The U.S. Court of Appeals for the 10th Circuit in Denver reversed a lower court ruling Monday, giving Colorado the go-ahead to collect sales tax from online sales even if a retailer has no physical store in the state.
The Supreme Court last year unanimously decided that federal courts could hear a challenge from the Direct Marketing Association to Colorado’s e-commerce tax law, which requires out-of-state retailers even without a physical presence in Colorado to collect the state’s 2.9% sales tax from their Colorado customers.
Court documents show that Colorado argued that the inability to collect the taxes meant it lost $170 million of tax revenue in 2012. Nationwide the situation could be more than $11 billion in uncollected sales taxes, according to the Washington Post.
Collecting sales tax on online orders sent to retailers with a physical presence in-state has been the go-to strategy. But Colorado wanted to take that further, to all e-commerce, regardless of its physical store footprint.
That’s what has given the Colorado law the nickname “the Amazon tax,” although Amazon’s expanding fulfillment center network has made it eligible for tax collection in many more states in recent years. In fact, Amazon no longer advocates against state sales tax collection.
Retailers with omnichannel operations have long tried to get the U.S. Congress to take over and make state tax collection mandatory nationwide, to eliminate what they say is an unfair advantage to their online-only rivals, but so far Congress has failed to act.
Last year, Justice Anthony Kennedy went so far as to challenge the status quo, where outside state taxes are not collected by retailers that don’t have a physical presence in a given state. He noted that the practice puts local businesses and other retailers that do collect the state taxes at a disadvantage and robs state governments of revenue.
Indeed, while the Supreme Court last year did unanimously agree that the case needn’t be reserved for state courts, the justices also agreed that there may be other reasons for the federal court to refuse to hear any challenge. The Colorado law was passed in 2010 but has never been put into practice because of the court challenges. That will likely change now, assuming the challenges are over. And look for other states, in the absence of Congressional action, to do the same.