On Monday, December 12, 2016 the Supreme Court refused to hear a case challenging a Colorado law that requires online retailers without a physical presence in the state to turn over customer purchase data to state tax officials. While the Colorado law spurred the case, the ramifications of the Supreme Court’s refusal to hear the challenge will affect individuals and businesses in states across the U.S.
Many online retailers can sell to consumers without charging state sales tax on purchases; this is the result of a 1992 Supreme Court decision which held that retailers must have a physical presence (nexus) in a state before officials can make them collect sales tax. In essence the consumer has been liable for paying sales tax all along under the guise of a state “use” tax, but that rule has been widely and effectively ignored.
In 2010, Colorado passed a law that required out of state retailers to report names, addresses and purchase amounts of Colorado customers to state tax authorities. The retailers were also required to notify the customers of their obligation to pay state taxes and to send annual purchase reports to consumers.
The Supreme Court’s refusal to hear the Colorado case essentially opens the door for Colorado to begin aggressively notifying and potentially collecting sales or use tax revenue from consumers who use online retailers and do not pay what the state considers to be their “fair share”.
What It Means to Businesses
As passed in Colorado and with other states already following suit (Louisiana, Oklahoma and Vermont), the law means that online retailers must keep records of and submit reports to state governments and potentially consumers for online purchases. Visualize a pseudo-1099 form produced by Amazon for purchases by consumers that meet a $500 threshold over the course of a year. That’s not many Amazon purchases or Zappos shoes, but it is a lot of record keeping and reporting for the business.
Although a spokesman for the Colorado Fiscal Institute (which supported the measure) says that the non-ruling means that this does not represent an undue burden on business, we suspect online retailers will have their own opinions on that subject.
Furthermore, this is just another mechanism to support use tax audits conducted by state auditors while reviewing business documentation. Businesses have always been asked questions regarding their self-assessment of tax for out-of-state purchases, but now these states will have evidence to back up their reviews without having to solicit additional paperwork from taxpayers during audit reviews.
What It Means to Consumers
If you shop online, spend more than $500 over the course of a year to one retailer and do not pay sales tax, you can possibly expect to receive a report from a retailer notifying you that you owe state sales tax. You’ll also receive a state tax notice, which you will be obligated to self-assess the taxes owed from these out-of-state purchases. Colorado is laying the ground work for new tax reporting rules that many states are going to follow if it proves to be successful. State governments have been trying to find ways to limit the tax dollars they have been losing for years through internet commerce, and this is their first victory in the e-commerce arena with many more interesting discussions to come.
If you have any questions, please do not hesitate to call Tim Howe at 404-874-6244 or simply fill out the form below.