Court Sides with DMA in Suit Against Colorado

Jan 29, 2011 4:45 AM  By

The Direct Marketing Association earned a victory in its case against the state of Colorado and its new out-of-state tax law. The U.S. District Court for the District of Colorado on Jan. 26 granted a motion for preliminary injunction against the Colorado Department of Revenue.

This means that Colorado is prohibited from enforcing the notice and reporting provisions of Colorado law, H.B. 10-1193. The Federal District Court in Denver agreed that the DMA would likely prevail on its claim that the Colorado Reporting Law violated the U.S. Constitution.

The law (HB 10-1193) requires marketers that ship orders into the state to provide purchase information to the Colorado Department of Revenue regarding who its customers were and what they spent. The notification requirement applies only to purchases on which the customer paid no Colorado taxes.

What’s more, direct merchants had to send a year-end statement to both the customer and the Department of Revenue. The statements would cover the previous calendar year’s purchases. (A new regulation passed last June gave marketers the option of waiting to notify customers until the year-end period, without mentioning it at the time of purchases.)

The crux of the DMA’s argument is that Colorado’s new legislation is unconstitutional under the U.S. Supreme Court’s decision Quill v. North Dakota. The 1992 ruling found that North Dakota was not entitled to collect taxes on orders shipped into the state, as Quill did not have a “substantial nexus” (physical presence) in the state.

The DMA, which filed the lawsuit last August, is naturally pleased with the outcome, and “particularly encouraged that the judge believes the DMA would likely prevail” in its lawsuit against the state of Colorado, says Jerry Cerasale, the DMA’s senior vice president of government affairs.

“All of the notices required by Colorado are now stopped,” Cerasale says. “All remote sellers—not just DMA members—do not have to comply with the Colorado law.” The DMA will with legal action until a final decision that declares the Colorado law unconstitutional, he notes. “We will fight similar laws in every state.”

Curt Barry, president of operations and fulfillment consultancy F. Curtis Barry & Co. and regular contributor to Multichannel Merchant, served as one of the DMA’s three expert witnesses. Barry wrote an opinion working with direct marketing law firm Brann & Isaacson to identify what the regulations meant to retailers and direct merchants in terms of changes to customer service, Internet and fulfillment systems; notification to customers, costs associated with complying meeting this regulation and key issues such as privacy, and sales impact.

“The case is not over, but this is an important milestone and suspends enforcement of the law,” says Barry. “We are excited to have been part of this case so critical to our industry.”
The DMA lawsuit does not preclude a hearing that is expected to be held sometime later this year on a permanent injunction.