Tenth Circuit Finds Colorado Use Tax Reporting Regime Constitutional

Today, February 22, the United States Court of Appeals for the Tenth Circuit upheld Colorado's use tax reporting regime in Direct Marketing Association v. Brohl.1 In so doing, the court held that (1) Quill applies only to sales and use tax collection and remittance obligations, not reporting requirements; (2) the regime does not facially discriminate against interstate commerce; (3) its direct effect is not to favor in-state economic interest over out-of-state interests; and (4) it does not impose an undue burden on interstate commerce. This important decision has significant and immediate ramifications for sellers with Colorado customers who otherwise lack physical presence in the state. Additionally, this decision may serve as a call-to-action in other states that are considering reporting requirements on out-of-state sellers.

Colorado's Use Tax Reporting Regime In 2010, Colorado enacted a law requiring sellers who did not collect Colorado sales tax on sales to Colorado customers to provide the Colorado Department of Revenue (the "Department") specific information regarding these sales.2 The statute and regulations imposed the following duties on non-collecting retailers with gross sales to Colorado customers in excess of $100,000:

Provide transactional notices to Colorado customers; Send annual purchase summaries to certain Colorado customers; and Annually report Colorado purchaser information to the Department.3 The Direct Marketing Association ("DMA") sought a permanent injunction in federal district court against the regime, arguing that it violated the Commerce Clause because it imposed a tax-related obligation on DMA's members who lacked a physical presence in Colorado. In Quill, the U.S. Supreme Court ("Supreme Court") held that sales and use tax collection obligations could only be imposed on entities physically present in the state.4 Because DMA did not have a physical presence in Colorado, it argued that Colorado could not impose the reporting requirement on it. The district court agreed and granted DMA's permanent injunction against the regime.5

The Tenth Circuit's Holding The Tenth Circuit reversed the prior decision of the federal district court to grant DMA injunctive relief against complying with the Department's reporting regime on the basis that the regime unconstitutionally discriminated against and unduly burdened interstate commerce. In direct contrast, the Tenth Circuit held that Colorado's use tax reporting regime does not violate the Commerce Clause because it does not discriminate against interstate commerce and does not impose an undue burden on interstate commerce.6

Quill Does Not Apply to Reporting Requirements In upholding Colorado's reporting regime, the Tenth Circuit first explained...