United States: Federal Court Of Appeals Orders Dismissal Of Case Granting Injunction Against Colorado’s Sales And Use Tax Notice And Reporting Requirements

On August 20, the Tenth Circuit of the U.S. Court of Appeals ordered a U.S. District Court to dismiss a case in which a permanent injunction had been granted against the Colorado Department of Revenue that prevented the Department from enforcing Colorado's sales and use tax notice and reporting requirements for out-of-state (remote) retailers.1 After determining that the federal Tax Injunction Act (TIA)2 deprived the U.S. District Court of jurisdiction to enjoin Colorado's tax collection effort, the U.S. Court of Appeals remanded the case to the District Court to dissolve the permanent injunction and to dismiss the Commerce Clause claims raised by the remote retailers. Previously, the U.S. District Court had determined that Colorado's notice and reporting requirements violated the Commerce Clause of the U.S. Constitution. In remanding the case, the U.S. Court of Appeals did not consider the merit of the constitutional arguments.


The Direct Marketing Association (DMA), which consists of businesses and organizations that market products directly to consumers via catalogs, print advertisements, broadcast media and the Internet, filed a lawsuit against the Department in U.S. District Court. In its lawsuit, the DMA challenged the constitutionality of Colorado's sales and use tax notice and reporting requirements for remote retailers by asserting violations of the Commerce Clause.3

The District Court granted the DMA's motion for a preliminary injunction against the Department that prevented enforcement of the notice and reporting requirements on remote retailers pending a final determination in the case.4 Both the DMA and the Department subsequently filed cross motions for summary judgment.

On March 30, 2012, the District Court granted a motion for summary judgment in favor of DMA and issued a permanent injunction against the Department that enjoined the enforcement of the notice and reporting requirements.5 The District Court concluded that Colorado's notice and reporting requirements discriminated against and placed undue burdens on interstate commerce, in violation of the Commerce Clause. The Department appealed the District Court's decision.

Notice and Reporting Requirements

On February 24, 2010, Colorado enacted legislation (the Act) that imposes notification and reporting requirements on remote retailers making Colorado sales.6 Under the Act and the associated regulations promulgated by the Department, remote retailers that did not collect Colorado sales and use taxes are required to notify customers that they are obligated to self-report and remit use tax on their purchases.7 Remote retailers that did not collect tax are also required to provide Colorado customers with an annual report by January 31 of each year, via first-class mail, detailing a customer's purchases in the previous year and notifying the customer that the retailer was required to report the customer's name and amount of purchases to the Department.8 Finally, remote retailers that did not collect tax are also required to report to the Department, the name, billing address, shipping address and total amount of purchases made by Colorado customers by March 1 of each year.9 Under the state's regulations, however, certain de minimis retailers, or retailers with de minimis purchasers, are not subject to these requirements.10

No Federal Jurisdiction under Tax Injunction Act

On appeal, the U.S. Court of Appeals held that the TIA precludes federal jurisdiction over DMA's claims. The TIA provides that "district 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."11 Because the Court determined that it did not have jurisdiction over the case, the Court did not consider the constitutionality of Colorado's notice and reporting requirements.

DMA Sought to Restrain Collection of State Tax

In holding that the TIA prohibited federal jurisdiction, the Court first considered whether DMA's action sought to "enjoin, suspend or restrain the assessment, levy or collection of any tax under State law." DMA unsuccessfully argued that the TIA did not preclude federal jurisdiction in this case because DMA: (i) was not a taxpayer seeking to avoid a tax; and (ii) challenged notice and reporting requirements rather than a tax assessment.

DMA argued that the TIA did not apply because it was not a taxpayer seeking to avoid state taxes. In support of its argument, DMA relied on a case, Hibbs v. Winn,12 in which the U.S. Supreme Court stated that the TIA is triggered when "state taxpayers seek federal-court orders enabling them to avoid paying state taxes." In Hibbs, the plaintiffs were Arizona taxpayers who brought an Establishment Clause challenge in federal court to a state tax credit for contributions to "school tuition organizations." The plaintiffs did not challenge a tax imposed on them, but sought to invalidate a tax credit. The U.S. Supreme Court determined that the TIA did not bar this type of lawsuit. Relying on its precedent interpreting Hibbs, the Court of Appeals disagreed that the TIA applies only when taxpayers seek to avoid a state tax in federal court. For example, in Hill v. Kemp,13 the Court of Appeals applied the TIA outside the context of a taxpayer seeking to avoid taxes. According to the Court, the key question is whether the plaintiff's lawsuit seeks to prevent "the State from exercising its sovereign power to collect . . . revenues."14 This interpretation follows the U.S. Supreme Court's instruction in Hibbs that the primary purposes of the TIA is to "shield[] state tax collections from federal-court restraints."15

In further support of its argument that the TIA did not apply, DMA contended that it sought to avoid notice and reporting obligations, not a tax. According to DMA, the fact that the obligations related to use tax owed by Colorado consumers did not bring the case under the TIA as a suit seeking to enjoin the collection of a state tax. The Court rejected this argument because the TIA also prohibits federal lawsuits that would restrain the collection of a state tax. Therefore, the issue was whether DMA's challenge of Colorado's notice and reporting requirements would restrain Colorado's tax collection. The Court determined that DMA's lawsuit seeking to enjoin state laws enacted to ensure compliance with and increase use tax collection would restrain tax collection. Although DMA did not directly challenge a tax, it contested the way Colorado wanted to collect use tax. Thus, the lawsuit's potential to restrain tax collection triggered the jurisdictional bar.

The Court of Appeals rejected DMA's argument that the Court's interpretation of the TIA was overly broad. After considering some cases cited by DMA,16 the Court explained that the revenue-generating, non-punitive purpose of Colorado's notice and reporting requirements placed them squarely within the TIA's protection.

DMA Has Plain, Speedy and Efficient Remedy in Colorado

The Court determined that DMA's lawsuit also satisfied the second prong of the test within the TIA because DMA had a "plain, speeding and efficient remedy . . . in the courts of [Colorado]." This part of the TIA requires the Court to be convinced that Colorado law provides DMA with sufficient process to challenge the notice and reporting statute. The Court explained that Colorado state courts can and do grant relief in cases challenging the constitutionality of tax statutes, but acknowledged that the U.S. Supreme Court suggested in Hibbs that the TIA does not refer to general process in state court. Although the Hibbs case did not specifically address the TIA's "plain, speedy and efficient remedy" language, the U.S. Supreme Court suggested that the statutory language may contemplate something more than the general availability of a remedy to "the universe of plaintiffs who sue the State."17 In Hibbs, the U.S. Supreme Court noted that the statute requires a "remedy tailormade for taxpayers."18

The Court of Appeals considered whether Colorado's tax laws provide a specific remedy for remote retailers such as DMA. Specifically, the Court examined whether DMA could challenge Colorado's statute outside of filing an action in state court for injunctive or declaratory relief. DMA argued that the law forces remote retailers to choose between following the notice and reporting requirements or remitting sales tax to the Department. The Court explained that a remote retailer could remit sales tax and then seek a refund. In pursuing the refund, the remote retailer could make arguments that the statute violates the Commerce Clause. Also, a remote retailer could challenge any penalties it incurs for failing to comply with the notice and reporting requirements. Therefore, the Court was "satisfied that Colorado provides avenues for remote sellers to challenge the scheme allegedly forcing them to choose between collecting sales tax and complying with the notice and reporting requirements." Colorado's administrative remedies provide for hearings and appeals to state court, as well as ultimate review by the U.S. Supreme Court.


This is a significant decision for taxpayers considering a constitutional challenge of state tax statutes. Taxpayers with state tax challenges have a greater probability of success in federal courts than state courts. With the release of this taxpayer-adverse decision, the Tenth Circuit's broad reading of the TIA may limit taxpayers' ability to have federal courts consider state tax issues and may prevent some taxpayers from seeking relief in federal court. DMA may request a reconsideration of the case by the Tenth Circuit sitting en banc, appeal the decision to the U.S. Supreme Court, or potentially proceed with the challenge in state court once the District Court dismisses the case.

This decision also is significant because it orders the District Court to dissolve its permanent injunction that enjoined the Department from enforcing Colorado's extensive sales and use tax notice and reporting requirements for remote sellers. Thus, without considering the substance of DMA's constitutional arguments, the Court of Appeals has vacated the District Court's decision that Colorado's statute violated the Commerce Clause. While DMA's constitutional arguments may be meritorious, given that Colorado is trying to require remote sellers that do not have a collection and remittance requirement to comply with the notice and reporting requirements, DMA may not get the chance to substantively argue its case.

Colorado took the lead in enacting controversial notice and reporting requirements for remote retailers. Since Colorado enacted its statute, several other states have likewise enacted notice requirements. For example, earlier this year, Kentucky enacted legislation requiring remote retailers to provide notice to purchasers that they must report and pay tax directly to the Kentucky Department of Revenue on purchases of nonexempt personal property.19 Moreover, Oklahoma,20 South Dakota21 and Vermont22 have enacted remote seller notification requirements as well. The requirements enacted by other states, however, are not nearly as extensive as Colorado's requirements. The other states only require that the remote seller notify the customer of its obligation to pay use tax. Unlike Colorado, they do not require an annual purchase summary and customer information report. The District Court's decision holding that Colorado's notification and reporting requirements were unconstitutional may have discouraged other states from enacting similar requirements while the injunction was in effect. The fact that this decision has been vacated may encourage other states to enact notification and reporting requirements.


1 Direct Marketing Association v. Brohl, U.S. Court of Appeals, 10th Circuit, No. 12-1175, Aug. 20, 2013. Note that the defendant in this litigation originally was Roxy Huber, the Executive Director of the Colorado Department of Revenue when this litigation commenced. The current Executive Director, Barbara Brohl, was substituted as the defendant.

2 28 U.S.C. § 1341.

3 U.S. CONST. art. I, § 8.

4 Direct Marketing Association v. Huber, U.S. District Court, D. Colorado, No. 10-cv-01546-REB-CBS, Jan. 26, 2011 (Order Granting Motion for Preliminary Injunction).

5 Direct Marketing Association v. Huber, U.S. District Court, D. Colorado, No. 10-cv-01546-REB-CBS, March 30, 2012.

6 H.B. 10-1193, Laws 2010, which is now codified at COLO. REV. STAT. § 39-21-112(3.5).

7 COLO. REV. STAT. § 39-21-112(3.5)(c); 1 COLO. CODE REGS. § 39-21-112.3.5(2)(b).

8 COLO. REV. STAT. § 39-21-112(3.5)(d)(I)(A), (B).

9 COLO. REV. STAT. § 39-21-112(3.5)(d)(II).

10 According to the state's emergency regulations, a retailer is presumed to be de minimis if it made less than $100,000 in total gross sales in Colorado in the prior calendar year and reasonably expects total gross sales in Colorado in the current year to be less than that amount. 1 COLO. CODE REGS. § 39-21-112.3.5(1)(a). Moreover, the summary of annual purchases is required to be delivered only to customers who spend over $500 in the calendar year with a particular retailer. 1 COLO. CODE REGS. § 39-21-112.3.5(3)(c).

11 28 U.S.C. § 1341.

12 542 U.S. 88 (2004).

13 478 F.3d 1236 (10th Cir. 2007).

14 Id.

15 542 U.S. 88, 104 (2004).

16 The Court considered United Parcel Service Inc. v. Flores-Galarza, 318 F.3d 323 (1st Cir. 2003), and Wells v. Malloy, 510 F.2d 74 (2d Cir. 1975). Also, the Court considered a recent case, Hobby Lobby Stores, Inc. v. Sebelius, U.S. Court of Appeals, 10th Circuit, No. 12-6294, June 27, 2013.

17 542 U.S. 88, 107 (2004).

18 Id.

19 Ch. 119 (H.B. 440), Laws 2013, amending KY. REV. STAT. ANN. § 139.450.

20 OKLA. STAT. tit. 68, § 1406.1.

21 S.B. 146, Laws 2011.

22 VT. STAT. ANN. tit. 32, § 9783.

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