Colorado’s Fight for Use Tax

Colorado really wants its citizens to pay use tax. After a long battle in court, a 2010 law is back in action that, requiring online sellers to provide use tax notices to their customers in Colorado as well as the Colorado Department of Revenue. We expect that the Direct Marketing Association (DMA), the group that filed the original suit against the law, will pursue another lawsuit in state court now that the Federal level has determined that they do not have jurisdiction in the case. There is a Federal law called the Tax Injunction Act that states: The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.

What this Act does is prevent the Federal government via the Judicial Branch from taking action to regulate state’s tax laws when the state can do so itself. In the event a state cannot “remedy” a problem related to taxation, a district court can then step in and rule on the problem. In this case, the DMA filed first in district court where the Colorado use tax reporting law was permanently enjoined back in April of 2012 through the Commerce Clause. On August 20, 2013, the US Court of Appeals, the next court higher to a US district court, said district courts do not have jurisdiction in this case because of the Tax Injunction Act.

What this means is the permanent enjoinder on the Colorado law from April is now reversed because the Federal court didn’t have grounds to enjoin it. The DMA can now file a lawsuit with Colorado’s state courts to pursue having the law stopped. If appeals continue after that point, it will work it’s way up to Colorado’s Supreme Court. It might then be filed in the US Supreme Court. If the Colorado courts find independent and adequate state ground separate of a Federal law, it’s unlikely that the US Supreme Court will hear the case. Generally, the US Supreme Court doesn’t rule on issues if a state has a law that speaks directly to the issue. At this point it’s unlikely that the law will be enjoined again for many more months, if it is ever enjoined again. As a business owner that does business in Colorado, be sure to review the statute so you understand your new obligations as an online seller.

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