10th Circuit Upholds Sales and Use Tax Reporting Requirements on Out-of-State Retailers

March 2016

In one of the most important and eagerly awaited state tax decisions of the year, the 10th Circuit has upheld a Colorado law that imposes notice and reporting obligations on retailers that do not collect sales tax. In Direct Marketing Association v. Brohl, the Direct Marketing Association (DMA) had argued that the Colorado law's notice and reporting obligations unconstitutionally discriminated against and unduly burdened interstate commerce, in violation of the dormant Commerce Clause (Dkt. No. 12-1175, 10th Cir., Feb. 22, 2016). The decision is likely to dramatically affect online retailers.


With the rapid growth of e-commerce, Colorado and other states face significant problems in collecting sales and use tax. In Quill Corp. v. North Dakota, 504 U. S. 298 (1992), the U.S. Supreme Court held that the dormant Commerce Clause prohibits states from requiring a retailer with no physical presence in a state to collect sales tax on sales it makes in that state. Although states can collect use tax on such sales directly from purchasers, the high cost of auditing and collecting use tax from purchasers makes it an infrequent practice. In addition, retailers who have a physical presence in the state have complained that they are placed at a competitive disadvantage.

Faced with its inability to collect sales tax from retailers with no physical presence in the state, Colorado enacted a law requiring retailers that do not collect sales tax to comply with the following notice and reporting requirements: (1) a transactional notice must be sent to purchasers that informs them they may be subject to Colorado's use tax; (2) Colorado purchasers who buy goods from the retailer that total more than $500 must be sent an "annual purchase summary" that provides the dates, categories, and amounts of purchases, reminding them of their obligation to pay use taxes on those purchases; and (3) retailers must provide the Colorado Department of Revenue with an annual "Customer Information Report" that lists customers' names, addresses, and total amounts spent. Defenders of Colorado's law have argued that the law makes it much easier for Colorado to collect use tax from residents on purchases for which no sales tax is charged, and in doing so, mitigates the competitive disadvantage alleged by in-state retailers.

Analysis of the Decision

Quill's Physical Presence Requirement Applies Only to Sales and Use Tax Collection Obligations

In rejecting the DMA's claims that the Colorado law was unconstitutional, the 10th Circuit began by analyzing the scope of the Quill decision and the line of cases stemming from it. Specifically, it asked whether Quill's physical presence requirement limited only the power of states to impose sales and use tax collection obligations, and therefore did not limit Colorado's ability to impose notice and reporting requirements. After reviewing Quill and the cases that followed it, the court held that Quill's bright-line physical presence test applied narrowly to limit sales and use tax collection laws, and not to notice and reporting requirements like those in the Colorado law. This holding is likely to dramatically affect online retailers. Quill does not prevent states from imposing other obligations on online retailers, such as those imposed by the Colorado law. Other states will likely enact notice and reporting requirements comparable to the Colorado law, or similar legislation imposing other requirements on out-of-state retailers.

The Colorado Law Is Not Facially Discriminatory

The court next considered whether the Colorado law's discriminating against interstate commerce implies that the law violated the dormant Commerce Clause. The court explained that a state law will generally violate the dormant Commerce Clause if it discriminates against interstate commerce either on its face or in its application. Finding that the Colorado law was "not facially discriminatory," the court explained that the Colorado law distinguished between retailers that collect sales tax and those that do not, not between in-state and out-of-state retailers. The court noted that the cases in which the Supreme Court has found laws to be facially discriminatory found so "based on statutory language explicitly identifying geographical distinctions." The court emphasized that the Colorado law made no such geographical distinctions, and it therefore was not facially discriminatory.

The Colorado Law Is Not Discriminatory in Its Application

The court also held that the Colorado law was not discriminatory in its application. The court noted that the Supreme Court has not established a bright-line test for statutes that are discriminatory in effect. The court rejected the DMA's argument that any differential treatment between in-state and out-of-state entities established a violation of the dormant Commerce Clause. It noted that the Supreme Court had repeatedly stated that "differential treatment must adversely affect interstate commerce to the benefit of intrastate commerce to trigger dormant Commerce Clause concerns." The court explained that the Colorado law did not give "in-state retailers a competitive advantage," but rather, established a mechanism for enforcing Colorado purchasers' preexisting obligation to pay sales or use tax on their purchases. The court also emphasized that equal treatment requires only that "those similarly situated be treated alike" and that disparate treatment is not "unequal treatment or discrimination if the subjects of the treatment are not similarly situated." The court found that out-of-state retailers that do not collect sales tax were not similarly situated with in-state retailers.

Impact of the Decision

The 10th Circuit's decision is one of the most important state tax decisions of the year. As noted above, the court's affirmation that Quill's bright-line physical presence test applies only to tax collection obligations, and not to other obligations, may lead other states to impose additional requirements on retailers that lack physical presence in a state and are not required to collect and remit sales tax. Online retailers are likely to respond by intensifying efforts to lobby Congress to exercise its power under the Commerce Clause to preempt the Colorado law and similar state laws. The 10th Circuit's decision also comes at an important time, as there are indications that the Supreme Court might be willing to reconsider its decision in Quill. In addition, much has been written on the impact that the death of Justice Scalia, a critic of the Court's dormant Commerce Clause jurisprudence, could have on the prospects for reconsideration of Quill.