Colorado’s “Amazon Law” Given Summary Judgment in Favor of Online Retailers
Colorado’s Amazon Law
Colorado’s Amazon Law is a misnomer because it is an entirely different beast than the original New
York “Amazon Law.” New York’s Amazon Law was firmly based on case law such as Quill v. North
Dakota because it establishes a physical presence in the state and thus, substantial nexus through the
numerous affiliates within the state. This is similar to the concept held under Scripto v. Carson. The
affiliates were deemed to extend a physical presence to Amazon and were then required to collect sales
and use tax. This legal concept has been named the “affiliate nexus” model.
Colorado on the other-hand chose to forgo the “affiliate nexus” argument championed by NYS because
the state wanted the sales tax base as broad as possible. Affiliate nexus is a solid legal argument, but its
strength is also its weakness. The argument requires having a large base of affiliates in the state;
otherwise the retailer is free to avoid sales tax. Thus, Amazon, Overstock.com and Ebay may be
captured within the affiliate net, but NewEgg and other online retailers would escape Colorado’s grasp.
Also, it’s important to note that although the affiliate nexus model has been a proven solution to require
online retailers to collect sales tax. It is not the solution. The affiliate nexus model leaves it open for
companies to simply cancel all of their affiliate programs or partners within a state that legislates such a
law. For example, Amazon has canceled their affiliate programs in states smaller than New York such as
North Carolina, Rhode Island, Hawaii and Colorado after calculating their cost benefit ratios. Thus,
legally the state is protected against online retailers but they would in effect reduce their sales and use
taxes revenues as well as employment and income taxes from the lost affiliate programs.
Colorado’s Amazon Law’s Weakness
Colorado’s greatest weakness was its lack of substantial nexus. The state accepted its weakness and
attempted to circumvent the issue by applying the Supreme Court’s two tier approach to analyzing
discrimination claims. Colorado’s Amazon Law failed to prove that it was nondiscriminatory in regards
to the Dormant Commerce Clause “on its face or in practical effect.” Hughes v. Oklahoma, 441 U.S. 322,
336 (1979). Colorado’s definition of a “non-collecting retailer” was the state’s attempt to evenhandedly
regulate in favor of local public interest. (Colo. Code Regs. 39-21-112.3.5) They hoped to demonstrate
that the local benefit outweighed the incidental effects on interstate commerce.
The first tier determines whether the statute is facially or directly discriminatory. Brown-Forman
Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 578 - 579 (1986). The second tier determines
whether the statute is practically in effect or indirectly discriminatory. If indirectly discriminatory, then
its practical effect is compared to the direct benefit provided to a legitimate local public interest. The
second tier only applies if its effects on interstate commerce are only incidental, it will be upheld unless
the burden imposed on such commerce is clearly excessive in relation to the local benefits. Huron
Cement Co. v. Detroit, 362 U.S. 440 (1960).
On its face, Colorado’s statute was found to be facially discriminatory and failed the first tier’s analysis.
The statutes definition of “non-collecting retailer” was its attempt to evenhandedly regulate all retailers.
The state argued that the retailer was provided an option to either report or collect sales and use tax.
But, these were options that only affected out-of-state retailers and ones that retailers weren’t required
to bear due to their lack of physical presence and substantial nexus. “The choice does not eliminate, but
instead, highlights the discrimination.” Direct Marketing Association, Inc. v. Huber, (2012).
Having failed the first tier’s analysis meant that their case was lost. But, the court decided to also rule
on the second tier analysis to affirm the injunction. When discrimination against commerce is
demonstrated, “the burden falls on the State to justify it both in terms of the local benefits flowing from
the statute and the unavailability of nondiscriminatory alternatives adequate to preserve the local
interests at stake” under the strictest scrutiny. Hughes v. Oklahoma, 441 U.S. 322, 336 (1979). The state
failed because they could’ve achieved the same goals by requiring individuals to report their sales and
use tax on their tax returns such as New York. Also, the state required sales and use tax returns to be
filed with individual income tax returns before it was found ineffective.
Having the court rule on the second tier is going to have serious consequences for a future variation of
the Colorado Amazon Law along with the MTC Draft Proposal that effectively mirrors the state’s statute.
The court will only allow discriminatory statutes when the effects are indirect and incidental without
nondiscriminatory alternatives. Taxpayers could easily argue that any state could require personal
income tax returns to report sales and use tax as an alternative to the reporting requirements.
Colorado and the MTC’s Mirror Statutes
The mirror statutes below illustrates that the outcome of the Colorado case is essentially an injunction
against the MTC’s Draft Proposal itself. Comparing the two will result in the same conclusions drawn by
Judge Blackburn. Below are the mirror statutes related to the vital points discussed in the case.
Exceptions for de minimis retailers:
Colorado
iii) A “retailer that does not collect Colorado sales tax” does not include a retailer whose sales in Colorado
are de minimis. For purposes of this regulation, the Department will presume that a retailer that makes less
than $100,000 in total gross sales in Colorado in the prior calendar year and reasonably expects total gross
sales in Colorado in the current calendar year will be less than $100,000 is a retailer whose sales in Colorado
are de minimis.
MTC
(d) Exceptions.
(1) Small Seller. A person who made less than $A [original SST threshold for small seller was
$100,000] in total gross sales during the prior calendar year shall not be required to provide
notice or file reports pursuant to section (c) of this Act.
Giving Sales Tax Due Notice to Buyer at Each Purchase Reporting Requirement:
Colorado
2) Obligation to give notice with each purchase
a) A non-collecting retailer must give notice to all Colorado purchasers that Colorado sales or use
tax is due on all purchases that are not exempt from sales tax. This notice must be provided with
respect to each transaction.
MTC
1)
Notice to Purchaser at Time of Transaction. A notice shall be provided to each purchaser at the
time of each such sale or lease.
(A)The notice shall indicate that neither sales nor use tax is being collected or remitted
upon the transaction, and that the purchaser may be required to remit such tax directly
to the Department.
Giving Annual Sales Tax Due Notice to Buyer at the End of the Year Reporting Requirement:
Colorado
3) Obligation to give Colorado purchasers notice of Colorado purchases
a) A non-collecting retailer must give an annual notice to all Colorado purchasers summarizing the
Colorado purchaser's Colorado purchases for the preceding calendar year. The notice shall meet
the following requirements:
MTC
(2)Annual Report to Purchaser.
of each year.
A report shall be provided to each purchaser before January 31
st
Giving Notice to the State at the End of the Year Reporting Requirement:
Colorado
4) Obligation to give the Department notice of purchases made by Colorado purchasers
a) Any non-collecting retailer who is required to provide a notice described in paragraph 3) must
file a report with the Department containing the following information:
MTC
(3)Annual Report to [State Department of Revenue]. A report shall be provided before January 31
each year to the Department.
st
of
Alternatives to Colorado’s Current Amazon Law
New York’s approach is limiting because the sales and use taxes collected would be limited to affiliates
that are within the state. Colorado clearly wanted to expand its sales and use tax base beyond that of
online advertisers and marketers. But, Colorado’s shotgun reporting is unrealistic under the current
laws.
There is the potential of a moderate approach that is between New York’s limited tax base and
Colorado’s hope to tax every retailer. New York applies affiliate nexus in order to substantiate the
collection of sales and use tax under the Commerce Clause. The affiliate marketing contracts between
the in-state marketers and Amazon is the origin of the substantial nexus. Affiliate nexus relies on the
Supreme Court case Scripto, Inc v. Carson 362 U.S. 207, New York explains that the nexus generating
contractual relationship between the wholesalers and Scripto, Inc. is similar to Amazon and its affiliates.
A variation to the above is to focus instead on the relationship between Amazon and the in-state
retailers. In-state retailers have an affirmative obligation to collect sales and use tax, but they’d often
use Amazon and other online websites as an intermediary to avoid the collection of taxes.
The benefits of this is that Colorado and other smaller states most likely don’t have a large base of
online affiliate marketers and Amazon could easily sever those programs and avoid collecting sales and
use tax. But, focusing on the Amazon marketplace in-state retailers would require Amazon to effectively
collect sales and use tax without an option to terminate their relationship. Amazon’s business relies
approximately 30% on its online retailers that are spread throughout the 50 states. This would serve the
purpose to expand the tax base and still meet the requirements under substantial nexus.
The problem with this approach is that it obviously doesn’t guarantee the full collection of all the sale
and use taxes that should’ve been. Also, Scripto, Inc. v. Carson was a relationship that Scripto entered
into with its wholesalers. Whereas, the Amazon marketplace is a relationship that in-state residents
enter into with Amazon. Although the relationship was reversed, it does not change the fact that
Amazon actively seeks out its in-state retailers through advertising and marketing similarly to how
Scripto sought out a wholesaler.
Conclusion:
It’s clear from the facts above that Colorado’s position was tenuous at best. They grasped at straws and
came up short. But, it would be a mistake to assume that Colorado’s failed “Amazon Law” will end the
argument whether online retailers are required to collect sales tax. Colorado’s failure is simply a step in
the process to create a new system of laws that’ll properly treat sales and use tax for the new
generation. You can rest assured that online retail will ultimately collect sales and use tax because state
revenue deficits have made it necessary and primary concern – it’s only a matter of time.
Cameron’s Background:
A CPA, EA and future NYS tax attorney with experience in PWC and KPMG. Practice specializations
include Real Estate, SALT and Financial Services. Founded a nonprofit 501(c)(3) tax clinic sponsored by
the IRS and in partnership with NYS and NYC that processed over 5 million income. The Keng Insititute
helps low income, the elderly and non-english speaking immigrants as well as the first free online IRS
Approved Continuing Professional Education Provider repository. Cameron has been featured on
Bloomberg, BusinessWeek, Fox News and Tax Analysts.