The Colorado legislature recently passed a bill (Colorado Bill HB 10-1193) that basically seeks to improve the state’s ability to collect use tax on internet sales. This is a tax that most buyers of the covered products technically should be paying anyway but are rarely collected. Most people think those things they buy online are tax-free when really they were supposed to have paid the tax on their own rather than having it collected by the retailer. As we all know, people rarely do.
Colorado and other states have tried to fix this for a couple primary reasons. The first is simply money. They’d like to collect more revenue. The second is to level the playing field for in-state companies. It’s not fair competition if local companies effectively have to charge buyers more for a product because they have to charge tax while online retailers do not.
Colorado first tried to tackle this problem by widening the description of a nexus to the state that would trigger collection obligations for sellers. They apparently kicked around the idea of requiring the seller to collect tax if the seller had any affiliate relationships within the state. That caused a backlash from companies like Amazon and its affiliates, so the final legislation made that more or less an irrelevant issue. The bill that passed basically says that out-of-state sellers do not have to collect tax at the time of sale, but do have to notify all buyers that they have an obligation to pay the use tax themselves. These sellers also have to mail a report by January 31 of each year to each purchaser marked “Important Tax Document Enclosed” that outlines the purchases made, the dates of purchase, and if known, whether such purchases are exempt from taxation. This report must also reiterate that Colorado requires a sales or use tax return to be filed and a sales or use tax to be paid, presumably by the purchaser. Finally, these sellers have to send separate reports to the state for each in-state purchaser outlining sales that were made to that purchaser. It’s sort of like 1099’s for consumers. It may prove to be effective, but is obviously pretty burdensome.
The odd turn of events, however, came with Amazon’s reaction. Amazon promptly terminated all of its affiliate relationships within Colorado, but said that it will continue to sell directly to Colorado consumers. That does nothing to relieve it of the burdens of the new law that would seem to be most objectionable or costly. As long as the law stands, Amazon will still have to comply with all the notice and reporting obligations regardless of whether it has affiliate relationships in the state. The only way it could eliminate that problem would be to stop shipping products into the state. Amazon’s reaction seems simply to use its affiliates as pawns to put pressure on the legislature, with the apparent thought being that if they inflict enough pain on enough local businesses, the government will cave. There is some evidence this may be having its intended effect as the finger pointing and emergency meetings have already commenced within the legislature.
There are several issues with this legislation, but Amazon’s reaction of “wife yells at husband, so husband kicks dog” is claiming a lot of innocent victims.
Paul Koenig is a co-founder/managing director of Shareholder Representative Services (www.shareholderrep.com), which serves as a professional shareholder representative following the acquisition of a VC-backed portfolio company.