Colorado’s use tax notice and reporting law is constitutional, Tenth Circuit holds

By Sally P. Schreiber, J.D.

The Tenth Circuit held on Monday that Colorado’s law requiring out-of-state retailers to notify Colorado customers of Colorado’s use tax requirement and to report tax-related information to those customers and the Colorado Department of Revenue is constitutional (Direct Marketing Ass’n v. Brohl, No. 12-1175 (10th Cir. 2/22/16)). The circuit court remanded the case to a lower court for further proceedings.

Colorado’s law (Colo. Rev. Stat. §39-21-112.3.5) was designed to improve the collection of use taxes on sales when out-of-state sellers with no physical presence in the state sell to customers located in Colorado.

Although the figures are disputed, the court noted that most experts believe sales tax compliance is high and estimate that use tax compliance is as low as 4%. Under a long-standing Supreme Court decision, Quill Corp. v. North Dakota, 504 U.S. 298 (1992), however, states are prohibited from requiring companies with no physical presence in the state to collect and remit sales and use taxes from customers in the state because that would violate the “dormant” Commerce Clause, a doctrine that forbids economic protectionism among the states. Quill imposes a bright-line physical presence test before a state can impose an obligation to collect and remit sales and use taxes (slip op. at 15).

Colorado’s law does not require use tax collection by out-of-state companies, called “non-collecting retailers,” but it does require them to (1) send a “transactional notice” to purchasers informing them that they may be subject to Colorado use tax; (2) send an “annual purchase summary” to customers who purchase more than $500 worth of goods in a year, with dates, amounts, and categories and another reminder that they may be subject to use tax; and (3) file an annual customer information report with the Colorado Department of Revenue. The law exempts from the reporting requirement retailers that made less than $100,000 of gross sales to Colorado customers in the previous year and that reasonably expect to make less than that amount in the current year.

Procedural history

The plaintiff, the Direct Marketing Association (DMA), first challenged the Colorado law in 2010, filing suit in federal district court claiming, among other things, that the law violated the dormant Commerce Clause because it discriminated against and imposed an undue burden on interstate commerce. In 2012, the district court permanently enjoined the law, finding the law to be unconstitutional (Direct Marketing Ass’n v. Huber, No. 1:10-CV-01546-REB-CBS (D. Colo. 3/30/12)).

The Tenth Circuit then reversed that decision on the basis that the lower court lacked jurisdiction to decide the case because of the Tax Injunction Act (28 U.S.C. §1341) (Direct Marketing Ass’n v. Brohl, 735 F.3d 904 (10th Cir. 2013)). That decision was appealed to the U.S. Supreme Court, which granted certiorari. The Court held that the law was not a tax and therefore could not be subject to the Tax Injunction Act (Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015)). The case was remanded to the Tenth Circuit for a decision on the substantive issues.

Tenth Circuit decision

In reversing the district court’s decision and upholding the law, the appeals court reviewed the dormant Commerce Clause doctrine, under which the Commerce Clause has been interpreted to limit states’ interference with interstate commerce. The court also looked at the bright-line test in Quill that prohibits states from imposing tax collection requirements on out-of-state retailers and determined that that prohibition does not apply in this case because the Supreme Court decided the law was not a tax when it held that the Tax Injunction Act did not apply. Finally, the court found that the law does not discriminate against out-of-state retailers or unduly burden interstate commerce.

On the claim that the law discriminates against out-of-state retailers, the court concluded that the law does not facially discriminate against interstate commerce or favor in-state economic interests over out-of-state ones. First, the court held, the law does not facially discriminate because it imposes different treatment depending on whether or not a retailer collects Colorado sales and use taxes—not based on whether the retailer is in-state or out-of-state.

Second, the law is not discriminatory in its direct effects because it does not favor in-state interests over out-of-state ones, the court held. The law imposing sales and use tax collection and remission is more burdensome on in-state retailers than the reporting requirements are on out-of-state companies.

Finally, the court held that the law does not unduly burden interstate commerce. The district court had decided the undue burden issue based solely on the bright-line test from Quill. However, the Tenth Circuit found that Quill did not apply because the Supreme Court had held that the Colorado notice and reporting requirements do not constitute a form of tax collection. Unable to identify any good reason to extend the bright-line rule of Quill to the notice and reporting requirements, the court held that the requirements were not an undue burden.

Sally P. Schreiber ( is a JofA senior editor.

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