A recent Supreme Court action may impact taxpayers who have or are contemplating filing a lawsuit challenging a state tax law, or retailers analyzing compliance requirements under state Amazon laws. On July 1, 2014 the Supreme Court granted certiorari in Direct Marketing Association v. Brohl. At issue is the scope of the Tax Injunction Act (“TIA”), a law that limits a federal court’s jurisdiction over state tax cases. Federal appellate courts are currently split on when the TIA precludes federal jurisdiction over state tax claims.
The case arose as a constitutional challenge to Colorado’s “Amazon law,” which forces some out-of-state online retailers to either collect sales tax from Colorado residents or comply with burdensome reporting requirements. Currently, more than 20 states have passed similar laws in an attempt to collect tax on online sales made by out-of-state retailers.
The United States District Court for the District of Colorado held that Colorado’s Amazon law violated the Commerce Clause because it discriminates against out-of-state retailers by placing undue burdens on interstate commerce. On appeal, however, the Tenth Circuit reversed and remanded the case on the grounds that the TIA prevented the district court from having jurisdiction. As a result, Direct Marketing filed a constitutional challenge in Colorado state court and petitioned the United States Supreme Court for review of the Tenth Circuit’s decision.
While the Supreme Court’s ruling will likely be limited to the issue of whether the TIA precludes federal court jurisdiction, the implications will be far reaching. In the context of Amazon laws, a ruling that the laws can be challenged in federal court could ultimately result in binding nationwide (or at least circuit-wide) precedent concerning constitutionality. It could also open the door to federal lawsuits challenging other state tax statutes, especially in the context of whether such statutes pass constitutional muster. On the other hand, a ruling affirming the Tenth Circuit’s decision would require the constitutionality of Amazon laws to be determined on a state-by-state basis.
The uncertainty surrounding the scope of the TIA has made it more difficult to determine the proper and most advantageous forum to file a lawsuit challenging a state tax law.