The Colorado Department of Revenue has relaxed a first-in-the-nation information reporting requirement for sales by Internet vendors to customers in Colorado.
The new legislation, adopted earlier this year, requires etailers that have more than US$100,000 in sales to Colorado customers to notify all customers of their obligation to pay use tax to the Department of Revenue. It also requires that etailers provide a statement to the Department of Revenue for each Colorado customer, setting out the amount purchased.
This created a rather burdensome information reporting obligation for etailers, especially ones that generally deal with smaller dollar volume items. It is one thing to require this for the sale of a $1,000 camcorder, for example, but another thing to require it for the sale of a $20 camcorder carrying case.
Although the legislation did not set a threshold limit for this requirement, the final regulation published by the Department of Revenue now sets a threshold for these two requirements.
Individual Customers, not Households
First, the obligation to mail notices to customers showing the purchase amounts for the prior year so they know how much use tax they should remit to Colorado will now apply only to customers who purchased more than $500 in goods from the etailer during the year.
The second requirement — that etailers must provide an information return to the Department of Revenue showing all sales to Colorado customers — will now apply only if the etailer has at least one customer with more than $500 in sales for the year.
So, if an etailer has no customers with $500 or more in sales, then there is no information reporting obligation. However, if an etailer has just one Colorado customer whose purchases exceeded $500 during the year, then the etailer will have an information reporting obligation for all sales to Colorado customers. This might cause some etailers to limit annual purchases to $500 or less.
The guidance does not say whether members of the same household count as a single customer for purposes of this $500 threshold. However, a discussion with a representative of the Department of Revenue indicates that they will treat each member of a household separately for purposes of this $500 threshold, provided that the name of the household member is on the invoice, and there is a separate online identity for each purchaser.
So, for example, if an etailer has $300 in sales to Mr. John Doe, and separate sales of $300 to his son, James Doe, then the $500 threshold is not exceeded if the different names are on the invoice, and each purchaser has his or her own email account. In such a case, an information report would not be necessary, as long as each individual member of the household purchases less than $500 from the etailer during the year.
Remember — in order for an etailer to have any reporting obligations at all, it must have at least $100,000 in annual sales to Colorado customers.
It is still not certain that Colorado has the authority to require an etailer that has no contact with Colorado, either directly or through an affiliate, to comply with these obligations. It is also possible that this information reporting requirement might be a violation of the customer’s first amendment rights.
It should be noted that a federal court in the state of Washington recently ruled in Amazon.com v. Lay that North Carolina could not compel Amazon to disclose the names of its North Carolina customers because it would be a violation of the customers’ first amendment rights.
There is a possibility that an etailer might file a similar case in Colorado. This will be a matter for the courts to address. However, until this law is successfully challenged in the courts, etailers should take steps to comply with these new requirements.
Marvin Kirsner is a shareholder in the tax department of the international law firmGreenberg Traurig.