News and Insights

U.S. District Court Preliminarily Enjoins Colorado from Requiring Out-of-State Retailers to Report Customers’ Purchases and to Provide Customers with Tax Notifications

Tax Development Feb 24, 2011

In Direct Marketing Association v. Huber, the U.S. District Court for the District of Colorado (“District Court”) issued a preliminary injunction prohibiting the Colorado Department of Revenue (DOR) from enforcing notification and reporting requirements imposed on out-of-state retailers under Colorado’s sales and use tax law.

In its successful motion for a preliminary injunction in this case, the Direct Marketing Association (“Association”) challenged the imposition of the following obligations on out-of-state retailers:

  • To notify Colorado customers that they owe use tax on purchases
  • To send Colorado customers annual reports of their Colorado purchases from the retailer with an explanation that customers are obligated to report and pay use tax and that the retailer is required to report certain information about the customers to the DOR
  • To report certain information about Colorado customers to the DOR

In its motion, the Association presented two U.S. Commerce Clause arguments against the challenged provisions on which the Association asserted that it would be substantially likely to prevail at trial.

First, the Association claimed that by imposing the challenged notification and reporting requirements on out-of-state retailers without also imposing the same requirements on in-state retailers, the State was discriminating against interstate commerce in favor of in-state commerce. While noting that the Colorado sales and use tax law imposes these duties on all retailers not collecting Colorado sales tax, the District Court stated that “in practical effect” these duties only “impose a burden on interstate commerce” because in-state retailers are required to collect sales tax. Accordingly, the District Court found that the Association demonstrated a substantial likelihood that it would prevail under this first argument.

As its second argument, the Association asserted that the notification and reporting requirements constitute “improper and burdensome regulation of interstate commerce.” The Association urged that the imposition of these requirements upon businesses whose only contacts with the state are through the use of common carriers or the United States Postal Service, is in substance no different from the sales and use tax collection obligations ruled unconstitutional in the Quill line of nexus cases. Finding too that the Association demonstrated a substantial likelihood of succeeding on this argument and that the other prerequisites for a preliminary injunction were met, the District Court granted the Association’s motion.


Susan T. Bittick