Today the U.S. Supreme Court unanimously held in Direct Marketing Ass’n v. Brohl that the Tax Injunction Act (TIA) does not bar Direct Marketing Association’s federal lawsuit against Colorado.1 The TIA provides 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.”2 In rejecting the application of the TIA to Colorado’s use tax notice and reporting requirements, the Supreme Court’s decision narrows the applicability of the TIA.
Background on Colorado Use Tax Notice and Reporting Requirements
In 2010, Colorado passed a law requiring retailers who did not collect sales tax (Non-collecting Retailers) on sales to Colorado customers to provide the Department of Revenue specific information regarding these sales.3 The statute and its regulations imposed three principal obligations on Non-collecting Retailers whose gross sales in Colorado 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.4
Direct Marketing Association (DMA) challenged Colorado’s notice and reporting requirements in federal court. Arguing that the law violated the dormant Commerce Clause by discriminating against interstate commerce and imposing undue burdens on interstate commerce, the U.S. District Court granted DMA’s request for an injunction preventing Colorado from enforcing its reporting requirements.5On appeal, however, the U.S. Court of Appeals for the Tenth Circuit, sua sponte, overturned the injunction and held that the TIA barred DMA’s challenge in federal court.6
The Court unanimously held that the TIA did not bar DMA’s suit in federal court. Justice Thomas delivered the opinion for the Court, and Justices Kennedy and Ginsburg each filed concurring opinions. Justices Breyer and Sotomayor joined Justice Ginsburg’s concurrence in part.
In its holding, the Court relied primarily on federal tax law to interpret the TIA’s use of the terms “assessment, levy or collection.” The TIA was modeled after the Anti-Injunction Act (AIA), which provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”7 Because the TIA was modeled after the AIA, the Court “assume[d] that words used in both Acts are generally used in the same way. . . .”8 The Court held that the terms “assessment, levy, or collection” refer to three distinct phases of the taxation process “that do not include information notices or private reports of information relevant to tax liability.”9 In other words, Colorado’s law did not involve the assessment, levy or collection of taxes, and DMA’s suit was permitted in federal court. The Court held that although Colorado’s reporting requirements might improve its ability to enforce the tax law, improving tax compliance is not implicated by TIA:
Enforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumer, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes. Such a rule would be inconsistent not only with the text of the statute, but also with our rule of favoring clear boundaries in the interpretation of jurisdictional statutes.10
The Court held that although a suit may “inhibit” the enforcement of a state tax law, the TIA only forbids “restrain[ing] the assessment, levy or collection” of a tax not merely inhibiting it.11
The Court declined to address whether comity would bar the action from federal court and remanded the case back to the Tenth Circuit to decide whether comity was properly before the court.12
Sutherland Observation: The comity doctrine limits federal courts’ review of state tax issues. The doctrine reflects “a proper respect for state functions, a recognition of the fact that the entire country is made up of a Union of separate state governments, and a continuance of the belief that the National Government will fare best if the States and their institutions are left free to perform their separate functions in separate ways.” Younger v. Harris, 401 U.S. 37, 44 (1971). The Tenth Circuit must now determine if comity is an available argument for Colorado, and if so, whether it would bar the suit in federal court.
Justice Kennedy’s Concurrence
Justice Kennedy joined the majority opinion but wrote separately to emphasize what, in his view, was a “continuing injustice” faced by Colorado and other states.
Justice Kennedy stated that the physical presence requirement, which was originally set forth in Bellas Hess, should have been reevaluated in Quill: “[The Court] should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Auto but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy.”13Justice Kennedy emphasized the hardships imposed on states from the rules articulated in Quill and Bellas Hess: “Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on these purchases. California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors.”14 Much of these hardships, continued Kennedy, have been magnified by the rise of the Internet:
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. A connection to a shopper’s favor¬ite store is a click away—regardless of how close or far the nearest storefront. Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be pre¬sent in a State in a meaningful way without that presence being physical in the traditional sense of the term.15
These technological advances encourage a speedy reconsideration of the Court’s holding in Quill, Kennedy argued. He placed the onus on the “legal system” to “find an appropriate case for this Court to reexamine Quill and Bellas Hess.”16 Because Colorado’s use tax notice and reporting requirements were not before the Court on the merits, the Court’s hands were tied to determine whether, and to what extent,Bellas Hess and its progeny are still applicable today.
The Court’s decision returns the case to the Tenth Circuit to address the merits. The district court held that Colorado’s reporting regime was unconstitutional under the dormant Commerce Clause. It will now be up to the Tenth Circuit to determine whether that decision was correct. However, if the comity doctrine is raised and/or addressed, more procedural twists and turns may be yet to come.