DMA Challenges Colorado Internet Tax Law

The Direct Marketing Association filed a lawsuit in federal court on Wednesday challenging a new Colorado law requiring e-commerce sites and other out-of-state retailers to disclose information about state residents' purchases to the authorities.

Colorado House Bill 10-1193, which went into effect on March 1, also requires out-of-state retailers to notify Colorado customers about their obligation to pay state sales tax on purchases.

The DMA argues in a lawsuit filed in federal district court in the District of Colorado that the measure is problematic for several reasons, including that it unconstitutionally interferes with interstate commerce.

In 1992, the U.S. Supreme Court ruled that state governments can't require retailers to collect sales tax unless they have a physical presence in the state, like a brick-and-mortar store. The DMA argues that state governments also can't require out-of-state retailers to notify consumers about state sales tax laws.

"There must be a sufficient, minimum connection between an out-of-state retailer and a state, in the form of a physical presence, before the state may impose regulatory obligations on such retailers of the type imposed by the act and regulations," the DMA says in its court papers.

The marketing group also argues that the measure compromises consumers' privacy. "Whether through intention, inadvertence, misconduct, or data breach, there is a real risk that sensitive, personal information ... will become public," the DMA says in its court papers.

The DMA is asking the court to declare the law unconstitutional and issue an injunction against its enforcement.

Colorado is one of several states to recently increase efforts to collect sales tax on online purchases. In New York, the state legislature in 2008 enacted a measure requiring Web retailers that use in-state affiliates to collect New York sales tax. A state appellate court is currently considering a challenge to that measure by Amazon and Overstock.

In addition, North Carolina recently asked Amazon for information about all purchases by state residents since 2003. Amazon and the ACLU say that complying with that demand would violate consumers' privacy and are asking a federal judge to declare the request unconstitutional.

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