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A federal court judge granted a preliminary injunction against a Colorado law that required e-commerce sites and other out-of-state retailers to disclose information about state residents’ purchases to the authorities. The law took effect last March and requires retailers with more than $100,000 in annual sales that do not have a physical presence in Colorado and that do not otherwise collect Colorado state taxes on sales to Colorado residents to notify Colorado customers that they owe a state tax on their purchases.

Retailers must also send an annual report to customers who spent more than $500 in the previous calendar year each January detailing their purchases from the prior year with the amount of Colorado sales tax they owe, and submit a report to the state with information about all in-state purchases. Penalties range from $5 to $10 per violation.

The Direct Marketing Association filed suit challenging the law, arguing that it interfered with interstate commerce. The DMA argument relies upon a 1992 U.S. Supreme Court decision holding that state governments cannot require retailers to collect state tax unless they have a physical presence in the state, which has been interpreted to mean a brick-and-mortar store.

Judge Robert Blackburn found that DMA had a substantial likelihood of prevailing on the merits of its claims, and granted a preliminary injunction against enforcement of the law. Although the state argued that it had a legitimate interest at stake – increased tax revenue – the court said non-discriminatory alternatives existed.

Noting that the estimated first-year cost for companies to comply with the law ranged from $3,100 to $7,000, the court said that monetary loss was an irreparable injury because if the law is struck down, retailers will be unable to recover their costs.

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