Earlier this year, affiliate marketers and other groups successfully beat back legislation in Colorado that would have required etailers like Amazon.com to collect sales tax for purchases made by Colorado residents if the etailers had affiliates in Colorado.

But Colorado didn’t simply give up on its effort to find new sources of revenue: it passed a bill, 10-1193, that went into effect in March. That bill requires out-of-state retailers with more than $100,000 in sales to Colorado residents to notify their Colorado customers that they must disclose their purchases to the state and pay the state any appropriate sales or use tax.

The penalty for not providing such a notification: $5 per failure. For large online retailers, that could easily add up.

Additionally, 10-1193 burdens out-of-state retailers; they must keep track of purchases made by Colorado residents, and ensure that by January 31 of each year, those residents receive a notification that includes “the dates of purchases, the amounts of each purchase, and the category of the purchase, including, if known by the retailer, whether the purchase is exempt or not exempt from taxation.” And they’re required to share this information in a filing with the Colorado Department of Revenue, ostensibly so that the Department of Revenue could go after customers who don’t pay up.

Needless to say, if every state enacted similar laws, online retailers could have their hands full.

But the Direct Marketing Association (DMA) is hoping that 10-1193 will be short-lived. Yesterday, it filed suit in federal court. It believes that the Colorado law must be struck down because it:

  • Discriminates against interstate commerce;
  • Exceeds the permissible scope of state regulatory authority over out-of-state companies;
  • Violates the right to privacy of Colorado consumers;
  • Infringes upon the free speech and due process rights of both consumers and retailers; and
  • Exposes confidential consumer information to the risk of unauthorized disclosure.

Jerry Cerasale, the DMA’s SVP of Government Affairs stated, “The new law and the regulations implementing it are an unconstitutional and blatant violation of Colorado consumers’ privacy.

Given that other states are pursuing similar techniques to enforce sales and use tax collection, and others are mulling similar laws, the outcome of the DMA’s lawsuit could be a significant one for consumers in the United States. If the law is upheld, the online shopping experience could become a lot less attractive on all fronts.