Colorado "Amazon" law's reporting requirement Is Constitutional
Letter to the Editor

In a recent article,[1] Stephen P. Kranz, Diann L. Smith, and Beth Freeman argued that HB 1193, Colorado's new law imposing use tax notice and reporting requirements on interstate retailers, violates the U.S. Constitution's dormant commerce clause and the First Amendment. We write to reject the authors' claim that the information reporting approach runs afoul of the dormant commerce clause. Although it is possible that some of Colorado's specific requirements should be invalidated as unduly burdensome, we believe that information reporting requirements can offer a constitutionally permissible means of aiding use tax collection on out-of-state sales. The problematic restrictions that the U.S. Supreme Court has imposed on states' ability to require retailers to collect taxes should not be extended to bar states from imposing reasonable information reporting requirements.

HB 1193 relies on three basic mechanisms, buttressed by penalty and audit provisions, to aid use tax enforcement. Out-of-state retailers without taxing nexus must:

provide Colorado residents notices at the time of purchase informing each that the purchase is subject to the state's use tax;

send annual notices to the purchasers reminding them of potential tax liability; and

send annual purchase information for each buyer to the Colorado Department of Revenue.

Regulations exempt retailers with annual gross sales of less than $100,000 from these requirements.[2]

Kranz, Smith, and Freeman argue that Colorado's reporting requirements are necessarily barred by the Supreme Court's decision in Quill v. North Dakota.[3] In that case, the Court held that the commerce clause requires a "substantial nexus" between a state and a retailer before the state may require the retailer to collect use taxes on sales to its residents.[4] This substantial nexus, the Court held, could not be satisfied without the retailer maintaining some physical presence within the state.[5] As a result, when the retailer has no such presence, the state must instead rely on the in-state buyers to report and pay the use tax, an approach that makes the use tax functionally unenforceable.

But HB 1193 requires retailers only to report information, not to collect taxes. Striking down information reporting requirements under Quill would represent an extension, rather than an application, of the physical presence rule. Yet a close examination of Quill's theoretical underpinnings shows that such an extension would be undesirable.

From a legal perspective, Quill is flawed. The notion that the commerce clause imposes an additional nexus requirement on state power, other than the traditional due process standard, lacks textual and historical support. Allowing states to collect the same taxes from interstate retailers that they collect from local retailers does not push states toward the economic Balkanization that the dormant commerce clause is meant to prevent.[6] Because the buyer's in-state presence gives states the jurisdiction to tax the sale, the commerce clause should not prevent the state from placing the collection responsibility on the retailer.

Although interstate retailers may need some protection from administrative burdens, particularly with respect to the myriad variations of local taxes, the sweeping exemption provided by Quill cannot be justified. In fact, the categorical reliance on physical presence is the very type of artificial formalism that the Supreme Court rejected in Complete Auto Transit, Inc. v. Brady.[7] Any valid concerns about administrative burden should be analyzed in the same manner as other regulatory burdens on interstate commerce, under the balancing analysis of Pike v. Bruce Church, Inc.[8] Under this analysis, courts can tailor rules that reduce burdens on interstate commerce without functionally exempting a substantial portion of national sales from the state use tax system.

From a tax policy perspective, Quill is equally dubious. A use tax on items purchased from out of state, combined with a retail sales tax on items purchased within the state, yields a neutral tax on purchases by state residents. In contrast, the Quill rule provides interstate retailers with a preferred status, one that will become more problematic as e-commerce's role in the national economy continues to expand. One study estimates that states and localities lost almost $7 billion of use tax revenue due to e-commerce in 2009 and that the loss will grow to more than $11 billion in 2012.[9]

Perhaps recognizing that the physical presence requirement lacked legal and policy justification, the Quill Court relied heavily on stare decisis to justify its decision.[10] When the only ground to preserve a holding is stare decisis, there is no justification for extending it. Quill should not be expanded to protect retailers from reasonable information reporting requirements.

Although tax collection after Quill must be considered a heavy burden on interstate commerce, requiring retailers to report and disclose information is quite different from compelling them to don the role of state revenue agent. On the other side of the ledger, enabling collection of taxes on transactions that have been functionally nontaxable provides vast local benefits for states that have seen e-commerce boom, revenue drops, and budgets shortfalls broaden. Although any aspects of Colorado's law that are unduly burdensome should be invalidated, the general approach of reporting and disclosure should pass constitutional muster.

Kranz, Smith, and Freeman also claim that Colorado's reporting requirements discriminate against interstate commerce, which would render the law almost per se unconstitutional. However, they misconstrue the nature of discrimination. The dormant commerce clause's ban on discrimination against interstate commerce is not a requirement for textual uniformity between interstate and intrastate transactions. Rather, "the central rationale for the rule against discrimination is to prohibit state or municipal laws whose object is local economic protectionism."[11]

Acknowledging this point, Kranz, Smith, and Freeman contend that the Colorado law is protectionist because it differentiates between retailers based on their constitutional protection from tax collection. But protectionism arises only when domestic industry is insulated from foreign competition. In contrast, information reporting merely implements the precept that interstate commerce can "be made to pay its way," a principle recognized by the Court for decades.[12] Such a requirement is not protectionist because it does not "cause local goods to constitute a larger share, and goods with an out-of-state source to constitute a smaller share, of the total sales in the market."[13]

Finally, Kranz, Smith, and Freeman assert that HB 1193 violates the First Amendment because it compels the out-of-state retailers to speak. This argument is difficult to take seriously, particularly in view of the lesser scrutiny the Court gives to regulations of commercial speech. At the federal level, the Internal Revenue Code includes dozens of requirements that firms and individuals provide other parties with information about their potential tax liabilities, none of which have ever been thought to pose First Amendment problems.14

The dormant commerce clause has played an important role in preventing states from taxing interstate transactions more heavily than intrastate transactions. Unfortunately, the Quill strand of jurisprudence takes the clause in a different direction, providing interstate transactions with an artificial tax advantage. Quill should not be extended to bar reasonable information reporting requirements.

Alan D. Viard is a resident scholar at AEI. Ryan Lirette is a research associate at AEI.


  1. "Colorado's End Run: Clever, Coercive, and Unconstitutional," State Tax Notes, Apr. 5, 2010, p. 55, Doc 2010-6640, or 2010 STT 64-9 .

  2. Emergency Regulation 39-21-11.3.5.

  3. 504 U.S. 298 (1992).

  4. Id. at 305.

  5. Id.

  6. Oklahoma Tax Commission v. Jefferson Lines, 514 U.S. 175, 179 (1995).

  7. 430 U.S. 274 (1977).

  8. 397 U.S. 137 (1970).

  9. Donald Bruce, William F. Fox, and LeAnn Luna, "State and Local Sales Tax Revenue Losses From E-Commerce," State Tax Notes, May 18, 2009, p. 537, Doc 2009-8902 , or 2009 STT 94-1 .

  10. Quill, 504 U.S. at 317.

  11. C&A Carbone v. Town of Clarkstown, 511 U.S. 383, 390 (1994) (J. Kennedy, concurring).

  12. Ott v. Mississippi Valley Barge Line Co., 336 U.S. 169, 174-175 (1949); see also Oregon Waste Systems v. Department of Environmental Quality, 511 U.S. 93, 102 (U.S. 1994) citing Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254, 58 S. Ct. 546, 82 L. Ed. 823 (1938).

  13. West Lynn Creamery v. Healy, 512 U.S. 186, 196 (1994) citing Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 126 (1978).

  14. See, e.g., IRC sections 6031(b), 6034A(a), 6037(b), 6039(b), 6039H(d)(1), 6039J(b), 6041(d), 6041A(e), 6042(c), 6044(e), 6045(b), 6045A(a), 6045B(i), 6047(b), 6049(c), 6050A(b), 6050B(b), 6050E(b), 6050F(b), 6050G(b), 6050H(d), 6050I(e), 6050J(e), 6050K(b), 6050L(c), 6050N(b), 6050P(d), 6050Q(b), 6050R(c), 6050S(d), 6050T(c), 6050U(b), 6050W(f), 6051, 6052(b), 6053, and 6070(e).

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About the Author


Alan D.
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times,, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
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