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Colorado’s Burdensome Tax Notification Law Violates the Commerce Clause: Direct Marketing Association v. Brohl

4 min readBy: Joseph Bishop-Henchman, James W. Kennedy

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On March 3, 2015, the U.S. Supreme Court ruled for the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers in in Direct Marketing Association v. Brohl, a challenge to Colorado’s “Amazon tax.” That law requires Internet retailers to (1) notify their Colorado customers of the obligation to pay state taxes on their online purchases, with dates and total amounts, and (2) provide detailed information to the Colorado Department of Revenue on purchases made by Colorado customers. The Direct Marketing Association had challenged the law in federal court as a violation of the Interstate Commerce Clause, and the Tax Foundation had filed a supportive brief, noting:

  • Deputizing out-of-state retailers to assist in the collection of use tax is unduly burdensome, given the sheer number of sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. jurisdictions in the United States (nearly 10,000), the dangers of permitting states to impose tax collection burdens on out-of-state retailers with no nexus to the state, and the onerous features of the statute in question (mailing notices with specific detail, separate from the mailing of the product, with no e-mail alternative permitted). The sponsor of the legislation admitted the purpose was to encourage retailers to give in and collect the tax.
  • The challenged statute violates the Supreme Court’s decision in Quill v. North Dakota, which limits sales tax collection obligations to businesses with a physical presence in the state.
  • The challenged statute purposefully discriminates against interstate commerce.

The trial court enjoined the law but the Tenth Circuit Court of Appeals ruled that a challenge was barred by the federal Tax Injunction Act (TIA), a federal law that limits federal courts’ ability to “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.”

The Supreme Court decision unanimously reverses the Tenth Circuit and allows the lawsuit to proceed. Justice Clarence Thomas, writing for the unanimous Court, concludes that the Colorado does not involve assessment, levy, or collection. As Justice Thomas writes, “Enforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumers, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes.”

The Court further concluded that the Tenth Circuit erroneously expanded the term “restrain” beyond its bounds: “To give ‘restrain’ the broad meaning selected by the Court of Appeals would be to defeat the precision of the list, as virtually any court action related to any phase of taxation might be said to ‘hold back’ collection.” We argued something very similar in our brief to the Court on this case: “Good policy dictates that the TIA must be bound by some limits. The lack of limits suggested by the Tenth Circuit’s decision would provide an absolute bar to a virtually endless list of state actions.”

Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonia Sotomayor write separately to clarify that the DMA’s challenge of reporting requirements is distinct from a taxpayer’s suit for a refund. Ginsburg and Breyer further note that a lawsuit that would have the effect of increasing state taxes would not be barred by the TIA.

The petitioners shouldn’t celebrate too much, however. Justice Anthony Kennedy concurred separately, agreeing in full with the Court’s decision but adding that he believes the Quill and National Bellas Hess decisions establishing the physical presence rule for sales tax are “now inflicting extreme harm and unfairness on the States.” Justice Kennedy cites the growth of Internet commerce, the reality of business presence even in the absence of physical presence, and his view that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill…. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”

This is a bombshell, but one that’s not unexpected. States have been pressing for sales tax collection on Internet sales as the size of e-commerce grows, and brick-and-mortar retailers have pressed for equity where they must collect tax while their online competitors don’t. Congress has considered the Marketplace Fairness Act several sessions in a row but have yet to pass anything. States have begun taking the law into their own hands and passing drastic collection mechanisms, inflicting nearly 10,000 sales tax jurisdictions with complicated rules on sometimes small online businesses. Justice Kennedy’s concurrence, despite being a voice of just one justice, strongly signals that the Court will let states collect taxes on Internet purchases if Congress does not.

In our primer on the Marketplace Fairness Act, we talked about the issue, the history, and possible solutions.