Industry Eye: Legal Matters - Colorado Invades Consumer Privacy to Collect Sales Taxes

The Colorado General Assembly is taking an alternate path to obtain sales tax revenues on purchases by Colorado residents from out-of-state retailers.
The new legislation, effective March 1, requires notices be sent to Colorado consumers in connection with every purchase they make on which sales tax isn't collected. Consumers must pay the sales tax directly to the state's Department of Revenue (CDR), and retailers are obligated to report Colorado consumers' total annual purchases to the CDR. A proposed regulation would also require merchants to turn over shipping addresses to the CDR. The mandatory disclosure of confidential consumer information to state tax officials has raised serious objections from both consumers and direct marketers.

Many Colorado citizens believe the "track and tax" law is an invasion of their privacy. They argue the government has no right, or need, to know from whom they make purchases and to whom they send gifts. Whether such information reveals political associations, sexual preferences, personal tastes, intimate friendships, etc., opponents believe the statute oversteps constitutional limits on state government authority and infringes on consumers' right to privacy. These concerns are heightened by the fact that the new legislation contains no provision for protecting the confidentiality of the information merchants must turn over to the Department of Revenue.

Direct marketers maintain that the new law undermines their relationships with customers and discriminates against interstate commerce because the legislation effectively applies to out-of-state retailers only. The Supreme Court's 1992 Quill decision bars states from imposing tax collection obligations on retailers that lack a physical presence (so-called "nexus") in the state. Remote sellers argue, however, that the Colorado legislation is essentially a form of government blackmail. Unless remote sellers waive their constitutional rights and agree to collect sales tax on all sales to Colorado residents, the resulting reporting obligation will alienate customers and cause a loss of business.

The constitutionality of the Colorado legislation will, most likely, be determined in court.

— George S. Isaacson, senior partner, Brann & Isaacson (gisaacson@brannlaw.com).