• by Wendy Davis  @wendyndavis, February 23, 2016

Handing a defeat to the Direct Marketing Association, a federal appellate court has upheld a Colorado law requiring some online retailers to send information about consumers' purchases to the tax authorities.

The Colorado law, passed in 2010, applies to out-of-state companies, including e-commerce companies, that don't collect sales tax from consumers. The measure requires those companies to send Colorado tax authorities annual reports with customers' names, addresses and total amounts spent. The law also requires companies to send annual reports notifying consumers about their obligations to pay state sales tax.

In a ruling issued Monday, the 10th Circuit Court of Appeals rejected the DMA's contention that the law interfered with interstate commerce.

"In light of the Colorado consumers’ preexisting obligations to pay sales or use taxes whether they purchase goods from a collecting or non-collecting retailer, the reporting obligation itself does not give in-state retailers a competitive advantage," the judges wrote.

The DMA argued that the law was invalid due to a 1992 Supreme Court case dealing with catalog companies. The Supreme Court ruled in that case that state lawmakers can't require out-of-state retailers to collect sales tax unless they had a physical connection to the state -- like a brick-and-mortar storefront.

But the 10th Circuit rejected the DMA's position on the grounds that the 1992 decision only deals with tax collection, as opposed to reporting rules.

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 in 2013 that state and local governments stood to lose around $173 million in tax revenue the prior year, because consumers failed to pay taxes on online purchases.

DMA Vice President of Advocacy Christopher Oswald stated that the group is reviewing the decision to determine its implications for "members and the data-driven marketing ecosystem.”

Earlier in the case, U.S. District Court Judge Robert Blackburn agreed with the DMA and entered an injunction prohibiting Colorado from enforcing the law. A 10th Circuit panel subsequently 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.

The DMA appealed to the Supreme Court, which unanimously ruled that the DMA could continue with its lawsuit.

Santa Clara University law professor Eric Goldman says he predicts that this week's ruling by the 10th Circuit will encourage other states to pass laws that will affect Web retailers.

"This opinion tells states that hey can impose mandatory reporting obligations on out-of-state vendors," he says.

Goldman adds that doing so doesn't cost state lawmakers anything, while imposing costs on companies that aren't constituents.