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Overstock Gets Federal Court Win on Colorado Tax Law Discrimination

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Overstock.com Applauds Federal Court Decision Halting Enforcement of Colorado Internet Tax Law

Court finds: "likelihood of success" in claims that the CO law is unconstitutional.      01/28 10:00 AM




SALT LAKE CITY, Jan. 28, 2011 /PRNewswire/ -- Overstock.com, Inc. (OSTK:$14.83,00$-0.59,00-3.83%) (short cut: O.CO) today applauded the decision by a Federal Court in Colorado enjoining the enforcement of Colorado's new "internet tax notice" law.

(Logo: http://photos.prnewswire.com/prnh/20110120/LA32935LOGO)

The controversial law, enacted in 2010, required out-of-state retailers to publish to Colorado purchasers a notice telling them of their obligation to pay Colorado "use" taxes on their purchases. 

The law also required retailers to report these transactions to the Colorado Department of Revenue at year's end, and to tell Colorado purchases at year's end of their obligations to pay and that the retailers were providing purchase information to the Colorado tax authorities. 

"We not only thought the Colorado law was a huge invasion of customer privacy," said Jonathan Johnson, President of Overstock.com (OSTK:$14.83,00$-0.59,00-3.83%) , "but that the law clearly violated the U.S. constitution by plainly discriminating against out-of-state retailers.  Other state legislatures considering copycat legislation should take note that this type of law is not legal."

The case was brought by the Direct Marketing Association, a membership organization consisting of companies who market products across state lines by mail and through the internet.

The court's injunctive decision cites constitutional grounds as the basis for its order, noting the Colorado law's discriminatory effect on out-of-state retailers—those the law targeted for compliance.  The law was heavily lobbied in the waning days of the last legislature by local brick-and-mortar retailers. 

The court buttressed its ruling by citing to long-standing decisions by the U.S. Supreme Court supporting the principal that a state may not impose on out-of-state retailers burdens not imposed similarly on in state retailers.  Citing these decisions, the court observed that "out-of-state retailers that do not have a physical presence in Colorado generally are not obligated to collect and remit sales tax on their sales in Colorado."

The new Majority Leader of the ColoradoHouse of Representatives, Amy Stephens was swift to endorse the court's ruling.  Majority Leader Stephens stated: "Unfortunately, this tax proposal was rushed through the legislature, causing concern for consumers and leading to the immediate loss of Colorado jobs."  Stephens added she would later be introducing a measure to repeal the entire law in an effort to recover the jobs lost.

Overstock.com (OSTK:$14.83,00$-0.59,00-3.83%) noted that the efforts to impose on out-of-state internet retailers tax collection obligations began in 2008, when New York passed a law that made doing business with New York's internet advertisers a basis to force out-of-state retailers to collect sales tax.  It backfired: Overstock.com (OSTK:$14.83,00$-0.59,00-3.83%) and other retailers reacted by terminating contracts with New York advertisers and Overstock.com (OSTK:$14.83,00$-0.59,00-3.83%) sued in New York state court. 

Although a New York trial court ruled in favor of the state, the company is confident that it will ultimately succeed and has pressed on through appeals, citing the Supreme Court cases as were relied upon by the U.S. District Court in its decision yesterday.  Ultimately, Overstock.com (OSTK:$14.83,00$-0.59,00-3.83%) believes that when Federal Courts examine the question, all these types of laws will be found unconstitutional.

About Overstock.com (OSTK:$14.83,00$-0.59,00-3.83%)

Overstock.com, Inc. (OSTK:$14.83,00$-0.59,00-3.83%) (short cut: O.CO) is a Savings Engine offering brand-name merchandise at discount prices.  The company offers its customers an opportunity to shop for bargains conveniently, while offering its suppliers an alternative inventory distribution channel.  Overstock.com, headquartered in Salt Lake City, is a publicly traded company listed on the NASDAQ Global Market System and can be found online at http://www.overstock.com and http://www.o.co. Overstock.com (OSTK:$14.83,00$-0.59,00-3.83%) regularly posts information about the company and other related matters on its website under the heading "Investor Relations."

Overstock.com® is a registered trademark and O.co™ and Savings Engine™ are trademarks of Overstock.com, Inc. (OSTK:$14.83,00$-0.59,00-3.83%)

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, but are not limited to, statements regarding the success of the legal efforts described herein. Our Form 10-K for the year ended December 31, 2009, our subsequent quarterly reports on Form 10-Q, or any amendments thereto, and our other subsequent filings with the Securities and Exchange Commission identify important factors that could cause our actual results to differ materially from those contained in our projections, estimates or forward-looking statements.

SOURCE Overstock.com, Inc. (OSTK:$14.83,00$-0.59,00-3.83%)

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Good win for Overstock but given the sorry state of govt. finances does this issue of avoidance of state sales taxes by internet retailers not deserve a resolution. It realy seems to me unfair to brick and mortor retailers and also to anyone dumb enough to buy something expensive in a state with a sales tax. It seems to me that an agreement is required for online retailers to remit taxes to the state that some one is resident is fair.

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Good win for Overstock but given the sorry state of govt. finances does this issue of avoidance of state sales taxes by internet retailers not deserve a resolution. It realy seems to me unfair to brick and mortor retailers and also to anyone dumb enough to buy something expensive in a state with a sales tax. It seems to me that an agreement is required for online retailers to remit taxes to the state that some one is resident is fair.



We're in the same direct marketing industry as Overstock.  We collect and remit sales taxes collected from the residents of the state where we are domiciled, consistent with our state's law.  The US Supreme Court has ruled that businesses only have to collect and remit sales taxes in states where they have a presence such as an office or other facility or resident employees in a state.  Having a presence in a state means that a business is deriving a direct benefit from that state such as police protection, state highways, etc.


Virtually all states with sales taxes require their residents to pay sales taxes on in state and out of state purchases.  In state retailers that derive direct advantages from the government of such states are required to go to the extra expense of collecting and remitting those taxes on behalf of their fellow residents of the same state.  The US Supreme Court ruled that states may not place the burden and expense of collecting the taxes their residents are required to pay onto out of state businesses that derive no direct benefit from the taxes collected.

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What's is most interesting about this sales tax concept is that, in a perfect world savvy consumers and business people would avoid purchasing "online" products from any retailer domiciled in their own state. If I lived in Utah, for example, I wouldn't buy from Overstock, rather, I would buy from a competitor, like Amazon, domiciled in a different state.


To further illustrate the draconian effects of states' reduced revenue streams, in a perfect world of "virtual" retailers whose consumers and business people were incorporating practices as mentioned above-sales tax avoidance-a great portion of a given state's "sales tax" revenue streams would disappear causing the state great economic harm based upon past budget models which had evolved into current state services over time.


Maybe the whole concept of sales tax is unconstitutional, I don't know. However, a state does require revenue streams to provide necessary services and operate on behalf of its citizens.


There are some who say that certain retailers beyond food vendors and numerous other business entities where brick and mortar shops can never be replaced with online models, especially clothiers where physical touch as well as feel, and the ability to try products on comes into play; will never be usurped by an online alternative. Stated differently, somewhere inside a state's sales tax revenue streams, lies the difference between retail sales tax revenues before internet(BI) and after internet(AI).   


It's a complex issue, but as one poster has suggested, it seems that some reasonable, rational workout solution must be made with the advent of the internet's disruptive online distribution systems and models. Then again, maybe these states will just have to adapt and get their financial houses in order!


As Charlie Munger has opined to his fellow Americans, "Suck it up!" imo     

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From an outside observer, it seems like a strange situation.  As far as I can tell, several online retailers are essentially tax arbitrage plays.  But now that the online guys are big, they can influence regulation and it seems unlikely to change soon.

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