Monday, February 14, 2011

Maine Introduces Modified, Colorado-Style Notice and Reporting Law, Which Also Likely Violates The Commerce Clause

On February 9, 2011, the Maine Legislature introduced a bill (LD 469) which would impose upon certain out-of-state retailers a set of notice and reporting obligations that closely parallel the requirements of Colorado’s 2010 law, H.B. 10-1193. Enforcement of H.B. 10-1193 was recently enjoined by a federal judge in Denver on the grounds that such requirements are likely unconstitutional and in violation of the Commerce Clause. As we have reported in prior posts, Brann & Isaacson represents the Direct Marketing Association in the federal court challenge to the now-suspended Colorado law, after which the Maine bill is patterned.

Maine’s LD 469 includes all three of the Colorado law’s notice and reporting requirements – retailers must provide the Transactional Notice, Annual Purchase Summaries to customers, and Customer Information Reports to revenue officials – and would impose penalties on affected retailers for non-compliance with the law.  Notably, however, unlike the Colorado law, the Maine bill includes no $500 annual minimum purchase threshold to trigger the requirement that an affected retailer must send a customer an Annual Purchase Summary. Similar to Colorado’s law, under LD 469 such annual summaries to customers must include, if available, “[d]escriptions of items purchased,” as well as dates and amounts.  Also in contrast to Colorado, the report to Maine Revenue Services must include all of the information provided to each purchaser in the annual summary – thereby requiring that at least descriptions of the items purchased by customers of an affected out-of-state retailer be turned over to Maine Revenue Services. The Maine bill thus raises even more significant privacy concerns for Maine consumers buying from affected retailers than does the privacy-invading Colorado law.

The Maine bill also appears to differ from the Colorado law in another respect: whereas the suspended Colorado law applies, by its terms, to all out-of-state retailers that do not collect Colorado sales tax, LD 469 imposes its onerous notice and reporting obligations only upon companies that are presumed to be doing business in the state because they are members of a “controlled group of corporations” that has at least one member who is already a retailer with a physical presence in the state.  The Bill Summary states that “[t]his bill requires out-of-state retailers that are not required to collect sales tax and that are part of a controlled group of corporations with a connection in the State” to comply with the notice and reporting obligations. The apparent requirement that, to be subject to the law, an out-of-state retailer must have an affiliated retailer with physical presence in Maine, means that the proposed law would not apply to as broad a group of out-of-state companies as does the Colorado law.

What the sponsors of the bill apparently fail to recognize is that limiting the notice and reporting obligations to a more narrow group of out-of-state retailers who do not collect sales tax (i.e, only those who are part of a controlled group) does not change the fact that it discriminates against interstate commerce in violation of the Constitution. The Supreme Court has made it perfectly clear that a state cannot pick and choose which out-of-state companies it will discriminate against – even state laws that have imposed disparate treatment upon only a single out-of-state company that is not imposed upon in-state companies are virtually per se invalid under the Commerce Clause.

The prospects for passage of LD 469 are, at this point, entirely uncertain, so there is still time for Maine’s elected officials to avoid following in the footsteps of their Colorado counterparts.  In addition to running afoul of over 180 years of established constitutional law, LD 469 is simply bad policy – invading the privacy of Maine citizens should never be viewed as a proper approach to promoting use tax reporting.

Since the new year, several other states, including Arizona, California, Connecticut, Hawaii, Illinois, New Mexico, South Dakota, Vermont, and Texas, have introduced new notice and reporting bills, or “Amazon” affiliate-nexus legislation.  Stay tuned for an update on the progress of these bills.


  1. I'm new to this stuff. Is the argument that states aren't entitled to this revenue? Could states seek these taxes in a non-discriminatory way? I'm trying to figure out what a permissible scheme would look like. Maybe it's not possible.

  2. John:

    The constitutional infirmity of the Colorado notice and reporting law, and of the legislation introduced in Maine, arises from the imposition of discriminatory burdens on out-of-state companies that are not imposed on in-state companies, as well as from the protection afforded under the Commerce Clause against state laws that may subject interstate commerce to inconsistent and unduly burdensome regulation.

    Non-discrimination against interstate commerce is a bedrock principle of our nation. Under constitutional jurisprudence dating back more than 180 years, and based on concerns for protecting the free flow of interstate commerce that were a primary motivation for convening the Constitutional Convention, a state cannot target any group of out-of-state companies with burdens not borne by in-state companies. This is true even if a state, in adopting such discriminatory burdens, is seeking somehow to “level the playing field” by “making-up” for a burden that in-state sellers bear, but the burden of which is not (or cannot be, consistent with the Constitution) imposed on out-of-state companies. [The only exception to this principle is the extremely narrow “compensatory tax” doctrine, which has no application to notice and reporting obligations.] Under the Constitution, only Congress, and not the states, has the authority to make such judgments.

    Thus, the fundamental requirement of a constitutionally permissible state scheme for taxing or regulating private (as opposed to government-operated) enterprises is simple: a state must regulate even-handedly, imposing the same burdens on in-state companies that it does on out-of-state companies. Now, such an “even-handed” scheme may still impose undue burdens on interstate commerce. It is the danger of undue burdens on interstate commerce that led the Supreme Court, in Quill Corp. v. North Dakota, to conclude that the Commerce Clause limits the power of a state to impose sales and use tax collection obligations upon retailers with no physical presence in the state. In other words, most sales and use taxes are not discriminatory; rather, imposing the obligation to collect such taxes on out-of-state sellers with no physical presence presents very real concerns about inconsistent regulation of interstate commerce by the more than 7,500 taxing jurisdictions in the United States.

    The problem under the Commerce Clause with notice and reporting laws that seek to “end run” the limitations imposed on state taxing power under Quill is that they both discriminate against out-of-state retailers and impose potentially conflicting and burdensome state regulation of interstate commerce. (Not to mention other inherent constitutional infirmities, including compromising privacy rights, chilling free speech, and taking property without due process or fair compensation.)

  3. Matt:

    Thanks for the elaboration. It's becoming less foggy.

    "A state must regulate even-handedly, imposing the same burdens on in-state companies that it does on out-of-state companies."

    So, it seems to me like Maine could pass a law requiring Amazon to charge a Maine sales tax to all Maine residents because that's what Maine requires of its in-state retailers with a physical presence. The problem with LD 49 seems to be the reporting requirements, which would seem to impose special burdens on retailers like Amazon.

    I'm sympathetic to online retailers and understand the importance of protecting interstate commerce. I'm also sympathetic to States needing to generate tax revenue. I look forward to seeing these types of laws challenged.

    Thanks again.

  4. Not so fast, John. Remember the other strand of Commerce Clause jurisprudence: undue burden.

    As Matt notes above, “It is the danger of undue burdens on interstate commerce that led the Supreme Court, in Quill Corp. v. North Dakota, to conclude that the Commerce Clause limits the power of a state to impose sales and use tax collection obligations upon retailers with no physical presence in the state.” Because Amazon appears to have no physical presence in Maine (no stores, no warehouses, no employees, etc.), Quill protects it from collection requirements imposed on retailers that do have a physical presence in Maine.