For almost four years, the Direct Marketing Association has been plugging away, trying to protect Colorado consumers from Internet sales taxes by filing lawsuits in federal and state courts.
Its fight goes on, though it gets no support from the state retail community, which naturally wants a sales tax on goods shipped to Colorado buyers from elsewhere. It’s human nature to prefer punishing rivals to liberating yourself.
DMA has even been abandoned by The Denver Post, which last week switched sides and urged a Denver judge not to grant a DMA motion that would block a statute imposing an outrageous burden on out-of-state Internet marketers.
The saga began in 2010, with the passage of House Bill 1193. That was an effort to bypass various U.S. Supreme Court rulings which prohibit states from collecting sales taxes on companies based in other states — unless the company has a facility in the state. The high court has long held that such collections unconstitutionally hamper interstate commerce.
The bill imposed reporting requirements so onerous that lawmakers hoped the retailers would collect sales taxes instead. For instance, it requires Internet marketers who do $100,000 in annual gross sales here to advise all Colorado customers they must pay a “use” tax on the items they buy. Failure to do so would cost the marketer a $5 fine.
That’s just the start. At the end of the year, the marketer must remind all customers of all the purchases they made the previous year and tell them, again, that they owe the use tax.
That notice, by the way, must be by first-class mail — even if all previous communication has been over the Web. (You may have noted that stamps just went up another 3 cents, to 49 cents.) Failure to notify any customer subjects the marketer to another $10 penalty.
What’s more, the marketer must tell the Revenue Department by March 1 how much it sold to each Colorado customer. There’s another $10 fine for each one it forgets.
Obviously the point was to “encourage” the marketer to collect and forward the sales tax instead. Or actually scare the customer into paying a use tax. Who among us has been sending the Revenue Department the tax money on each item that is delivered to our house?
The DMA sued the state in federal court in July 2010, alleging that the bill 1) imposed discriminatory treatment on out-of-state retailers who have no presence in the state; 2) abuses the customers’ right of privacy, especially on products that might have “expressive content;” 3) exposes confidential information regarding consumers to the risk of data security breaches, and 4) deprives retailers of the value of their proprietary customer lists without due process or fair compensation.
Denver U.S. District Judge Robert Blackburn granted a temporary injunction against the law in early 2011, preventing immediate enforcement, and in March 2012 made the injunction permanent. He agreed with DMA that the onerous reporting requirements unconstitutionally burdened interstate commerce.
The state appealed to the 10th Circuit, which last August ordered the district court to dismiss the case. It based its decision on the federal Tax Injunction Act, which directs federal courts not to enjoin or restrain the assessment of any tax under state law when there is “plain, speedy and efficient remedy” in state courts.
The DMA had argued that the injunction act didn’t apply, since it wasn’t a taxpayer seeking to avoid a tax. What’s more, it was challenging notice and reporting requirements, not a tax assessment. But the appeals court said that didn’t matter; the act was “revenue-protective,” meaning it was aimed at any maneuver that might deprive the state of its “sovereign power” to collect revenue.
The appeals court determined that Colorado courts did indeed provide a forum even for nonresidents challenging state tax laws. It did not, however, discuss the merits of the case
The DMA had a choice. It could file a suit in Denver district court, or it could ask the U.S. Supreme Court to review the 10th Circuit decision. It’s chosen to do both. It asked Denver District Judge Morris Hoffman to enjoin enforcement of the statute, and it will ask the high court to review the 10th Circuit ruling.
Hoffman heard arguments last week and indicated he would rule soon.
The issue may become academic if the U.S. House passes the so-called Marketplace Fairness Act, which would allow states to compel retailers to collect sales taxes on transactions, no matter where the seller is located. It was approved easily by the Senate last year, 69-27. Colorado’s senators, both Democrats, voted for the bill — but so did almost half the Republican senators. It seems that the lust to raise taxes is one of the few issues in Washington that draws bipartisan support.
Indeed the Senate sponsor of the bill was Mike Enzi, R-Wyo. Perhaps Liz Cheney’s abortive primary campaign against him might still be going if she had pointed that out more vigorously to voters.
Whether the House will go along with the Senate by year’s end is unknown. Rep. Bob Goodlatte, R-Va., chairman of the House Judiciary Committee, says the bill is too burdensome in its current form.
One of the problems: How are Internet marketers to determine the tax rate at every U.S. address? Colorado’s home-rule cities, for instance, are entitled to authorize and collect their own sales taxes. According to DMA lawyer George Isaacson, there are more than 9,000 different sales tax jurisdictions in the U.S.
Hoffman wondered aloud last week whether the existing prohibition against interstate sales taxes made sense “in an Internet context.”
But mail order isn’t exactly new. Back in the day, Montgomery Ward and Sears Roebuck sold everything through the mail. Sears, in fact, sold 100,000 houses between 1908 and 1940. Everything you needed for construction was delivered to your lot. FedEx and UPS have nothing on the Wells Fargo wagon.
Brick-and-mortar stores complain that Internet companies’ customers don’t have to pay sales taxes. They don’t point out that the customers do have to pay shipping costs, which are often greater than sales taxes, even when the shipping is “free” — i.e., built into the retail price.
As for those window-shoppers who check out items at stores like Best Buy and then order off the Web, it should be noted that those stores also all have Web sites.
If stores are worried about tax-free Internet competition, they might try asking cities and states to cut sales taxes (and all the nongovernmental services they often pay for) instead of trying to raise taxes on Internet sales.
Longtime Rocky Mountain News political columnist Peter Blake now writes Thursdays for CompleteColorado.com. Contact him at firstname.lastname@example.org You may re-publish his work at no charge and without further permission; please give full credit to Peter Blake and www.CompleteColorado.com
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