• by Wendy Davis  @wendyndavis, July 1, 2014

The battle over Colorado's “Amazon tax” is moving to the U.S. Supreme Court, which said on Tuesday that it will hear the Direct Marketing Association’s challenge to the measure.

The tax fight dates to 2010, when Colorado passed a law requiring out-of-state companies, including e-commerce companies, to send detailed lists of consumers' purchases to the tax authorities. Soon after the law was passed, the DMA challenged it in federal court, arguing that the measure unduly burdened interstate commerce.

The marketing group is relying on a 1992 U.S. Supreme Court ruling 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 also argues that state governments shouldn't be able to require out-of-state retailers to notify consumers about state sales tax laws.

U.S. District Court Judge Robert Blackburn agreed with the DMA and entered an injunction prohibiting Colorado from enforcing the law. But a 10th Circuit panel ruled that Blackburn lacked jurisdiction to consider the matter, due to the federal Tax Injunction Act, which prohibits federal courts from suspending state tax laws.

Earlier this year, the DMA asked the Supreme Court to hear the case. The trade group argued that the federal Tax Injunction Act only applies to lawsuits about the imposition of taxes. The DMA says the law it's challenging doesn't impose a new tax, only new procedural obligations.

“The DMA’s suit will not, in any respect, alter the tax collection obligations of other retailers, in-state and out-of-state alike, that are required to collect Colorado sales and use taxes,” the group argued in its petition for Supreme Court review. “Rather, the DMA’s suit seeks to protect its members from discriminatory regulatory obligations that violate the members’ constitutional rights and those of its members’ customers.”

Colorado state residents are required to pay tax on merchandise even when retailers don't collect it. But state officials say that many residents don't do so. Colorado officials estimated that state and local governments lost around $173 million in tax revenue in 2012, due to non-payment of tax on online purchases.

The DMA also is suing in Colorado state court. Earlier this year, a state judge enjoined officials from enforcing the law.

Numerous states have recently passed laws aimed at collecting sales tax on e-commerce purchases. Vermont, Oklahoma and South Dakota are among the states that have enacted laws requiring online retailers to inform consumers about their duty to pay sales tax -- although none of those states require e-commerce companies to disclose consumers' purchases to the tax authorities.

New York also now requires online retailers to collect sales tax from consumers directly, if the retailers use in-state affiliates. Amazon and Overstock unsuccessfully challenged New York's law in court.

In Illinois, however, the state's top court struck down a law similar to the one enacted in New York. In that case, the Performance Marketing Association sued on the grounds that the law illegally discriminated against online companies. The Illinois law required companies to collect sales tax if they worked with online performance
marketers -- meaning Web publishers that display ads linking to retailers' sites -- but not offline performance marketers.