Direct Marketing Association (DMA) continued its fight against Colorado’s use tax reporting regime during oral arguments today before the United States Court of Appeals for the Tenth Circuit.1 After getting sidetracked with a jurisdictional question that proceeded to the U.S. Supreme Court,2 DMA returned to the Tenth Circuit and urged it to affirm the decision of the lower court that Colorado’s law violates Quill Corp. v. North Dakota.3

Background on Colorado Use Tax Reporting Requirements

In 2010, Colorado enacted a law requiring retailers who did not collect Colorado sales tax customers to provide the Department of Revenue (the Department) specific information regarding these sales.4 The statute and its regulations imposed three principal obligations on non-collecting retailers whose gross sales to Colorado customers exceed $100,000:

  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.5

DMA claimed that the reporting regime violated the US Constitution and sought a permanent injunction enjoining Colorado from enforcing the notice and reporting obligations imposed on its members.6

District Court Ruling

In the district court, DMA raised two Commerce Clause claims against the Colorado regime. First, DMA argued that the laws and regulations discriminate impermissibly against interstate commerce. Second, DMA contended that the laws and regulations impermissibly impose undue burdens on interstate commerce. Under the dormant Commerce Clause, a law discriminates against interstate commerce if it imposes “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.”7 The district court held that the law created a geographic distinction between an in-state and an out-of-state retailer that “discriminates patently against interstate commerce.... That discrimination triggers the virtually per se rule of facial invalidity.”8 

DMA’s second argument relied on the Quill physical presence standard. It argued that Colorado’s law imposed use tax reporting obligations on it even though it did not maintain a physical presence in Colorado. The district court agreed, holding:

[U]nder the standard established in Quill, a state law that imposes a use tax collection burden on a retailer with no physical presence in the state causes an undue burden on interstate commerce. The burdens imposed by the Act and the Regulations are inextricably related in kind and purpose to the burdens condemned in Quill. Thus, the Act and the Regulations impose an undue burden on interstate commerce.9

The district court granted DMA’s permanent injunction against the Department’s enforcement of the reporting regime.

Arguments Raised at the Tenth Circuit

Oral arguments were held today in Denver, Colorado. Two questions were before the Tenth Circuit: first, the argument that the comity doctrine barred the action in federal court available to Colorado. Importantly, Colorado has repeatedly waived the comity doctrine. The second was whether to uphold the district court’s ruling that the use tax reporting regime violated the dormant Commerce Clause.

The Department’s Argument

The Department, as appellant, had to demonstrate that the district court’s decision was incorrect. Interestingly, the two primary cases it cited to do so were handed down by the U.S. Supreme Court this year.

First, the Department argued that Quill should not apply. Quill, it argued, should be restricted to the four corners of the opinion: that is, only to tax collection and remittance obligations. The Department contended that the U.S. Supreme Court’s decision in DMA v. Brohl last term clearly indicates that Quill is not violated because of the Court’s finding that the regime does not involve the “levy, collection, or assessment of a tax” for purposes of the Tax Injunction Act10 (SeeSutherland’s previous coverage of this case).

The three judge panel, with specific focus by Judge Gorusch, inquired if Quill does not apply, doesn’t the court need to determine the burden on interstate commerce imposed by the reporting regime? In fact, couldn’t the burden bore by out-of-state retailers to comply with the reporting regime create even a greater burden on interstate commerce than the burden Quill sought to prevent? In this case, the Department argued that the balancing approach articulated in Pike v. Bruce Church11  would apply. Under the Pike analysis, courts are required to ask two questions to determine whether the dormant Commerce Clause is violated:

Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.

If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will, of course, depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities12

The Department argued that under the Pike balancing approach, the burden imposed on out-of-state retailers is insubstantial to give rise to a constitutional violation. It emphasized the amount of revenue the reporting regime would create for Colorado, while minimizing—and barely mentioning—the burden the regime imposes on out-of-state retailers.

The Department also argued that when determining whether Colorado’s use tax reporting regime unconstitutionally discriminates between in-state and out-of-state retailers, courts must weigh every tax burden imposed on in-state retailers by Colorado against the burdens imposed by it on out-of-state retailers. For this proposition, Colorado cited Alabama Department of Revenue v. CSX, another case handed down by the U.S. Supreme Court in 2015.13  In this case, the Supreme Court held that when interpreting the 4-R Act14 —federal legislation regulating state impositions of burdens on the railroad industry—courts must look to the aggregate burdens imposed on an entity by that state. The Department argued that although CSX was not a case involving the dormant Commerce Clause, the Court invoked the Clause’s discriminatory tax prohibition, thus making it relevant in this case.

DMA’s Argument

DMA began its argument by focusing on the application of Quill’s physical presence standard. It argued that Quill applies and justifies striking down Colorado’s regime—the very determination made by the district court in this case’s earlier proceeding. The panel questioned why Quill should apply, as the U.S. Supreme Court just held that the reporting regime does not involve the “levy, collection or assessment of a tax.”15  DMA responded that the harm Quill and the dormant Commerce Clause seek to prevent is burdening the national economy. The fact that Colorado’s regime involves a reporting requirement as opposed to a collection requirement does not remove the protections of Quill. In fact, a key factor in Quill was the substantial number of jurisdictions that impose sales and use taxes; this factor exists today. DMA argued that the number of jurisdictions that impose taxes and related obligations have increased in the past two decades. Therefore, the justifications for Quill’s physical presence test are even more substantial today than in 1992.

The court also questioned why the compensatory tax doctrine—which permits the imposition of both sales and use taxes even though doing so is discriminatory—should not apply in this case. Judge Gorusch questioned whether the compensatory tax doctrine should permit a use tax reporting obligation on out-of-state retailers if in-state retailers have a similar sales tax obligation. DMA contended that the burdens imposed by the two regimes are not comparable, a key requirement of the compensatory tax doctrine.

Comity and Kennedy

Noticeably absent from the arguments were the comity doctrine and Justice Kennedy’s concurring opinion in DMA v. Brohl. The comity doctrine, which limits federal courts’ review of state tax issues, was not addressed by either party, thus reducing the likelihood that the doctrine will bar DMA’s action in federal court.

Questioning Quill? Possible Implications of the Tenth Circuit Decision

Regardless of the Tenth Circuit’s decision, this case is likely to be appealed to the U.S. Supreme Court. If the Court decides to review the decision, Quill and the physical presence standard would be squarely before the Court for the first time since 1992.