United States: Tenth Circuit Finds Colorado Use Tax Reporting Regime Constitutional

Today, February 22, the United States Court of Appeals for the Tenth Circuit upheld Colorado's use tax reporting regime in Direct Marketing Association v. Brohl.1 In so doing, the court held that (1) Quill applies only to sales and use tax collection and remittance obligations, not reporting requirements; (2) the regime does not facially discriminate against interstate commerce; (3) its direct effect is not to favor in-state economic interest over out-of-state interests; and (4) it does not impose an undue burden on interstate commerce. This important decision has significant and immediate ramifications for sellers with Colorado customers who otherwise lack physical presence in the state. Additionally, this decision may serve as a call-to-action in other states that are considering reporting requirements on out-of-state sellers.

Colorado's Use Tax Reporting Regime In 2010, Colorado enacted a law requiring sellers who did not collect Colorado sales tax on sales to Colorado customers to provide the Colorado Department of Revenue (the "Department") specific information regarding these sales.2 The statute and regulations imposed the following duties on non-collecting retailers with gross sales to Colorado customers in excess of $100,000:

  1. Provide transactional notices to Colorado customers;
  2. Send annual purchase summaries to certain Colorado customers; and
  3. Annually report Colorado purchaser information to the Department.3

The Direct Marketing Association ("DMA") sought a permanent injunction in federal district court against the regime, arguing that it violated the Commerce Clause because it imposed a tax-related obligation on DMA's members who lacked a physical presence in Colorado. In Quill, the U.S. Supreme Court ("Supreme Court") held that sales and use tax collection obligations could only be imposed on entities physically present in the state.4 Because DMA did not have a physical presence in Colorado, it argued that Colorado could not impose the reporting requirement on it. The district court agreed and granted DMA's permanent injunction against the regime.5

The Tenth Circuit's Holding The Tenth Circuit reversed the prior decision of the federal district court to grant DMA injunctive relief against complying with the Department's reporting regime on the basis that the regime unconstitutionally discriminated against and unduly burdened interstate commerce. In direct contrast, the Tenth Circuit held that Colorado's use tax reporting regime does not violate the Commerce Clause because it does not discriminate against interstate commerce and does not impose an undue burden on interstate commerce.6

Quill Does Not Apply to Reporting Requirements In upholding Colorado's reporting regime, the Tenth Circuit first explained why Quill's physical presence requirement did not apply to reporting obligations. The court narrowly interpreted Quill to find that the physical presence requirement applies solely to sales and use tax collection and remittance obligations, citing the Supreme Court's decision last March in Direct Marketing Association v. Brohl ("Brohl I"): "[a state law] may not require retailers who lack a physical presence in the State to collect [sales and use taxes] on behalf of the [state]."7 The court thus rejected DMA's argument that Quill restricts collection obligations as well as reporting obligations. . The court concluded that "Quill applies narrowly to and has not been extended beyond tax collection."8 With Quill out of the picture, the two questions remaining before the court were (1) whether the law discriminates against interstate commerce and (2) whether the law creates an undue burden on interstate commerce.

Colorado's Reporting Regime Is Not Discriminatory On the discrimination claim, the district court held that because the reporting regime applied overwhelmingly to out-of-state retailers, the law facially discriminated against remote sellers. DMA argued that the law applies only to "each retailer that does not collect Colorado sales tax,"9 and because all in-state retailers collect sales tax, the DMA argued it applies only to out-of-state retailers. The Tenth Circuit rejected this argument because the text of the statute demonstrates an absence of a geographic distinction (language distinguishing between in-state and out-of-state retailers).

Having found the statutory regime not facially discriminatory, the court needed only ask whether the law has the direct effect of discriminating against interstate commerce. The Tenth Circuit held that it does not have such effect. The court first relied on Supreme Court precedent requiring a showing that interstate commerce is burdened by a law while intrastate commerce is benefited by it. Because Colorado purchasers have a legal obligation to remit use tax regardless of whether the reporting regime is part of the law, in-state retailers do not gain a competitive advantage over out-of-state retailers. In addition, because in-state and out-of-state retailers are not "similarly situated," imposing the reporting obligation only on out-of-state retailers does not violate equality principles. Finally, after examining the entire sales and use tax regime (from collection to remittance and reporting), the court concluded that DMA failed to demonstrate that the out-of-state retailers bear a discriminatory economic burden "when viewed against the backdrop of the collecting retailers' tax collection and reporting obligations."10 Again, the court emphasized that Quill has never been extended beyond sales and use tax collection obligations, and so Quill did not apply to Colorado's reporting regime.

The Regime Does Not Impose an Undue Burden on Interstate Commerce To satisfy the Dormant Commerce Clause, even though Colorado's reporting regime does not discriminate against interstate commerce, it must also not impose an undue burden on interstate commerce. Because the Tenth Circuit held that the statutory regime did not impose such a burden, the regime is constitutional under the Commerce Clause. The district court's analysis on this question was limited to Quill—and the DMA only relied on Quill for this argument—so the Tenth Circuit limited its discussion solely to whether Quill restricted Colorado's ability to impose reporting requirements on out-of-state retailers, which it concluded Quill does not do. To buttress this argument, the court turned to the Supreme Court's decision in Brohl I on whether the Tax Injunction Act ("TIA") barred DMA's suit against Colorado. The Supreme Court held that the reporting regime did not fall within the scope of the TIA's prohibition against challenging the "levy, collection or assessment" of a tax.11 Because Quill applies only to tax collection, and Colorado's reporting regime did not involve tax collection, Quill does not apply. Having disposed of Quill—and because DMA did not raise arguments available from Pike v. Bruce Church12—the court determined that the reporting regime did not impose an undue burden on interstate commerce.

What's Next? The Future of Quill's Physical Presence Rule Since the Supreme Court's 1992 reaffirmation of the physical presence rule in Quill, states have experimented with ways to elicit the Supreme Court's review of Quill. The DMA is likely to request review of the Tenth Circuit's decision by Supreme Court. If granted, this would be the second trip to the high court for the Colorado law. In Brohl I, the Court unanimously held that DMA's action was not barred by the Tax Injunction Act.13 Although Brohl I was a unanimous decision, Justice Kennedy's concurring opinion urged the "legal system" to "find an appropriate case for this Court to reexamine Quill...."14 In his view, the technological advances in the decades since Quill require the Supreme Court to reevaluate Quill's physical presence rule. He specifically addressed online retailers and their ability to reach customers across the country:

The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper's favorite store is a click away—regardless of how close or far the nearest storefront. Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.15

Because DMA obtained a permanent injunction against Colorado's regime—which requires "actual success on the merits"—Quill's physical presence rule would be squarely before the Court as it relates to use tax reporting obligations. Justice Kennedy's concurrence was cited by the Tenth Circuit to emphasize the injustice faced by states because of Quill: "[Quill's physical presence rule] may well be a serious, continuing injustice faced by Colorado and many other States."16

However, Justice Kennedy was the sole voice on the Court who raised Quill in the disposition of Brohl I, and the Supreme Court may—again—defer to the Congress for resolution on when States may or may not impose sales and use tax collection on remote sellers. Alternatively, there could be other cases in the near future that finally elicit the Court's granting of certiorari on this issue.

Alabama's Economic Nexus Guidance One example of a recent law that flaunts the application of Quill is Alabama's economic nexus standard, which imposes a sales tax collection obligation on retailers not physically present in Alabama. Department Commissioner Julie Magee has acknowledged that the regulation goes beyond Quill's interpretation of the U.S. Constitution:

"Why would we continue to work under an antiquated court ruling? Look how old Quill was...Times change and things were once constitutional and they're not constitutional anymore. It is time for some sort of paradigm shift and we can't continue to remain under the Quill ruling.... All sorts of things were constitutional or unconstitutional until they weren't anymore. Sue us."17

Recently, the Department sent notices to online retailers notifying them of this new regulation and their obligations under the same. One may anticipate that retailers without physical presence in Alabama will soon receive notices of assessment from Alabama, and when this occurs, these retailers should strongly consider Alabama's Commissioner's invitation to challenge the assessment and the regulation.

Today's Tenth Circuit decision reaffirms that nexus issues are going to continue to dominate the national spotlight for the foreseeable future. Emboldened by the Tenth Circuit, states may become even more aggressive regarding sales and use tax collection obligations.

To discuss strategies for your business in light of DMA v. Brohl, including, whether and how to comply with the Department's reporting regime, as well as how best to approach Alabama's aggressive nexus position, contact any member of the Reed Smith State Tax Team.


1. Direct Marketing Ass'n v. Brohl, Case No. 12-1175 (10th Cir., Feb. 22, 2016).

2. Colo. Rev. Stat. §§ 39-21-112(3.5)(c), (d).

Id.; 1 Colo. Code Regs. § 201-1:39-21-112.3.5.

3. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

4. Direct Marketing Ass'n v. Huber, No. 10–CV–01546–REB–CBS, 2012 WL 1079175 (D.Colo. Mar. 30, 2012).

5. Direct Marketing Ass'n v. Brohl, Case No. 12-1175 (10th Cir., Feb. 22, 2016p>

Direct Marketing Ass'n v. Brohl, 575 U.S. __ (2015) (emphasis added).

6. Direct Marketing Ass'n v. Brohl, Case No. 12-1175, at 18 (10th Cir., Feb. 22, 2016).

7. Id. at 22.

8. Id. at 28.

9. 28 U.S.C. § 1341.

10. 397 U.S. 137 (1970). Under Pike, courts apply a balancing test to determine whether or not a statute creates an undue burden on interstate commerce. In order to survive constitutional scrutiny, the plaintiff must demonstrate that the commercial burden imposed by the law are "clearly excessive in relation to the putative local benefits." 397 U.S. at 137.

11. Direct Marketing Ass'n v. Brohl, 575 U.S. __ (2015); 28 U.S.C. § 1341.

12. Direct Marketing Ass'n, 575 U.S. at 3 (Kennedy, J., concurring).


13. Id.

14. Alabama DOR Commissioner and Attorney Spar Over Sales Tax Nexus, Tax Analyst (Sept. 14, 2015).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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