Colorado Judge Blocks Internet Sales-Tax Law, A Month After North Carolina Got A Green Light

Cash-strapped states really want out-of-state Internet retailers to help in collecting sales taxes. But despite a string of new "Amazon laws" aimed at forcing E-tailers to do just that, the states' options keep getting narrowed—and E-tailers keep getting mixed messages.

Last Wednesday (Jan. 26), a federal judge blocked a Colorado law requiring E-tailers to turn over Internet sales information to the state. But that ruling appears to directly contradict another federal judge's ruling in October giving a green light to a North Carolina law that requires exactly the same thing. Given that the federal judges at issue are in different regions of the country, this opens the door widely for—and almost requires—U.S. Supreme Court intervention.

The Colorado ruling comes on the heels of a recent court decision about a similar law in New York, which also offered a mix of good and bad news for E-tailers. But the truly bad news is that there's no clear trend in the decisions. That makes it impossible for E-tailers to know just how close requirements for sales-tax collection might be—and what they need to prepare (and budget) for.

In the Colorado ruling, U.S. District Judge Robert Blackburn said the Colorado law—which requires out-of-state E-tailers to send "you owe sales tax" notices to Colorado customers and report sales to the Colorado Department of Revenue—appears to impose an illegal burden on "out-of-state retailers who have no connection with Colorado customers other than by common carrier or the United States mail." As a result, the judge issued an injunction to block enforcement of the law for retailers who don't have any physical operations in Colorado, at least until the case goes to trial.

Blackburn specifically found that issuing such an injunction in this case—brought by the Direct Marketing Association (DMA) on behalf of many of its member retailers—wouldn't cause much harm to the state. And if it did, it's appropriate, the judge said.

“I find and conclude that the public’s interest in revenue raising by the state will not be impaired substantially by the issuance of a preliminary injunction. At most, the state may suffer some delay in implementing its new technique for enforcing its use tax laws, if the Act and the Regulations are upheld against the DMA’s challenge," Blackburn wrote. "On the other hand, the enforcement of a law that likely is unconstitutional, even if the goal of the law is important and legitimate, does not serve the public interest. Thus, the public interest factor weighs in favor of the issuance of a preliminary injunction.”

That's a sharp contrast to an October decision by a federal judge in Seattle, who ruled that Amazon isn't protected from having to send similar sales-tax notices and reports about its customers in North Carolina.The Seattle judge ruled that Amazon doesn't have to divulge exactly which books, DVDs and other products Amazon's North Carolina customers bought, but it does have to cough up enough information to help North Carolina collect its taxes.

Which judge is right? As with the recent dueling decisions by judges ruling on the federal healthcare reform law, it won't be settled until all appeals are exhausted. In the case of Internet sales taxes, the Seattle and Colorado judges are in two different appeals circuits; that means it will take a U.S. Supreme Court decision to settle the question—and that decision may be years away. In the meantime, E-tailers now face different rules on collecting sales-tax information in at least two different states. North Carolina, yes; Colorado, no. But that's not the end of it.

That's not the end of it. In New York, Amazon and filed a lawsuit challenging a state law that said any E-tailer with sales affiliates in the state had to collect sales taxes. That lawsuit was thrown out in 2009, putting New York in the collect-sales-tax column. (Amazon has been collecting sales tax from New York customers ever since that ruling, but it discontinued its affiliate programs in other states, such as North Carolina, Colorado and Rhode Island, that passed similar laws.)

But in November 2010, a New York state appeals court said the E-tailers' lawsuit could go forward—even though that court also ruled that Amazon's main argument, claiming that the law was unconstitutional under the U.S. Constitution's Commerce Clause, was wrong. New York will still collect sales taxes from Amazon until that case goes to trial—again.

Meanwhile, other states are trying to get in on the action, with California, Hawaii, Illinois, Iowa, Maryland, New Mexico, Vermont and Virginia all trying to pass similar laws. Not identical laws, mind you; each state seems determined to tweak its proposal. That means the crazy-quilt of state sales-tax regulations for Internet selling will add even more uncertainty and confusion about when and how Internet retailers might have to collect sales taxes or information.

For an E-tailer the size of Amazon, which has been the biggest target of most of these laws, making the necessary adjustments to its E-Commerce systems has been just a matter of doing business. Amazon has offices and warehouses (what the tax laws refer to as "nexus") in several states, so it's stuck with collecting sales taxes there. Adding more states to that list will be a pain for customers, but it's just a straightforward programming task from an IT point of view.

Chances are good that Amazon could now flip a switch for any state where a court decision goes against it and comply with whatever regulations it needs to in order to keep selling there.

For other E-tailers, though, the uncertainty about which way Internet sales taxes will go—and when—is a much bigger IT spending decision. And it doesn't look like anything will become clearer any time soon.