The U.S. Supreme Court unanimously held on March 3 that the Tax Injunction Act does not bar a lawsuit brought by the Direct Marketing Association, a trade association of retailers, challenging the enforcement of a Colorado law that imposes notice and reporting obligations on out-of-state retailers whose Colorado customers have made purchases online. Direct Marketing Ass’n v. Brohl, No. 13-032. In a concurring opinion, Justice Kennedy invites reconsideration of the long-standing physical presence requirement for sales tax purposes in light of changes in technology and the increase in e-commerce sales.
Under the Commerce Clause and prior Supreme Court precedent, out-of-state retailers that do not have a physical presence within the taxing state are not required to collect sales and use taxes. Instead, the in-state consumers are required to voluntarily report and pay use tax on their purchases. To stem what states claim is a significant loss of tax revenue from online sales due to lack of use tax compliance, Colorado enacted a law in 2010 requiring the non-collecting retailers to notify Colorado customers of their use tax liability and send an annual report to customers who bought more than $500 worth of goods during the prior year. The Colorado law also required out-of-state retailers to annually report their customer names, addresses, and amount of purchases to the state.
The Direct Marketing Association filed suit claiming that the notice and reporting law discriminated against and imposed undue burdens on interstate commerce, in violation of the negative Commerce Clause. The district court granted summary judgment on those claims and enjoined the enforcement of the notice and reporting requirements. The Tenth Circuit Court of Appeals reversed, finding that the district court lacked jurisdiction because the suit was barred by the Tax Injunction Act, 28 U.S.C. § 1341. The Tax Injunction Act limits federal court jurisdiction in state tax cases, providing that federal courts “shall not 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.”
Writing for the Court, Justice Thomas focused on whether the notice and reporting requirements are acts of “assessment, levy or collection” of taxes for purposes of the Tax Injunction Act. The Court easily concluded that the notice and reporting requirements are acts that precede the steps of assessment, levy and collection. The Court also rejected the Tenth Circuit’s broad definition of the word “restrain” to encompass a suit brought to “limit, restrict or hold back” the assessment, levy or collection of taxes.
While finding that the suit was not barred under the Tax Injunction Act, the Court expressed no opinion on the merits of the claims. The Court also took no position on the whether the lower court should decline to exercise jurisdiction under the “comity doctrine,” where federal courts generally refrain from interfering with fiscal operations of state governments.
The victory for online retailers may be short-lived. In his concurring opinion, Justice Kennedy favors taking another look at the “serious, continuing injustice” faced by the states as a result of the physical presence requirement for sales tax purposes in Commerce Clause precedents,Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Dep’t of Revenue of Ill. Justice Kennedy stated his view that in light of the “dramatic technological and social changes that had taken place in our increasingly interconnected economy,” it would be unwise to delay a reconsideration of Quill. He concurred, however, that the instant case did not raise this issue in a manner to be addressed by the Court. Justice Ginsburg also filed a concurring opinion, in which Justice Breyer joined and Justice Sotomayor joined in part.