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When Colorado politicians pushed an affiliate tax designed to bolster their state's revenue on the back of out-of-state retailers, one thing was certain: the effort would backfire.

After all, we've known for years that states which have tried to find a way to collect sales tax on out-of-state internet sales fail to raise revenue.

The latest state to learn that the hard way is Illinois. When it passed affiliate tax legislation, it saw major retailers like Amazon and Overstock terminate their Illinois affiliates, giving successful busineses dependent on affiliate fees a good reason to flee for other states. Adding insult to injury, we now know that the tax hasn't raised a cent for the financially-troubled state.

Colorado politicans, perhaps aware of the failure of affiliate taxes in other states, decided to take a different approach when they passed legislation in 2010 designed to ensure that residents of its state pay use tax on purchases from large out-of-state internet retailers. Instead of trying to force out-of-state retailers with in-state affiliates to physically collect sales tax, Colorado's legislation sought to force out-of-state retailers to report purchases from Colorado residents. With those reports, Colorado's tax authorities would be able to pursue the use taxes residents are supposed to pay but rarely ever do.

Colorado's new tax law was temporarily blocked while a lawsuit questioning its legality worked its way through the court system and now, that dispute is one step closer to resolution after a US District Court Judge declared the law unconstitutional last Friday.

In issuing his opinion, US District Court judge Robert Blackburn wrote that the so-called Amazon tax would "impose an undue burden on interstate commerce" and that "enforcing a reporting requirement on out-of-state retailers will, by definition, discriminate against the out-of-state retailers by imposing unique burdens on those retailers."

The state of Colorado may very well appeal the decision, so it would be premature for the retail and affiliate groups who led the fight against Colorado's law to declare victory. But given the evidence that trying to tax out-of-state sales on the internet is a fruitless exercise -- evidence which has only grown since Colorado passed its law -- perhaps state officials will take a step back and reconsider just how much their coffers realistically stand to gain from tax laws that are as foolish as they are unenforceable.

Patricio Robles

Published 5 April, 2012 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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