United States: Supreme Court To Hear Tax Injunction Act Case

On August 20, 2013, in Direct Marketing Association v. Brohl, the U.S. Court of Appeals for the Tenth Circuit held that the federal Tax Injunction Act (TIA) prohibited the U.S. District Court for the District of Colorado from ruling on the Direct Marketing Association's (DMA) challenge to Colorado's use tax notice and reporting requirements.735 F.3d 904 (10th Cir. 2013).  The Supreme Court of the United States has granted certiorari and will hear the case during its October 2014 term.

State Court Bias and the Tax Injunction Act

Among state and local tax practitioners there exists the perception that state court judges, despite their sincere efforts, have difficulty remaining unbiased when hearing state tax cases.  The concern is that the judges may be unconsciously biased against the claims of taxpayers because the judges themselves are inextricably entwined with state government.  Every decision in favor of a taxpayer results in a reduction of revenue for the state—the ultimate payor of the judge's salary—and perhaps a slap in the face of the judge's colleagues in state government.  As a result, they may improperly take the loss of state government revenue and power into consideration when determining case outcomes.

Taxpayers can point to numerous examples of state courts considering the loss of state government revenue when issuing a ruling.  For example, in Exelon Corp. v. Illinois Department of Revenue, the taxpayer successfully convinced the Illinois Supreme Court that electricity was tangible personal property, and thus the taxpayer was entitled to the investment credits for taxpayers engaged in retailing tangible personal property.  917 N.E.2d 899 (Ill. 2009).  However, following a motion for rehearing, the court limited its holding to prospective application only.  In Miller v. Johnson Controls, Inc., the Kentucky Supreme Court upheld legislation retroactively prohibiting refunds resulting from the change from separate unitary filing to unitary combined filing.  296 S.W.3d 392 (Ky. 2009).  The court held that the retroactive application did not violate the taxpayer's due process and equal protection rights because the legislation was rationally related to the legitimate governmental purpose of preventing the loss of revenue.  See Arthur R. Rosen & Julie M. Skelton, "Desperately Seeking State Tax Fairness: The Need for Federal Adjudication," 61 State Tax Notes 357 (Aug. 8, 2011).  Based on these decisions, taxpayers' worries about state court bias may be for good reason.

Taxpayers have long desired a way to engage in federal court adjudication to receive impartial treatment.  Despite concerns about state court bias, the TIA and its common law basis, comity, prohibit taxpayers from petitioning federal courts for the adjudication of most state tax controversies.  The TIA prohibits federal district courts from "enjoin[ing], suspend[ing] or restrain[ing] 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."  28 U.S.C. § 1341.  Such actions may be pursued only in state courts. 

The Supreme Court of the United States has previously commented on the scope of the TIA in Hibbs v. Winn and Levin v. Commerce Energy, Inc.  In Hibbs v. Winn, the Supreme Court determined that the TIA does not apply to a third party challenging a state tax credit's constitutionality under the Establishment Clause.  542 U.S. 88 (2004).  The TIA only prohibits federal courts from hearing cases that interfere with the state's collection of revenue.  The Supreme Court also noted that "in enacting the TIA, Congress trained its attention on taxpayers who sought to avoid paying their tax bill by pursuing a challenge route other than the one specified by the taxing authority.  Nowhere does the legislative history announce a sweeping congressional direction to prevent 'federal-court interference with all aspects of state tax administration.'"  Id. at 104 – 05. 

In Levin v. Commerce Energy, Inc., the Supreme Court distinguished Hibbs v. Winn, holding that the comity doctrine, separate and apart from the more narrow TIA, barred the "taxpayer's complaint about allegedly discriminatory state taxation framed as a request to increase a competitor's tax burden."  560 U.S. 413, 425 – 26 (2010).  The Supreme Court indicated three factors that gave rise to the application of comity: (1) the respondent sought "federal-court review of commercial matters over which Ohio enjoys wide regulatory latitude; [the] suit [did] not involve any fundamental right or classification that attract[ed] heightened judicial scrutiny," (2) respondents sought "federal-court aid in an endeavor to improve their competitive position," and (3) the state courts were better positioned to correct any violation because of a greater familiarity with "state legislative preference and because the TIA does not constrain their remedial options."  Id. at 431 – 32. 

One could argue that the TIA evidences Congress' desire to narrow the common law comity principle.  Justice Ruth Bader Ginsburg has stated that "the [TIA] may be best understood as but a partial codification of the federal reluctance to interfere with state taxation."  Id. at 414 (quoting Nat'l Private Truck Council v. Okla. Tax Comm'n, 515 U.S. 582, 590 (1995)).  Treating the TIA as having a narrower jurisdictional bar than the pre-existing common law comity principle renders the TIA superfluous.  Therefore, it may be more sensible to see the TIA as Congress narrowing comity.

Direct Marketing Association v. Brohl

As noted below, in Direct Marketing Association v. Brohl, the Tenth Circuit held that the TIA prohibited a federal district court from ruling on the constitutionality of Colorado's remote seller use tax reporting laws despite the provisions neither imposing nor requiring the collection of a tax.  735 F.3d 904 (10th Cir. 2013).

Colorado's use tax requires Colorado purchasers that have not paid sales tax on the purchase of tangible goods to pay a 2.9 percent use tax on the "storage or acquisition charges or costs for the privilege of storing, using, or consuming in [Colorado] any articles of tangible personal property purchased at retail."  Colo. Rev. Stat. § 39-26-202(1)(b).  The use tax compensates for the loss of sales tax revenue resulting from residents purchasing property from other states with lower sales tax rates (or no sales tax at all) and bringing the property back into Colorado for its use.  Colorado requires individuals to self-report their use tax liabilities.  See Colorado DR 0252, Consumer Use Tax Return and Instructions.  However, the extremely low compliance rate has resulted in the loss of state tax revenue. 

In 2010, Colorado attempted to capture this revenue by adopting Colorado Revised Statutes sections 39-21-112(3.5)(c) and (d) and Colorado Code of Regulations section 39-21-112.3.5, requiring certain retailers that have not collected sales tax from Colorado purchasers, such as remote sellers, to: (1) provide transactional notices to Colorado customers stating that the retailer does not collect Colorado tax and that the purchase is not exempt solely because it is made over the internet or by other means, (2) send annual purchase summaries to Colorado customers, and (3) annually report Colorado customer information to the Colorado Department of Revenue (Department).  See also Direct Marketing Assoc., 735 F.3d at 907; Brief Amicus Curiae of Council on State Taxation in Support of Petitioner, Direct Marketing Assoc. v. Brohl, 2014 WL 1285844 (U.S. 2014) (No. 13-1032).  Many observers believe that the Colorado legislature hoped that these onerous requirements, which would require sellers to invent and implement totally new systems, would economically coerce sellers into collecting and remitting the tax.

In June 2010, the DMA sued the Colorado Department of Revenue's executive director in the U.S. District Court for the District of Colorado, arguing that the notice and reporting requirements were unconstitutional under the Commerce Clause.  The district court granted the DMA's motion for summary judgment, holding that the notice and reporting requirements facially discriminated against interstate commerce and placed burdens on out-of-state retailers that would unconstitutionally interfere with interstate commerce.  The court reached this conclusion because it placed an obligation only on sellers with no physical presence in Colorado (since those with Colorado presence would be collecting the tax and thus not subject to the reporting requirements).  Direct Marketing Assoc. v. Huber, 2012 WL 1079175, No. 10-cv-01546-REB-CBS (D. Colo. Mar. 2012).

The Department appealed to the Tenth Circuit, arguing that the TIA barred the federal court from hearing the case.  First, the DMA argued that the TIA did not apply because the DMA is not a taxpayer seeking to avoid a tax.  In rejecting this argument, the Tenth Circuit took an expansive view of the TIA, stating that it "applies to federal court relief that 'would ... operate[ ] to reduce the flow of state tax revenue.'"  Direct Marketing Ass'n, 735 F.3d at 911 (quoting Hibbs v. Winn, 542 U.S. at 106).  The court limited Hibbs v. Winn to the holding that the TIA does not apply to a petitioner contesting a tax benefit provided to a third party because the suit did not attempt to reduce the flow of state tax revenue.  Citing to Tenth Circuit case law and Congress' "state-revenue-protective objectives," including prohibiting "taxpayers, with the aid of a federal injunction, from withholding large sums, thereby disrupting state government finances," the Court of Appeals held that the TIA does not apply only to taxpayers challenging their own state tax liabilities, but also to plaintiffs seeking to prevent "the State from exercising its sovereign power to collect ... revenues."  Hill v. Kemp, 478 F.3d 1236, 1249 (10th Cir. 2007). 

The DMA also argued that the TIA did not apply because it sought to avoid notice and reporting obligations, not a tax, and thus did not seek to restrain the assessment, levy or collection of any tax.  Direct Marketing Assoc., 735 F.3d at 912.  The court read "restrain" broadly to apply to not just the direct challenge of a tax, but to a lawsuit concerning a procedure that operates to enforce and increase tax collection.  For instance, the court found that "the annual customer information reports sent to the Department would aid the Department's auditing of taxpayers" and be a significant tax collection mechanism.  Id. at 914. 

Under the Tenth Circuit's interpretation of the TIA, taxpayers would not be able to challenge any aspect of taxation that would operate to hamper, even indirectly, a state's ability to raise revenue.  The Tenth Circuit's opinion has resulted in a circuit court split with the First, Second and Sixth Circuits.  These courts have each viewed the TIA as not applying to a tax agency's administration functions that serve to indirectly aid in the collection of tax.  See United Parcel Serv., Inc. v. Flores-Galarza, 318 F.3d 323 (1st Cir. 2003); Wells v. Malloy, 510 F.2d 74 (2nd Cir. 1975); BellSouth Telecommunications, Inc. v. Farris, 542 F.3d 499 (6th Cir. 2008). 

Supreme Court of the United States

On July 1, 2014, the Supreme Court granted certiorari in Direct Marketing Association v. Brohl.  The court will determine "whether the TIA bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the informational notice and reporting requirements of a state law that neither imposes a tax, nor requires the collection of a tax, but serves only as a secondary aspect of state tax administration."  See Direct Marketing Assoc. v. Brohl Question Presented.

The Supreme Court will have the chance to revisit Hibbs and Levin, clarify the limits of the TIA and the common law comity principle, and remedy the federal circuit court split regarding whether the TIA applies to secondary elements of state tax administration that only indirectly affect the collection of tax.  The Tenth Circuit has broadly interpreted the TIA's purpose, prohibiting taxpayers from challenging practically any aspect of tax administration in federal court if the challenge would hamper the state's ability to raise revenue, even indirectly.  A ruling against the DMA would expand the reach of the TIA to encompass nearly all state tax-related lawsuits and extinguish state taxpayers' hopes of receiving unbiased treatment from the judiciary.

Supreme Court to Hear Tax Injunction Act Case

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions