Although a decision won't come for weeks, a Colorado law that would require retailers currently not collecting state sales tax to report Colorado customers’ online purchases faced harsh questioning at the United States Supreme Court Tuesday.
The 2010 Colorado law goes a step further than a 1992 law that requires online retailers to collect sales tax in states where they have a physical presence. In addition to the notifications to the state revenue department, the Colorado law requires online retailers to tell customers that they owe the state’s 2.9% sales tax and to send an annual end-of-year report to those who spend more than $500.
The Direct Marketing Association prevailed against the law in district court, where a federal judge barred its enforcement. But on appeal, another federal judge ruled that federal courts can’t interfere with states’ collection of taxes. The Direct Marketing Association moved its challenge to state court and argued that the law wouldn’t pass muster under the Constitution, which landed the whole thing in the Supreme Court.
The argument before the Supreme Court has to do with whether the challenge to the law is a federal or state court matter. The Direct Marketing Association is invoking the Constitution’s Commerce Clause, which says, “State laws may not discriminate against or burden interstate commerce.” The group is also challenging the law based on privacy concerns, saying retailers shouldn’t be required to report the activity of their customers.
Still, the Supreme Court justices Tuesday had tough questions for Colorado Solicitor General Daniel Domenico and seem inclined to reject the Colorado law, according to reporting by Forbes. That would close another avenue for the collection of state sales taxes from online retailers, a policy that has foundered in Congress and has frustrated omnichannel retailers, who say they’re put at a disadvantage by online-only competitors who don’t have to collect sales taxes.