On December 8, 2014, the United States Supreme Court heard oral arguments in the second of three state and local tax cases that it has accepted this term –Direct Marketing Association v. Brohl – to determine the reach of the federal Tax Injunction Act (“TIA”). The TIA provides that federal courts are barred from hearing state tax cases “where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S. Code § 1341.
In 2010, Colorado passed a law requiring retailers who did not collect sales tax to provide the Department of Revenue (“Department”) specific information regarding sales to Colorado customers. Colo. Rev. Stat. §§ 39-21-112(3.5)(c), (d). The statute and its regulations imposed three principal obligations on non-collecting retailers whose gross sales in Colorado exceed $100,000:
- provide transactional notices to Colorado purchasers,
- send annual purchase summaries to certain Colorado customers, and
- annually report Colorado purchaser information to the Department.
Id.; 1 Colo. Code Regs. § 201-1:39-21-112.3.5.
Sutherland Observation: Four other states have also passed similar laws requiring non-collecting retailers to provide notice of use tax obligations: Kentucky, Oklahoma, South Dakota and Vermont. However, these states’ laws differ in one important respect from Colorado’s – they do not require retailers to provide any purchaser information to the taxing authorities.
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 that would prevent Colorado from imposing the reporting requirements. Direct Marketing Ass’n v. Huber, 2012 WL 1079175 (Mar. 30, 2012). On appeal, however, the Tenth Circuit overturned the injunction and held that the TIA barred DMA’s challenge in federal court. Direct Marketing Ass’n v. Brohl, 735 F.3d 904 (2013).
In a footnote, the Tenth Circuit also held that even if the TIA did not apply, “comity” prevents the federal courts from hearing DMA’s case. Comity is a federal common law doctrine restricting a taxpayer’s ability to bring suit in federal court. The doctrine is premised on the theory 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.” Levin v. Commerce Energy, Inc., 560 U.S. 413, 421 (2010).
In July, the United States Supreme Court agreed to review the Tenth Circuit’s decision. 134 S. Ct. 2901 (2014).
Sutherland Observation: The constitutional claims originally raised by DMA are not before the Court. While the merits of the constitutional questions were briefly referenced by Justices Scalia and Alito, it is unlikely that the Court’s decision will directly address whether the Colorado information reporting laws are part of a tax regime that is subject to the Quill physical presence test.
Did the Department Waive TIA and Comity Arguments?
DMA began its argument by highlighting the fact that the Department failed to make either a TIA or a comity argument in District Court or at the Tenth Circuit. Rather, the Department previously agreed that the TIA did not apply and pursued the constitutional questions in federal court as it desired a faster resolution.
Sutherland Observation: While it was raised in the briefs, the comity doctrine did not garner substantial attention from the Court.
The Justices queried whether a state could actually waive the TIA. As Justice Scalia pointed out, the language of the TIA imposes a prohibition against the District Courts – not the parties to the proceeding. However, when asked why TIA and comity arguments were not made, counsel for the Department stated that it was simply a mistake and that, in retrospect, they should have been asserted.
What is the Scope of the TIA?
The Court’s questions focused on the level of connection needed between the actual collection of a tax and the activity at issue to implicate the TIA. While counsel for DMA argued that information reporting was only indirectly related to the collection of tax and thus outside the scope of the TIA, counsel for the Department argued the information to be provided by the non-collecting retailers (i.e., the names and amounts) was central to its ability to collect the use tax from Colorado purchasers.
Chief Justice Roberts and Justices Breyer and Alito questioned the Department’s assertion that it could not collect the use tax without the information provided by the non-collecting retailers. The Court pointed to the fact that many tax regimes require self-reporting, and the Department could obtain the same information directly from Colorado residents. Counsel for DMA asserted that some states provide a line on income tax returns for individuals to report use tax obligations.
What Happens Next?
After the Court announces its opinion, DMA’s challenge to the Colorado law will continue. In fact, DMA re-filed its case in Colorado state court and successfully argued that the reporting regime should be enjoined because of its constitutional infirmities. Direct Marketing Ass’n v. Colorado Department of Revenue, Colo. Dist. Ct., City and County of Denver Case No. 13CV34855 (pending).
If the Court holds that the TIA does not bar this suit in federal court, the case likely will be remanded to the Tenth Circuit, because the federal District Court previously determined that the law is unconstitutional. Alternatively, if the TIA bars DMA’s action in federal court, the litigation will continue in Colorado state court.
Justice Scalia recognized that if the suit proceeds in state court, the likelihood of it returning to the Supreme Court is substantially diminished:
But you know that we accept [a] minuscule, miniscule percentage of appeals from State supreme courts. And as a practical matter, these challenges in State supreme courts[,] if they’re . . . ruled in a manner that [ ] violates Federal law, they’re not going to come up here [–] 90 percent of them aren’t going to come up. . . . So it is important that it begin in Federal court [ ] especially when what is at issue is the selfish State’s assessment and collection of taxes. I mean, there is a real incentive on the part of the state government[,] which includes the state courts[,] to . . . find the tax not paid.
Sutherland Observation: As it is unlikely the Court will make a direct determination on the constitutional issues at play, this case will continue either on remand to the Tenth Circuit, or in Colorado state courts. However, the Court’s decision could have a significant effect on the constitutional litigation.