Denver Bar Association
June 2012
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What If Colorado Hadn’t Lost Its Tax Battle with Amazon?

by Tyler Murray


magine getting a bill itemizing the taxes for items you bought online in the past year and having to pay it with the rest of your taxes on April 15.

Sound like a headache? A decision by the U.S. District Court for the District of Colorado on March 30 permanently enjoined the Colorado Department of Revenue from enforcing H.B. 10-1193 and its accompanying regulations, which were aimed at increasing revenue through the greater reporting and collection of the state’s use tax. It was aimed at large Internet retailers who don’t collect Colorado sales tax on purchases to Colorado customers.

Read an in-depth analysis about this case in the June issue of The Colorado Lawyer.

The use tax is just like sales tax, but it applies where sales tax does not. Retailers who have a physical presence, or nexus, (such as a storefront) in the state are required to collect sales tax at the time of a sale. Internet retailers, such as Amazon, who do not maintain any physical presence in Colorado, are exempt from the sales tax collection requirements.

In order to make up for the lost sales tax revenue from Internet purchases, the state legislature enacted H.B. 10-1193.

It was ruled unconstitutional under the Commerce Clause, specifically the Dormant Commerce Clause, as discriminatory and unduly burdensome to out-of-state retailers. States can use an Internet retailer’s relationship with in-state affiliates to create the constitutionally required nexus. However, Amazon ceases to maintain relationships with in-state affiliates once their home state imposes an "Amazon tax." The legislature wanted to protect in-state affiliates of large Internet retailers, so it imposed the reporting requirements instead of using the in-state affiliates to create that required nexus.

Colorado’s use tax is still due every April 15 for residents; however, without the reporting requirements most taxpayers don’t declare any use tax. The court decision did nothing to change the oft-ignored requirement to report any use tax due from un-taxed Internet purchases made during the year. If upheld, the act and its regulations would have given the DOR the information necessary for them to determine each taxpayer’s use tax bill. Without them, there is no way for the DOR to enforce the use tax, absent an audit of every taxpayer.

The act also would have been a nightmare for Internet start-up retailers who may do business in the state. If every state was allowed to force Internet (and mail-order) retailers to collect sales tax for all 45 states that impose them, it would require tracking each state’s (and possibly each city or county’s) sales tax amount, plus all possible exemptions.

The accounting costs for such a system would cripple a start-up retail business in its infancy. The result would be less competition for online retailers, because only major retailers could afford to comply with the all the sales tax systems across the country. On the flip-side, there could be a growth in companies that could track the sales taxes for online-retailers.


The decision to bar enforcement of the act allows Internet retailers to continue to enjoy a major advantages over brick and mortar stores: Colorado residents usually pay between seven and eight percent of an item’s purchase price in sales tax when they go to a store. The same purchase from an Internet retailer who does not collect Colorado sales tax costs less to the consumer at the time of purchase. Meanwhile, Colorado continues to lose revenue at a time when the it is struggling with a budget deficit.

Often, implementing an "Amazon Tax" is not a panacea to struggling states. Rhode Island, which used the constitutionally acceptable affiliate relationship, did not see a growth in sales tax collections after its law was passed. As in Colorado, Amazon severed its relationship with Rhode Island affiliates after the enactment of the tax. The loss of income tax revenue from in-state affiliates could easily off-set any gains in sales tax collection as a result of the law. D


Tyler Murray practices tax law at The Law Offices of Murray & Wright, P.C.

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