DMA’s Colorado sales and use tax information reporting saga continues
No Commerce Clause protection for remote sellers
TAX ALERT |
UPDATE (8/30/2016): On Aug. 29, 2016, the taxpayers in the Direct Marketing Association v. Brohl case petitioned for a writ of certiorari with the U.S. Supreme Court to review the decision of the U.S. Court of Appeals for the 10th Circuit that found that Colorado’s use tax notice and reporting requirements did not violate the Commerce Clause of the U.S. Constitution. Most recently on April 1, 2016, the 10th Circuit denied DMA’s petition to rehear that decision en banc.
This is the second time DMA has petitioned the U.S. Supreme Court. On March 3, 2015, the U.S. Supreme Court unanimously held that the Tax Injunction Act did not bar the 10th Circuit jurisdiction from hearing the case because Colorado’s notice and reporting statute merely required informational reporting and did not impose tax. The issue before the U.S. Supreme Court was whether the 10th Circuit could hear the case and did not address DMA’s substantive challenge to the law, that is, that it violates the Commerce Clause of the U.S. Constitution. Those challenges are the subject of the current petition and will be addressed if the U.S. Supreme Court agrees to hear the case.
UPDATE (2/24/2016): On Feb. 22, 2016, the U.S. Court of Appeals for the 10th Circuit issued its opinion on remand in Direct Marketing Association v. Brohl, reversing the Federal District Court of Colorado’s grant of summary judgment in favor of DMA and holding that Colorado’s notice and reporting requirements imposed on remote sellers under Colo. Rev. Stat. section 39-21-112 did not violate the Commerce Clause of the U.S. Constitution because the reporting requirements did not discriminate against or unduly burden interstate commerce. In reaching this decision, the 10th Circuit determined that the physical presence nexus requirement stated by the U.S. Supreme Court in Quill v. North Dakota is narrowly limited to sales and use tax collection, and, therefore, does not apply to information reporting requirements like those imposed by Colorado. This approach, if upheld and applied across the states, could result in a substantial reporting burden on remote sellers, even if collection and remittance of tax is not ultimately required. It is unclear at this time whether DMA will argue that an interlocutory appeal is appropriate in this case and file a Petition for Certiorari with the U.S. Supreme Court, or return to the District Court for final judgement on the merits in relation to its other arguments including the application of the Due Process Clause of the U.S. Constitution. Regardless of the status of DMA’s suit in the federal courts, application of the reporting requirements under Colo. Rev. Stat. section 39-21-112 remains barred pursuant to a state-level injunction issued by the Denver District Court. For more information, please see our alert.
UPDATE (4/15/2015): On April 13, 2015, the U.S. Court of Appeals for the 10th Circuit in its ongoing consideration of Direct Marketing Association v. Brohl on remand ordered the state of Colorado and DMA to submit a full briefing on DMA's Commerce Clause and comity claims.
In so doing, the court will likely have to address the continued viability of the Quill physical presence nexus standard, which would represent a near-term opportunity for the U.S. Supreme Court as a whole to address Justice Kennedy's call to reexamine Quill in his concurrence to the Court's March 3, 2015, opinion in Direct Marketing Association v. Brohl. Colorado must file its opening brief by May 13, 2015, and DMA must file a response brief within 20 days of service.
Clearly, the outcome of this case could have a far-reaching impact on how we understand and apply the foundational principles of modern constitutional nexus analysis.
ORIGINAL (3/5/2015): On March 3, 2015, the U.S. Supreme Court issued its ruling in Direct Marketing Association v. Brohl, reversing and remanding the U.S. Court of Appeals for the 10th Circuit’s 2013 decision that the U.S. District Court for the District of Colorado lacked jurisdiction to enjoin Colorado from enforcing the provisions of Colo. Rev. Stat. section 39-21-112. This state law requires remote sellers that do not collect and remit the Colorado sales and use tax and whose gross sales in Colorado exceed $100,000 to either (1) collect and remit sales tax voluntarily, or (2) provide notices to Colorado purchasers informing them of their duty to pay use tax, send annual purchase summaries to Colorado customers, and annually report Colorado purchaser information to the Colorado Department of Revenue.
The Direct Marketing Association (DMA) is a trade association representing businesses that market products and services directly to consumers via the Internet, catalogues, print advertising and broadcast media. Many of the DMA’s members do not have a physical presence within Colorado and do not collect and remit Colorado sales tax on purchases made by Colorado customers. As such, these members fall within the grasp of Colo. Rev. Stat. section 39-21-112 and, as they do not collect and remit the sales tax, are required to comply with the reporting requirements imposed by the statute.
In 2010, the DMA sued Colorado in the U.S. District Court for the District of Colorado and, seeking injunctive relief, argued that the reporting requirements imposed by Colo. Rev. Stat. section 39-21-112 violate, among other provisions, the Commerce Clause of the U.S. Constitution because the statute discriminates against, and imposes an undue burden on, interstate commerce. Staying all other challenges, the district court considered only the DMA’s Commerce Clause arguments, granted partial summary judgment in favor of the DMA, and permanently enjoined enforcement of the Colo. Rev. Stat. section 39-21-112 reporting requirements. The state of Colorado appealed.
As discussed in our prior alert, on appeal, the U.S. Court of Appeals for the 10th Circuit held that the district court lacked jurisdiction to hear the DMA's suit over Colo. Rev. Stat. section 39-21-112 because the federal Tax Injunction Act (TIA) bars federal court jurisdiction over state tax matters. In particular, the TIA provides in 28 U.S. Code section 1341 that the federal district courts cannot “enjoin, suspend or restrain the assessment, levy or collection of any tax under state law where a plain, speedy and efficient remedy may be had in the courts of such State.” The court of appeals found that the information to be provided by remote sellers as a consequence of Colo. Rev. Stat. section 39-21-112 was calculated to improve compliance with the state’s sales and use tax, but that the requirement to provide the information was not itself an act of assessment, levy or collection. However, the court of appeals determined that providing injunctive relief would restrain the collection of tax within the meaning of the TIA because the state’s compliance enforcement efforts would be inhibited thereby. Lastly, the court of appeals found that the DMA could challenge the application of the reporting requirement and receive the requested remedy in Colorado state courts. Accordingly, the court of appeals, noting that application of the doctrine of comity would support dismissal even in the absence of the TIA, reversed the district court’s decision and remanded the case to the district court to be dismissed for lack of jurisdiction. The DMA petitioned to the U.S. Supreme Court for a writ of certiorari.
On July 1, 2014, the U.S. Supreme Court (the Court) granted the DMA’s petition for a writ of certiorari, and, on Dec. 8, 2014, the Court heard oral arguments in the case. In a highly anticipated decision, Justice Thomas wrote the unanimous opinion of the Court, finding that (1) the reporting requirements imposed by Colo. Rev. Stat. section 39-21-112 preceded the acts of assessment and collection and were not, therefore, “assessment, levy or collection” within the meaning of the TIA, and (2) while the reporting requirements could improve the state’s ability to assess or collect tax, providing injunctive relief barring against the requirements did not restrain the assessment, levy or collection of tax because the tax could still be imposed and collected without the information to be obtained via the application of Colo. Rev. Stat. section 39-21-112. In reaching this conclusion, the Court determined that the term “restrain” as used in the TIA was to be narrowly construed as “prohibit,” as opposed to the broader interpretation of “inhibit” applied by the court of appeals. This narrow approach to the use of the term restrain in the TIA may allow more taxpayers to challenge similar reporting requirements in federal courts.
Because the Court determined that injunctive relief did not restrain Colorado’s power to assess, levy or collect its sales and use tax, the Court did not reach the issue of whether the court of appeals was correct in its finding that Colorado courts provided access to a “plain, speedy and efficient remedy” as required by the TIA. Further, on finding that the court of appeals note that “the doctrine of comity […] militates in favor of dismissal” was not a holding, the Court took no position on whether the comity doctrine, which advises federal courts to avoid hearing cases within their jurisdiction that interfere with the fiscal operations of the state, would apply to DMA’s suit. However, on reversing the court of appeals’ decision regarding the TIA, the Court noted that the court of appeals could “decide on remand whether the comity argument remains available to Colorado.” This leaves open the possibility that the court of appeals could dismiss the case on essentially procedural grounds, with the potential for a second petition to the Court for a writ of certiorari before the case could truly be considered on the merits.
Justice Kennedy wrote a concurring opinion providing his unqualified join and assent to the opinion of the Court, but added that, while Direct Marketing Association v. Brohl did not afford the Court an appropriate opportunity to address nexus issues, the problem addressed by Colo. Rev. Stat. section 39-21-112 – remote sellers cannot be required to collect and remit sales tax on sales to in-state purchasers and those in-state purchasers overwhelmingly fail to meet their use tax remittance responsibilities, thus resulting in an unjust loss of tax revenues – is indicative of a need for the Court to revisit its rulings in National Bellas Hess, Inc. v. Department of Revenue of Ill. and Quill Corp. v. North Dakota, which require a remote seller to have physical presence in a state in order to be subject to that state’s taxing jurisdiction. In arguing in for a strong move away from the physical presence requirement, Justice Kennedy noted:
The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.
In light of these changes in how Americans interact with businesses and make purchases, Justice Kennedy called for the legal system to provide the Court with a case suitable to address whether the rationale in National Bellas Hess and Quill is still viable in the modern world. This call and the clear deliberation that went into it present a glimpse of a potential not-so-distant future in which the physical presence nexus standard for sales tax purposes is nothing but a memory. Given the difficulty states have with this issue, revenue shortfalls, and the quagmire in which the Marketplace Fairness Act is presently sunk, it would come as no surprise if the states are already seeking Justice Kennedy’s “appropriate case for this Court to reexamine Quill and Bellas Hess”.
Clearly, remote sellers won a victory with the Court’s decision in Direct Marketing Association v. Brohl. While the restoration of the federal injunction arguably has little impact, as a state injunction barring the enforcement of Colo. Rev. Stat. section 39-21-112 was granted to DMA by the Denver district court on Feb. 18, 2014, the narrow reading of the TIA should give remote sellers comfort that the TIA should not bar them from seeking relief in federal courts against similar reporting requirements. However, one victory is not the end of the matter. The court of appeals will still have an opportunity to dismiss the case on comity grounds, and, even if that hurdle is overcome, it is likely that there will be years of ongoing litigation before a final decision on the merits is rendered. And, even if DMA secures ultimate victory on the merits, that victory may prove to be pyrrhic if, as a result of Justice Kennedy’s concurrence, the Court revisits National Bellas Hess and Quill and overrules the physical presence nexus standard.