• by Wendy Davis  @wendyndavis, April 4, 2012

A federal judge has struck down Colorado's law requiring e-commerce companies to disclose information about state residents' purchases to the tax authorities.

In a 22-page ruling, U.S. District Court Judge Robert Blackburn agreed with the Direct Marketing Association that the law unconstitutionally restricts interstate commerce. "The act and the regulations directly regulate and discriminate against out-of-state retailers and, therefore, interstate commerce," Blackburn wrote. He entered an injunction prohibiting Colorado from enforcing the law.

 The Colorado law applied to any out-of-state companies (including e-commerce companies) that don't collect sales tax from consumers. The measure required them to send detailed lists of consumers' purchases to the tax authorities, and to send consumers annual reports detailing their purchases and notifying them about their obligations to pay state sales tax.

The DMA filed a lawsuit challenging the law in March 2010, shortly after it was enacted. The marketing group drew 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 argued that state governments also shouldn't be able to require out-of-state retailers to notify consumers about state sales tax laws.

Colorado is expected to appeal the decision to the 10th Circuit Court of Appeals, which might not decide the issue for many months.

The ruling could dissuade other states from enacting laws similar to the one in Colorado, says Jerry Cerasale, senior vice president for government affairs at the DMA. "Other states have been watching this case, and waiting to see what happens," Cerasale says.

Consumers in states with sales taxes generally are supposed to pay tax on items purchased via the Web. Many states rely on consumers to self-report this figure -- a practice that is believed to result in underpayments.

In the last few years, a number of states passed laws aimed at collecting more of the sales tax they were owed. Vermont, Oklahoma and South Dakota all 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.

Other states, including New York, now require online retailers to collect sales tax from consumers if the retailers use in-state affiliates. Amazon and Overstock challenged New York's law in court; the case is still pending.