Yesterday, the U.S. Court of Appeals for the Tenth Circuit (Tenth Circuit) issued its opinion in Direct Marketing Association v. Brohl, reversing the district court’s order granting summary judgment.1 (See Sutherland’s previous coverage of this case.) The Tenth Circuit held that Colorado’s notice and reporting requirements imposed on non-collecting retailers did not violate the dormant Commerce Clause because they neither discriminated against, nor unduly burdened, interstate commerce. In determining that Colorado’s law did not violate the dormant Commerce Clause, the Tenth Circuit further held that the application of Quill v. North Dakota (Quill) is narrowly limited to sales and use tax collection.

Background on Colorado’s Use Tax Reporting Requirements

In 2010, Colorado enacted a law subjecting non-collecting out-of-state retailers whose gross sales to Colorado customers exceed $100,000 to three reporting requirements:

  1. Provide transactional notices to Colorado purchasers;
  2. Send annual purchase summaries to certain Colorado customers; and
  3. Annually report Colorado purchaser information to the Department.2

District Court Ruling

The Direct Marketing Association (DMA) claimed that the reporting regime violated the U.S. Constitution and sought a permanent injunction enjoining Colorado from enforcing the notice and reporting obligations imposed on its members.3 The district court held that the Colorado law discriminated impermissibly against interstate commerce and impermissibly imposed undue burdens on interstate commerce. As a result, the district court granted DMA’s permanent injunction against the Department’s enforcement of the reporting regime.

Tenth Circuit Ruling

The Tenth Circuit reversed the district court, holding that Colorado’s notice and reporting requirements imposed on non-collecting retailers do not “violate the dormant Commerce Clause because [they do] not discriminate against or unduly burden interstate commerce.”4

Prior to analyzing whether the Colorado law violated the dormant Commerce Clause, the Tenth Circuit held that Quill “applies narrowly to sales and use tax collection.”5 The Tenth Circuit observed that in Direct Marketing Association v. Brohl, the U.S. Supreme Court “characterized Quill as establishing the principle that a state ‘may not require retailers who lack a physical presence in the State tocollect these taxes on behalf of the [state].’”6 After reviewing the cases cited by DMA, the Tenth Circuit concluded that “Quill applies narrowly to and has not been extended beyond tax collection.”7

Discrimination

The Tenth Circuit held that the Colorado law did not discriminate against interstate commerce. First, the Tenth Circuit considered whether the Colorado law facially discriminates against interstate commerce.8 The court held that, on its face, the law does not discriminate against interstate commerce because it imposes differential treatment “based on whether the retailer collects Colorado sales or use taxes,” not based on whether the vendor is located in-state or out-of-state.9 Unlike in cases where the Supreme Court had previously concluded that a law facially discriminated against interstate commerce, the Colorado law did not explicitly identify a geographical distinction.10

Second, the court considered whether the Colorado law unconstitutionally discriminated by having the direct effect of favoring in-state economic interests over out-of-state interests.11 The court noted that “[t]he party claiming discrimination must show that the state law benefits local actors and burdens out-of-state actors, and the result must ‘alter[] the competitive balance between in-state and out-of-state firms.’”12  

The court noted that limiting the application of the reporting requirements to out-of-state sellers does not violate the dormant Commerce Clause because:  

  • Colorado customers are required to pay sales or use tax when they purchase goods from a collecting or non-collecting retailer. Thus, “the reporting obligation itself does not give in-state retailers a competitive advantage”;13   
  • While “equal treatment requires that those similarly situated be treated alike,”14 the non-collecting out-of-state retailers and in-state retailers are not similarly situated because the in-state retailers are required to comply with tax collection and reporting requirements; and  
  • The Supreme Court has “repeatedly stressed that laws are not to be understood in isolation, but in their broader context.”15 The court should analyze the entire regulatory system “to determine whether it is discriminatory with regard to the economic burdens that result.”16  

Thus, the court held that the Colorado notice and reporting requirements did not alter the competitive balance between in-state and out-of-state firms. DMA did not demonstrate that the Colorado law “imposes a discriminatory economic burden on out-of-state vendors when viewed against the backdrop of the collecting retailers’ tax collection and reporting obligations.”17   

Undue Burden

The Tenth Circuit also held that the Colorado law does not unduly burden interstate commerce in violation of the dormant Commerce Clause. The district court had previously held that the law unduly burdened interstate commerce because “[t]he sole purpose of [the notice and reporting requirements] is to enhance the collection of use taxes by the State of Colorado.”18 Thus, the law violated Quill. However, the Tenth Circuit construed Quill narrowly to apply only to the duty to collect and remit sales and use taxes. The Tenth Circuit relied on the Supreme Court’s previous analysis of the Colorado law, albeit in the Tax Injunction Act context, finding that it “does not require out-of-state retailers to assess, levy, or collect use tax on behalf of Colorado.”19 Thus, the court held that Quill does not control, leading it to note that, ironically, “DMA’s success in Brohl II [led] to the demise of its undue burden argument….”20

Future Congressional Intervention?

The Tenth Circuit reversed the lower district court’s order granting summary judgment and held that the Colorado notice and reporting requirements imposed on non-collecting out-of-state retailers did not violate the dormant Commerce Clause. The court concluded “by noting the Supreme Court’s observation in Quill that Congress holds the ‘ultimate power’ and is ‘better qualified to resolve’ the issue of ‘whether, when, and to what extent the States may burden interstate [retailers] with a duty to collect [sales and use] taxes.’”21