such as Amazon) are required to send a transactional notice to Colorado customers.
Further, such notice was required to contain a statement that Colorado requires sales tax of 2.9 percent to be paid on all purchases where the retailer did not collect the tax. In addition to sending this information to the consumer, the retailer is also required to send it to the Colorado Department of Revenue if the retailer makes more than $100,000 in sales to Colorado residents.
Multiple Court Cases
Since 2011, several courts have dealt with this case. Initially, the U.S. District Court granted summary judgment for the DMA and issued a permanent injunction preventing the Colorado Department of Revenue from enforcing the notice and reporting requirements of the statute. This was based on the Court’s judgment that such requirements were unconstitutional under the U.S. Constitution’s commerce clause as it discriminated against out-of-state retailers and caused an undue burden for such retailers. This order was appealed to the 10th Circuit of Appeals.
In 2013, the 10th Circuit Court ruled that the case should have been dismissed by the District Court as the case should be heard by state courts, rather than federal. The 10th Circuit Court remanded the case back to the District Court to have it dismissed and the permanent injunction removed. However, prior to either happening, a request was made to the U.S. Supreme Court to hear the case that was granted, elevating the case to the highest court in the nation.
Unanimous Supreme Court Decision
On March 3, 2015, the Supreme Court, in a unanimous decision, overruled the 10th Circuit Court’s decision and stated that the case can be heard by the District Court and does not need to be heard in state courts. While the Supreme Court did not address merits of the case, it did make two important points.
First, the Supreme Court said that reporting requirements were not an “assessment, levy, or collection” of taxes under the U.S. Tax Injunction Act, a federal law that requires certain tax cases to be brought in state court rather than federal.
Second, it opened the door to eventually taking on a case to determine exactly where the line can be drawn by online retailers for actually collecting taxes or reporting sales. Justice Anthony Kennedy, in a concurring optinion, stated, “It is unwise to delay any longer a reconsideration of the court’s holding in Quill. A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier.”
“Quill” is Quill Corp. vs. North Dakota, the 1992 Supreme Court case that established the nexus sales-tax requirement to begin with. Stay tuned.