An article by Elon Law professor Andy Haile, published as a special report in the September 20 edition of State Tax Notes, defends the constitutionality of a Colorado law aimed at reducing state and local tax losses due to noncompliance in the payment of taxes owed on Internet purchases. Tax losses from non-compliance on Internet purchases are projected to exceed $130 million for Colorado and $8.6 billion nationwide in 2010.
The Colorado law at issue (HB 1193) requires Internet retailers to notify consumers that just because sales taxes are not collected on Internet purchases, taxes may still be owed. In particular, use taxes (which are charged at the same rate as sales taxes) are owed on goods purchased remotely but intended for use in the state. The purpose of the use tax is to prevent sales tax avoidance by consumers purchasing goods from out-of-state retailers. The reason that some out-of- state retailers are not required to collect sales taxes is a 1992 Supreme Court decision called Quill v. North Dakota. In Quill, the Supreme Court held that if a retailer does not have a physical presence in a state, the state may not require the retailer to collect sales taxes. Instead, consumers must self-report purchases from remote retailers and pay use taxes on those purchases.
Since the Quill decision, states have tried to find ways to increase use tax compliance, which at least one study has approximated at only 75%, well below the compliance for most all other taxes. Colorado’s reporting requirements are the latest in a long line of efforts by the states to increase use tax compliance. Those reporting requirements, however, have been challenged in federal court by the Direct Marketing Association, a trade association comprised of Internet and other remote retailers. Haile’s article responds to the arguments made by the DMA in its lawsuit alleging that the Colorado reporting requirements violate the Constitution’s dormant commerce clause.
“The constitutionality of the statute’s reporting requirements under the commerce clause will most likely turn on the standard of review given those requirements, which depends on whether they are found to be discriminatory,” Haile contends. “If [deemed discriminatory], they will receive rigorous scrutiny and likely will fail commerce clause review. If, however, they are viewed as non-protectionist and therefore subject to the . . . balancing test [used to review non-discriminatory statutes], there is a far greater likelihood they will be upheld.”
Click on the E-Cast link to the right of this article to read Haile’s complete analysis in State Tax Notes.
State Tax Notes is a publication of Tax Analysts, a nonprofit provider of tax news and analysis, serving more than150,000 tax professionals in law and accounting firms, corporations, and government agencies daily, including tax professionals at the top 25 international law firms, 96 of the top 100 U.S. law firms, and the majority of the Fortune 100. The following is the mission of Tax Analysts, according to its website: “By working for the transparency of tax rules, fostering increased dialogue between taxing authorities and taxpayers, and providing forums for education and debate, Tax Analysts encourages the creation of tax systems that are fairer, simpler, and more economically efficient.”
Click here for additional information about Andy Haile, with links featuring his recent scholarship and news appearances on state tax law and policy, including the article, “A Time for Action: Reforming the North Carolina Tax Code,” published by the North Carolina Law Review in March 2010 as the first article in the Review’s new online Addendum series.