E-commerce merchants, catalogers and direct marketers are partnering to fight a recently enacted Colorado law that requires online retailers to notify the state of all purchases made by residents so it can collect sales tax from them.
"We think it's unconstitutional," said Jonathan Johnson, president of online retail giant Overstock.com.
Retailers are questioning whether this Colorado law, which became effective May 1, violates the 1992 Quill Corp. v. North Dakota case in which the US Supreme Court ruled that retailers who do not have a physical presence in a state do not have to collect and remit sales taxes there.
"We think it's problematic for several reasons," Johnson said. "They're imposing a burden on an out-of-state retailer that has no footprint in the state of Colorado. Secondly, the costs are significant to us. We're going to mail out at the end of the year a notice to each of our Colorado customers and a list to the state. That's a burden that no [bricks-and-mortar] retailer doing business in Colorado has."
Chris Bradley, president and CEO of Cuddledown, a Maine-based e-commerce company specializing in home furnishings, said his company will comply with the law but expressed concern that future legislation could invade consumer privacy.
"We sell pretty pedestrian stuff — no one should be embarrassed that they get pillows — but there are a lot of companies out there that people buy from because they buy through the mail and don't want anyone to know about it," he said. "If we do it in Colorado, what happens with other states if they're successful? It seems to be a very problematic law from everyone's standpoint."
"Clearly the interstate commerce will be something that we're going to be using as grounds [to challenge this law]," said Jerry Cerasale, SVP of government affairs at the Direct Marketing Association.
The DMA sent members a call for contributions to fund a federal lawsuit seeking a preliminary injunction on April 30, saying that "a suit in federal count is the next reasonable course of action."
In addition to concerns about the constitutionality of the law, most online retailers and direct marketers believe that the tax is part of the state's strategy to replenish its cash-strapped coffers, he added.
"The law itself was included in a budget package that was passed by the [Colorado] legislature and signed by the governor," Cerasale continued. "It's all part of the economic situation that all of us are finding ourselves in. It was likely the trigger for this law."
In a letter dated April 27, Hamilton Davison, American Catalog Mailing Association president and executive director, implored members and non-members alike to make monetary contributions that would fund litigation against the state of Colorado.
"What's worse than having to pay sales taxes in every state?" he wrote. "Having to report to every state every purchase your customers have made so the taxing authorities can start chasing your customers down and ordering them to pay back taxes."
Davison told DMNews that the law, which he says Tennessee and California are watching closely to possibly emulate, is "an opportunity to get revenue for the state without making the constituents angry."
"It's basically the government putting us against our customer. It's a dangerous precedent and an unfair tax," he said. "It's an egregious burden, and it is just very wrong on every level. It has to be opposed quickly and challenged quickly."
His plea has generated sympathy from Johnson, who said he not only will support the fight against the tax, but "we will participate in the funding of the DMA lawsuit."
"We'll be compliant with the law that's on the books but we'll fight to show it's not constitutional," he continued. "As more states [enact similar legislation], we are likely to see that we have no nexus in those states so we have no affiliates there, which is hurtful to the local businesses who are employing people there."
To strengthen its legal stance against the state of Colorado, the DMA has hired George Isaacson, a senior partner in the Lewiston, ME law firm of Brann & Isaacson, to act as attorney.
Davison added that the Multistate Tax Commission, an organization that coordinates state government policies on interstate commerce, is citing the Colorado law as a model for other states to consider. Tennessee and California, both of which are suffering fiscal difficulties, may follow suit with similar legislation, he said. North Carolina's Department of Revenue launched a program on April 23 that urged Internet retailers to collect sales taxes on products sold online in order to "resolve issues of tax liability."
The "Internet Transactions Resolutions Program," the result of several months of dialogue between the state and e-commerce merchants, is available to any e-commerce retailer with an affiliate program in the state. Merchants that complete the program will not be assessed tax penalties or interest prior to September 1.
The Colorado tax bill's sponsor, State Sen. Rollie Heath, a Democrat, told the Associated Press that "there's no new tax."
"We're just collecting what's already on the books," he told the AP.
Monica Smith, CEO of Marketsmith, a marketing services company, said her firm is advising clients to consult with attorneys on the issue and formulate a state-by-state strategy for dealing with potential future taxes.
"Colorado's got through, but a company shouldn't just focus on Colorado. It should focus on the fact that each state needs to generate revenue," she said. "You should be prepared to manage e-commerce in each state."
Smith noted that the Colorado law also affects eBay sales, commonly used by both companies and individuals.
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April 30, 2010