On March 3, the U.S. Supreme Court unanimously held that the Tax Injunction Act (TIA)1 did not bar a challenge in federal court of Colorado's sales and use tax notice and reporting requirements for out-of-state (remote) retailers.2 The U.S. Supreme Court reversed and remanded a decision by the Tenth Circuit of the U.S. Court of Appeals that had held that the TIA deprived the U.S. District Court of jurisdiction to enjoin Colorado's notice and reporting requirements. Previously, the 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 Supreme Court did not consider the underlying merits of the challenges to Colorado's notice and reporting requirements, which will need to be addressed by the federal courts.
Background
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 Colorado Department of Revenue in U.S. District Court. In its lawsuit, 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 DMA's motion for preliminary injunction against the Department that prevented enforcement of the notice and reporting requirements on remote retailers pending a final determination in this case.4 Both DMA and the Department subsequently filed cross motions for summary judgment. 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 In reaching this decision, 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.
U.S. Court of Appeals Decision
On appeal, the Tenth Circuit of the U.S. Court of Appeals held that the TIA precluded federal jurisdiction over DMA's claims.6 The TIA provides that federal "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."7 The Court of Appeals acknowledged that this "differs from the prototypical TIA case," but found that the case was barred by the TIA because, if successful, it "would limit, restrict, or hold back the state's chosen method of enforcing its tax laws and generating revenue." After determining that the TIA deprived the District Court of jurisdiction, the Court of Appeals remanded the case to dissolve the permanent injunction and to dismiss the Commerce Clause claims raised by DMA. Because the Court of Appeals determined that it did not have jurisdiction over the case, it did not consider the substantive aspects of Colorado's notice and reporting requirements, including whether such requirements violated constitutional provisions. DMA appealed this decision and the U.S. Supreme Court agreed to consider the case.
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.8 Under the Act and the associated regulations promulgated by the Department, remote retailers that did not collect Colorado sales tax are required to notify Colorado customers that they are obligated to self-report and remit use tax on their purchases.9 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.10 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.11 Under the state's regulations, however, certain de minimis retailers, or retailers with de minimis purchasers, are not subject to these requirements.12
TIA Does Not Bar Jurisdiction
In deciding that the TIA did not bar the District Court from considering DMA's claims, the Supreme Court was required to decide whether an injunction of Colorado's notice and reporting requirements would "enjoin, suspend or restrain the assessment, levy or collection of any tax under State law," as contained within the TIA. Because the Court determined that these statutory provision were not met, the Court was not required to consider the additional statutory language of whether "a plain, speedy and efficient remedy may be had in the courts of" Colorado. "Assessment, Levy or Collection" Requirement Not Satisfied The Supreme Court determined that the enforcement of Colorado's notice and reporting requirements was not an act of "assessment, levy or collection." In defining the terms of the TIA, the Court uses federal tax law as a guide.13 The TIA does not concern federal taxes, but it was modeled on federal legislation, the Anti-Injunction Act (AIA),14 which concerns federal taxes. The AIA provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person."15 In interpreting the language of the TIA, the Court based its analysis on the assumption that the words in both the AIA and TIA generally are used in the same way. Also, the Court considered the broader Internal Revenue Code (IRC) in determining the meaning of the terms in the AIA. The Court examined the IRC definitions that were in effect when the TIA was enacted in 1937. The IRC has long treated information gathering as a phase of tax administration procedure that occurs before assessment, levy or collection. "Assessment," which is the next step in process, refers to the official recording of a taxpayer's liability. "Levy," as defined in the IRC, refers to a specific mode of collection under which the Secretary of the Treasury distrains and seizes a recalcitrant taxpayer's property.16 "Collection" is the act of obtaining payment of taxes due.
Based on these definitions, the Court determined that the terms in the phrase "assessment, levy and collection" do not encompass Colorado's enforcement of its notice and reporting requirements. As explained by the Court, the notice and reporting requirements precede the "assessment" and "collection" steps. In Colorado, the law provides for specific assessment and collection procedures that are triggered after the state has received the returns and made the deficiency determinations that are facilitated by the notice and reporting requirements. The Court concluded that "[e]nforcement 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."
"Restrain" Narrowly and Equitably Interpreted
The Supreme Court rejected the Court of Appeals' broad interpretation of "restrain," as contained within the TIA. The Court of Appeals incorrectly concluded that the TIA bars any suit that would "limit, restrict, or hold back" the assessment, levy or collection of state taxes. Accordingly, the Court of Appeals erroneously held that because Colorado's notice and reporting requirements are intended to facilitate the collection of taxes, the injunction of these requirements limited or restricted the Department's collection efforts. The Supreme Court explained that "restrain," standing alone, can have several meanings. Under the Court of Appeals' broad meaning, "restrain" includes orders that merely inhibit acts of assessment or collection. However, the Supreme Court noted that the term "restrain" could be read more narrowly, only applying to actions that serve to "prohibit" or "enjoin."
To resolve the ambiguity of which definition of "restrain" applies to the TIA, the Supreme Court looked at the context in which the word is used. First, the statutory context supported a conclusion that the TIA uses "restrain" in its narrower sense. The words "enjoin" and "suspend" which accompany "restrain" in the TIA are terms of art in equity. These terms refer to different equitable remedies that restrict or stop official action. The Court determined that "restrain" should be interpreted in the same manner. Also, assigning the word "restrain" its meaning in equity was consistent with the Court's prior recognition that the TIA "has its roots in equity practice."17 The Court of Appeals' broad definition of "restrain" would cause the TIA to bar every suit which had a negative impact on a state's tax revenue. Also, case law further supported the conclusion that Congress used "restrain" in its narrower, equitable sense. Finally, adopting a narrower definition is consistent with the rule that jurisdictional rules should be clear. The Supreme Court concluded that "[a]pplying the correct definition, a suit cannot be understood to 'restrain' the 'assessment, levy or collection' of a state tax if it merely inhibits those activities." After determining that the TIA did not bar DMA's claims, the Supreme Court remanded the case to the Court of Appeals.
Comity Doctrine
The Supreme Court did not take a position on whether this case might be barred under the "comity doctrine." Under this doctrine, federal courts refrain from interfering with the fiscal operations of state governments if the federal rights of the persons could otherwise be preserved unimpaired.18 Unlike the TIA, the comity doctrine is not jurisdictional. Also, in this case, Colorado did not seek comity from either of the federal courts below. The Court instructed the Court of Appeals to decide on remand whether the comity argument remains available to Colorado.
Concurring Opinions
Although the decision was unanimous, Justices Kennedy and Ginsburg issued concurring opinions. Justice Kennedy filed a concurring opinion that discussed the broader issue of nexus and the widely-cited cases of National Bellas Hess, Inc. v. Department of Revenue,19 Complete Auto Transit, Inc. v. Brady20 and Quill Corp. v. North Dakota.21 Justice Kennedy suggested that the Quill Court should have taken the opportunity to reevaluate the nexus standards in Bellas Hess "in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy." He emphasized that the Internet has caused many changes in the way that consumers purchase items since Quill was decided. According to Justice Kennedy, "[g]iven these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill." Furthermore, Justice Kennedy explained that "[a] case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier." Thus, it is important to reconsider this "doubtful authority." Justice Kennedy concluded in his concurring opinion that "[t]he legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess."
Justice Ginsburg filed a concurring opinion to make two observations.22 First, as the Court has noted, Congress designed the TIA not to prevent federal court interference with all aspects of state tax administration, but to prevent taxpayers from using federal courts to avoid the states' requirement of paying the tax and later suing for a refund.23 This case did not implicate this congressional objective. In this case, DMA was not challenging a tax liability or collection responsibility. However, a different question would be posed by a suit to enjoin reporting obligations imposed on a taxpayer or tax collector. The Court's opinion did not address this situation. Second, Justice Ginsburg emphasized that this decision was entirely consistent with the decision in Hibbs v. Winn.24 Similar to the instant case, the lawsuit in Hibbs did not directly challenge an assessment, levy or collection. In the instant case, the Court held that even a lawsuit that inhibits an assessment, levy or collection is not barred by the TIA. According to Justice Ginsburg, the instant holding "casts no shadow on Hibbs' conclusion that a suit further removed from the Act's 'staterevenue- protective moorings'"25 is not within the Act's scope.
Commentary
This is a significant decision that favors taxpayers and other parties with sufficient standing that seek to challenge certain types of state tax statutes in federal court. The Supreme Court's interpretation of the TIA allows taxpayers and other parties with sufficient standing to file challenges in federal court of state tax statutes that are not strictly "assessment" and "collection" statutes. As challenges to state tax regimes often fare better in federal courts than state courts, the Supreme Court's decision may serve to encourage more of these challenges to be heard in federal courts. Further, the Court's rejection of the Court of Appeals' broad reading of the TIA's use of "restrain" is important in that taxpayers and other affected parties may challenge state tax statutes in federal court that indirectly concern tax assessment or collection.
This case will allow DMA to raise the federal constitutional challenges concerning Colorado's extensive notice and reporting requirements in federal court. Without considering the substance of DMA's constitutional arguments, the Court of Appeals had vacated the District Court's decision that Colorado's statute violated the Commerce Clause. Thus, DMA will be able to make its constitutional arguments that were originally dismissed by the Court of Appeals.26 It will be interesting to see whether the Court of Appeals ultimately follows the District Court's constitutional analysis, or finds an alternative ground to uphold the reporting and notification requirements that does not violate the Supreme Court's decision.
Although Colorado took the lead in enacting these requirements for remote retailers, several other states have followed suit. For example, 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.27 Moreover, Oklahoma,28 South Dakota29 and Vermont30 have also enacted remote seller notification requirements. 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, the other states do not require an annual purchase summary and customer information report, and for the most part do not impose significant penalties for noncompliance. Presumably, however, it is the hope of each of these jurisdictions that in response to these rules, remote retailers will choose to register and collect sales taxes from in-state customers rather than simply follow the notification and reporting requirements. With the remand of this case to the U.S. Court of Appeals, the specter of a future federal court decision addressing the constitutionality of Colorado's notice and reporting requirements is likely to prevent states from enacting similar legislation until the state of the law is more settled.
Justice Kennedy's concurring opinion that recommends that the Supreme Court reexamine landmark nexus cases such as Quill and Bellas Hess is somewhat remarkable in its tacit willingness to revisit and potentially overturn long-standing precedents, and will be viewed by some as being more noteworthy than the conclusions reached in the lead opinion. He stresses the tremendous changes in technology and the way in which consumers purchase products since Quill was decided in 1992. This concurring opinion may signal the Court's increased interest in reconsidering a pure physical presence nexus case covering sales and use taxes, though it should be noted that no other justice joined in the concurrence and it would take at least four justices to grant certiorari and accept a future case challenging Quill. In the wake of this concurring opinion, it will be interesting to see not only what the Court does with future litigation on this subject, but whether Congressional activity on the sales and use tax treatment of remote sellers suddenly gains momentum. Congress has attempted to address this issue of the nexus standard with the proposed Marketplace Fairness Act.31 While Congress has made progress, this legislation has not been enacted. Justice Kennedy's concurring opinion would appear to offer an alternative path for those supporting an economic nexus type standard.
Footnotes
1 28 U.S.C. § 1341.
2 Direct Marketing Association v. Brohl, U.S. Supreme Court, No. 13-1032, March 3, 2015. Justice Thomas delivered this opinion for a unanimous Court. 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.
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 Direct Marketing Association v. Brohl, 735 F.3d 904 (10th Cir. 2013).
7 28 U.S.C. § 1341.
8 H.B. 10-1193, Laws 2010, which is now codified at COLO. REV. STAT. § 39-21-112(3.5).
9 COLO. REV. STAT. § 39-21-112(3.5)(c); 1 COLO. CODE REGS. § 39-21-112.3.5(2)(b).
10 COLO. REV. STAT. § 39-21-112(3.5)(d)(I)(A), (B).
11 COLO. REV. STAT. § 39-21-112(3.5)(d)(II).
12 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). 13 Hibbs v. Winn, 542 U.S. 88 (2004).
14 26 U.S.C. § 7421.
15 26 U.S.C. § 7421(a).
16 The Court acknowledged that "levy" does not appear in the AIA. As a result, an argument could be made that the meaning of "levy" in the TIA is not tied to the meaning of the term as used in federal tax law. However, dictionaries limit the term to an official governmental action imposing, determining the amount of, or securing payment on a tax.
17 Tully v. Griffin, Inc., 429 U.S. 68, 73 (1976).
18 Levin v. Commerce Energy, Inc., 560 U.S. 413, 422 (2010).
19 386 U.S. 753 (1967).
20 430 U.S. 274 (1977).
21 504 U.S. 298 (1992).
22 Note that Justice Breyer joined this concurring opinion in its entirety, while Justice Sotomayor joined this concurring opinion only with respect to the first observation. 23 Hibbs v. Winn, 542 U.S. 88 (2004).
24 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.
25 542 U.S. at 106.
26 Note that DMA also has commenced litigation in Colorado state courts. The Denver District Court granted a preliminary injunction based on an initial determination that the Colorado notice and reporting requirements unlawfully discriminated against nonresident retailers. Direct Marketing Association v. Department of Revenue, District Court, City and County of Denver, No. 13CV34855, Feb. 18, 2014 (Order Granting Motion for Preliminary Injunction).
27 Ch. 119 (H.B. 440), Laws 2013, amending KY. REV. STAT. ANN. § 139.450.
28 OKLA. STAT. tit. 68, § 1406.1.
29 S.B. 146, Laws 2011.
30 VT. STAT. ANN. tit. 32, § 9783.
31 On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act of 2013 (S. 743, H.R. 684), which would allow states to require remote (out-of-state) sellers to collect and remit sales and use tax on sales to in-state residents even if the retailer has no physical presence in the state. However, this legislation did not make much progress in the U.S. House. Similar legislation is expected to be introduced in the Senate again this year.
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.
