The Colorado Internet Sales Tax Collection Effort

States have been trying to collect sales tax from online sales with little success. Now, Colorado may have come up with an interesting internet sales tax collection scheme.

The states are almost universally broke. They spend like no tomorrow, but the Great Recession has resulted in a massive fall off of tax revenues. Simply put, the states are running huge deficits and are trying to find ways to raise revenues. Nearly every one is looking to the web for sales tax payments by their citizens.

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Often called the Amazon tax, the effort by states to tax online retail giants like Amazon are as typical as they are failures. The state has to show a connection between the retailer and the state to collect the tax per a 1992 Supreme Court decision. They typically try to do this by claiming any affiliate in the state that produces a sale for the retailer meets the necessary requirements.

Politicians are idiots and this approach has born out the truth of this assertion. Why? It never works. New York was the first state to really give it a go. Amazon challenged the law in court in the state. When it lost, it did something rather obvious. It simply terminated all the affiliates it had in New York. The nexus was broken and no sales tax need be collected. Even worse for New York, the affiliates that were axed suddenly had less revenue and paid less in tax. Despite this outcome, other states have tried the same approach with the same result.

To its credit, the politicians in Colorado have tried something new with their internet sales tax collection effort. The state has passed a law that says any online business [called a "remote seller"] that does more than $100,000 in sales in the state must collect the sales tax and pay it or the retailer can report the purchasers and what they purchased so the state can go after them. The retailers would then also have to notify the purchasers of the amounts due. Any failure to comply would come with a $5 fine per transaction.

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Will the law fly? It is hard to say. Online retailers will certainly sue to block it. The law is clearly very burdensome given the fact retailers would have to collect, calculate and pay taxes in 50 different states if the law is followed by other states. That being said, the $100,000 revenue minimum will exclude many of the small businesses that would be overly burdened.

Sooner or later, the states are going to hit upon an approach that works when it comes to collecting sales tax from online retailers. So far, this appears to be the best approach by far. Whether it is enough to satisfy the legal precedents is something yet to be determined.

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