Internet Sales Tax Fairness - Colorado

In February 2010, Colorado passed a law that requires remote retailers (internet and catalog companies) that do not collect state sales taxes to notify Colorado customers that they owe the tax on their purchases. The law applies to retailers with more than $100,000 in annual sales, including Amazon.com and Overstock.com.

Although out-of-state retailers are not required to collect sales tax in most states (there are a growing number of exceptions), customers still owe the tax and are suppose to include it with their state income tax returns. But few people do and it's almost impossible to enforce.

Colorado's law aims to increase compliance by individuals - and perhaps also to induce internet retailers to start collecting sales tax as a simpler solution than having to provide the various notifications required by the law.

Under the law, out-of-state retailers must include a notice on each invoice informing customers that the purchase is subject to Colorado sales tax and send a report to customers in January of each year detailing all of their purchases in the preceding year and the amount of sales tax owed. Retailers must also provide this information annually to the Colorado Department of Revenue. Failure to comply will result in fines of $5-10 per violation, which, in many cases, will be more than the sales tax owed. The law applies only to state sales tax (which is 2.9 percent as of this writing) and does not cover local and county sales taxes.

Update: In January 2011, a federal district court issued a ruling that suspends enforcement of Colorado's law pending the outcome of a case brought by the Direct Marketing Association, which claims the law violates the commerce clause of the U.S. Constitution.