Rossputin.com Rational Thinking About Our World

Democrats in the Colorado General Assembly have backed away from trying to tax Internet retailers based on whether they have “affiliates” in Colorado.  That approach, which would have said that if a Coloradoan had an ad for Amazon.com or Overstock.com on his web page, that would mean Colorado would deem Amazon.com and Overstock.com to be “doing business in” the state and therefore responsible to collect sales tax on items sold to Coloradoans.

The new version of HB 1193 says that if a retailer that does not collect Colorado sales tax is part of a multi-chain corporation where one of the other chains does have a physical presence in the state, then other chains of the corporation are considered to be “doing business in this state."  Then, if that out-of-state retailer sells a product (usually via the Internet) into Colorado, the retailer must tell the buyer that he owes sales or use tax.

The way I read it is, for example, that since Macy’s and Bloomingdale’s are owned by the same company and since Macy’s has stores in Colorado, this bill would argue that online purchases by Coloradoans from Bloomingdales (or other covered-by-this-law retailers) are subject to sales or use tax and that Bloomingdales will be required to:

First, tell its Colorado buyers that they owe sales or use tax and that the buyers have to file a sales or use tax return,

Second, the retailer will face a $5/incident for not telling the buyers they owe the tax

Third, the retailer will have to send “notification” to Colorado purchasers by January 31 of each year showing how much they bought from that retailer and that the buyer owes tax to the state on those purchases with a $10/incident penalty for not sending the notification,

Fourth, the retailer will file a compilation of all those notifications with the Colorado Department of Revenue, with a penalty of $10/purchaser for not filing

One State Senator I spoke with thinks this may be wrong because Macy’s doesn’t try to drive web traffic to Bloomingdale’s web site from their Macy’s stores, but I think the language is such that we would assume the Colorado Department of Revenue to try to enforce it in this way.

State Senator Greg Brophy says “This is not the camel’s nose under the tent.  This is the whole camel into the tent on the issue of taxing the Internet."  Brophy believes that this bill will “set up the challenge at the Supreme Court over Internet taxation” and, going back to the camel metaphor, “we are going to have to see if SCOTUS will throw the smelly beast out."  This would essentially be a rehearing of Quill v North Dakota, a 1992 case in which the Supreme Court ruled that a retailer only had to charge sales tax if they had a physical presence in that state. It should be noted that for most sections of Quill, the Court’s verdict was unanimous.

The key to Quill is this concept from the decision:

(A) mail-order house may have the “minimum contacts” with a taxing State as required by the Due Process Clause and yet lack the “substantial nexus” with the State required by the Commerce Clause. These requirements are not identical, and are animated by different constitutional concerns and policies. Due process concerns the fundamental fairness of governmental activity, and the touchstone of due process nexus analysis is often identified as “notice” or “fair warning.” In contrast, the Commerce Clause and its nexus requirement are informed by structural concerns about the effects of state regulation on the national economy.

This gets very technical, but what the Court said is that even though the state’s attempt to impose a use tax might meet the burden of a “due process” test, that does not mean the tax is not an impermissible burden on interstate commerce.  It’s one of the few cases in recent years where you’ll see the Court at least implicitly recognize that the term “regulate” in the Constitution as it applies to interstate commerce meant “to make regular", to keep from being burdened, etc., and NOT to be “regulated” in the sense that people use that word today, i.e. interfered with through regulation or law.

The Court also noted the value of stare decisis in terms of leaving business with some degree of regulatory certainty:

Indeed, it is not unlikely that the mail-order industry’s dramatic growth over the last quarter century is due in part to the bright-line exemption from state taxation created in (prior Supreme Court case) Bellas Hess… (T)he Bellas Hess rule has engendered substantial reliance and has become part of the basic framework of a sizable industry. The “interest in stability and orderly development of the law” that undergirds the doctrine of stare decisis…

The Court then went on to say that Congress could possibly change the impermissibility of requiring these sales or uses taxes by enacting federal legislation while hinting that such legislation might still end up being unconstitutional and that Congress might do itself a favor by respecting the Court’s opinion on this matter.

Legal counsel for Amazon.com believes HB1193 is inherently unconstitutional for other reasons, including a rather technical but important point that the enforcement provisions of the bill are “facially discriminatory against out-of-state retailers” who are faced with a different enforcement process than  in-state retailers. This lack of equal protection thus renders the measure unconstitutional, in his opinion.

Again, it’s worth emphasizing that the Quill decision was unanimous and that the decision was written by Justice Stevens.  It’s hard to imagine the “conservatives” on the Court siding with the state here and it’s hard to imagine the liberals on the Court saying that Stevens was wrong in 1992.  While anything can happen, HB1193 could end up being a blessing in disguise in that it could permanently end the possibility of states imposing sales and use taxes on items purchased from out-of-state retailers with no substantial “nexus” in-state.

As far as HB1193, Senate Minority Leader Josh Penry has an amusing take: “The legislators who vote for this will be among the first in the free world to push to tax the Internet, breaking a longstanding bipartisan consensus against the Internet levies since Al Gore invented it. I’m convinced that if the Democrats in Colorado would have been alive in the Stone Age, they would have pushed for a use tax on fire, a value added tax on the advent of the wheel, and a manufacturing tax on the chisel.”

HB1193 is an Orwellian nightmare, with the State of Colorado claiming that it can tell out-of-state companies to inform on Coloradoans.  Is this government “of, by, and for the people” or simply of, by, and for government and its lackies.  At some point, the many people who voted for our current Democratic state legislature majority are going to have to realize that Democrats are not “for the little guy” and are not even for “the voters".  They are for unions and for amassing as much of your money and your constitutionally guaranteed power as possible for themselves.  Make no mistake: Just as with Nancy Pelosi and Harry Reid on the federal level, our tax-hiking, big-spending Democrats in the state legislature are not just misguided; they are the enemy.

As I told Senator Brophy, the day I get a letter from the State of Colorado saying that I owe them sales tax on something I purchased online from an out-of-state retailer is the day I decide to move out of Colorado.  I guarantee I won’t be the only one.