United States: Federal Court Of Appeals Upholds Colorado's Sales And Use Tax Notice And Reporting Requirements

On February 22, 2016, the United States Court of Appeals for the Tenth Circuit upheld the constitutionality of Colorado's notification and reporting requirements imposed on out-of-state retailers that do not collect sales tax in the state.1 The Tenth Circuit held that the notification and reporting requirements do not violate the dormant Commerce Clause because they do not discriminate against or unduly burden interstate commerce. In its decision, the Tenth Circuit held that the U.S. Supreme Court's decision in Quill Corp. v. North Dakota2 was not applicable based on U.S. Supreme Court and Tenth Circuit decisions construing Quill narrowly to apply only to the duty to actually collect and remit taxes.


Colorado imposes a complementary sales and use tax. The sales tax is paid at the point of sale, while the "use tax is paid when property is stored, used, or consumed within Colorado but sales tax was not paid to a retailer." 3 In-state retailers are responsible for collecting and remitting the sales tax to the state. Purchasers are required to calculate and remit the appropriate use tax on purchases from out-of-state retailers.

As a result of the difficulty in enforcing compliance with respect to the use tax system, the state enacted legislation in 2010 that imposed several notification and reporting requirements on retailers that do not collect sales tax. 4 The new law imposed three requirements5 on "non-collecting retailers:" 6

  • Sending a "transactional notice" to Colorado purchasers letting them know that they may be subject to Colorado's use tax; 7
  • Sending an "annual purchase summary" to Colorado purchasers who buy more than $500 in goods from the retailer with the dates, categories, and amounts of purchases, reminding them of their obligation to pay use taxes on those purchases; 8 and
  • Filing an annual "customer information report" with the Colorado Department of Revenue listing their customers' names, addresses, and total amounts spent. 9

The Direct Marketing Association (DMA) consists of businesses and organizations that market products directly to consumers via catalogs, print advertisements, broadcast media and the Internet. DMA filed a lawsuit against the Department in a federal District Court arguing that the statute enacting notice and reporting requirements "violates the dormant Commerce Clause because it discriminates against and unduly burdens interstate commerce."

Procedural History

On March 30, 2012, a federal 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. 10 In reaching its 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.

On August 20, 2013, the U.S. Court of Appeals for the Tenth Circuit held that the Tax Injunction Act (TIA) 11 precluded federal jurisdiction over DMA's claims12 and remanded the case to dissolve the permanent injunction and to dismiss the Commerce Clause claims raised by DMA. 13 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.

Following the Tenth Circuit's denial of DMA's request for en banc review, DMA appealed the decision to the U.S. Supreme Court, and concurrently filed suit in a state court. 14 The U.S. Supreme Court granted certiorari on July 1, 2014.

On March 3, 2015, the U.S. Supreme Court unanimously held that the TIA did not bar a challenge in federal court of Colorado's sales and use tax notice and reporting requirements for out-of-state retailers. 15 The Court did not consider the underlying merits of the challenges to Colorado's notice and reporting requirements. In reversing and remanding the Tenth Circuit's decision, the Court set the stage for this decision which allowed DMA the ability to raise the federal constitutional challenges concerning Colorado's extensive notice and reporting requirements in federal court rather than in state court.

Dormant Commerce Clause and Scope of Quill

The Tenth Circuit began its analysis by providing a broad overview of the dormant Commerce Clause doctrine. Tracing the development of the doctrine, the Tenth Circuit explained that the "focus of a dormant Commerce Clause challenge is whether a state law improperly interferes with interstate commerce." Underlying this is the primary concern of economic protectionism. The Tenth Circuit addressed the four-prong test in Complete Auto16 for dormant Commerce Clause challenges involving state taxes on interstate commerce and concluded that the test did not apply in the case at hand because the facts involved a "reporting requirement and not a tax."

Turning its discussion to Quill,17 the Tenth Circuit stated that its decision in this case was determined by the scope of Quill. The Tenth Circuit concluded that the scope of Quill does not extend beyond sales and use tax collection. The Tenth Circuit noted that in DMA, the U.S. Supreme Court stated that Quill established "the principle that a state 'may not require retailers who lack a physical presence in the State to collect these taxes on behalf of the [state].'" Furthermore, while the U.S. Supreme Court has not overturned Quill, it "has not extended the physical presence rule beyond the realm of sales and use tax collection."

The Tenth Circuit also cited to similar language in its own decision in American Target Advertising, Inc. v. Giani18 to underscore its point. In that decision, the Tenth Circuit stated that "Bellas Hess and Quill concern the levy of taxes upon out-of-state entities" and the U.S. Supreme Court in Quill "repeatedly stressed that it was preserving Bellas Hess' bright-line rule 'in the area of sales and use taxes.'" The Tenth Circuit found that the "Utah Act imposes licensing and registration requirements, not tax burdens" and thus, the "Bellas Hess/Quill bright-line rule is therefore inapposite."

The Tenth Circuit rejected DMA's argument that the Supreme Court cited Quill in three cases19 that did not involve a tax collection obligation. According to the Tenth Circuit, these decisions "merely describe points of law in Quill and do not actually extend its holding to other contexts." None of the cases cited by DMA "actually invokes Quill's dormant Commerce Clause analysis—only its due process analysis and discussion of congressional authority—and they do not demonstrate that Quill extends beyond the actual collection of taxes by out-of-state retailers."

DMA's Discrimination Claim

In granting summary judgment to DMA, the District Court had held that Colorado's notice and reporting requirements: (1) impermissibly discriminated against and (2) unduly burdened interstate commerce. The Tenth Circuit reversed the District Court's order granting summary judgment, finding that the Colorado notice and reporting requirements did not violate the dormant Commerce Clause because the statute does not discriminate against or unduly burden interstate commerce. In its discrimination analysis, the Tenth Circuit considered whether the Colorado notice and reporting requirements facially discriminate against interstate commerce, and whether the direct effect of such requirements is to favor in-state economic interests over out-of-state interests.

Facial Discrimination

The Tenth Circuit found that Colorado's notice and reporting requirements were not facially discriminatory. The notice and reporting requirements do not distinguish between in-state and out-of-state economic interests but impose differential treatment if the retailer collects Colorado sales or use taxes or not.

The Tenth Circuit noted that, while the title of the statute, "An Act Concerning the Collection of Sales and Use Taxes on Sales Made by Out-Of-State Retailers," mentions out-of-state retailers, the statute itself clearly refers to "[e]ach retailer that does not collect Colorado sales tax."

Additionally, the Tenth Circuit stated that "when the Supreme Court has concluded a law facially discriminates against interstate commerce, it has done so based on statutory language explicitly identifying geographical distinctions." According to the Tenth Circuit, the notice and reporting requirements do not make this distinction. The law only distinguishes between "those retailers that collect Colorado sales and use tax and those that do not." Thus, the Tenth Circuit concluded that there was no facial discrimination.

Discriminatory in its Direct Effects

The Tenth Circuit explained that a state law violates the dormant Commerce Clause if "its effect is to favor in-state economic interests over out-of-state interests." 20 This is determined by looking at the "overall effect of the statute on both local and interstate activity." In order to prevail, DMA was required to show that the notice and reporting requirements served to benefit local actors, and burden out-of-state actors, resulting in an alteration of "the competitive balance between in-state and out-of-state firms." DMA failed to meet this burden, leading the Tenth Circuit to hold that the Colorado notice and reporting requirements do not favor in-state economic interests and are not discriminatory in their effect.

In its analysis, the Tenth Circuit rejected DMA's argument that "any differential treatment" between in-state and out-of-state entities violates the dormant Commerce Clause and that Colorado's notice and reporting requirements should be viewed in isolation. The Tenth Circuit noted that the reporting obligation does not give in-state retailers a competitive advantage. The Tenth Circuit also noted that disparate treatment is not discrimination if the subjects of the treatment are not similarly situated. The "noncollecting out-of-state retailers are not similarly situated to the in-state retailers, who must comply with tax collection and reporting requirements that are not imposed on the out-of-state non-collecting retailers." Finally, the Tenth Circuit held that DMA did not prove that the notice and reporting requirements imposed "a discriminatory economic burden on out-of-state vendors when viewed against the backdrop of the collecting retailers' tax collection and reporting obligations." The reporting requirements apply to retailers that do not otherwise have to comply with tax collection and reporting and were created to "increase compliance with preexisting tax obligations," the Tenth Circuit explained.

The Tenth Circuit then considered whether the Colorado notice and reporting requirements had a discriminatory effect, and viewed this question in terms of the reach of Quill. The Tenth Circuit had already determined that Quill was inapplicable to the Colorado notice and reporting requirements because Quill concerned the collection of sales and use taxes, while Colorado's law was enacted to deal with a different objective. As a result, DMA needed to prove that the notice and reporting obligations were discriminatory if such obligations constituted "'differential treatment of in-state and outof- state economic interests that benefits the former and burdens the latter,' and thereby 'alter[] the competitive balance between in-state and out-of-state firms.'" According to the Tenth Circuit, DMA failed to prove discrimination. In addition, the Tenth Circuit concluded that DMA failed to show that the notice and reporting requirements for noncollecting out-of-state retailers are more burdensome than the regulatory requirements faced by in-state retailers, including obtaining a license and calculating the amount of tax due.

DMA's Undue Burden Claim

Following the rejection of DMA's discrimination arguments, the Tenth Circuit separately evaluated DMA's undue burden argument. As DMA relied on Quill in its analysis of undue burden, the Tenth Circuit summarily concluded that Quill's non-applicability to the Colorado notice and reporting requirements made it impossible for DMA to prevail on the undue burden claim. The Tenth Circuit did not evaluate whether the notice and reporting requirements could be invalidated based on the argument that the burden imposed on interstate commerce was "clearly excessive in relation to the putative local benefits." 21


The decision by the Tenth Circuit marks the latest twist in a seemingly unending loop of litigation between DMA and the Department on the legality of imposing expansive notice and reporting requirements on remote sellers. If the result ultimately stands, the Tenth Circuit's decision would endorse notice and reporting requirements as an alternative method by which states attempt to address the issue of the disparity in treatment between online sellers and brick-and-mortar sellers. It remains to be seen whether other states immediately adopt the notice and reporting requirements, which are based on a model statute adopted by the Multistate Tax Commission, or whether they await a final disposition of the case. Given the uncertainty in this area, one would think that states might exercise caution for the moment.

As this litigation has evolved, in addition to notice and reporting statutes directed at remote sellers, states have used a variety of tools to expand the universe of taxpayers subject to the collection and remittance requirements of the sales and use tax, including the adoption of click-through and affiliate nexus statutes. At the same time, several incarnations of federal legislation that would overturn the Quill physical presence standard continue to be considered in Congress, albeit at a deliberate pace.

DMA now faces a decision on whether to: (i) request an en banc hearing as it did the last time the Tenth Circuit handed down an adverse decision to DMA; (ii) appeal directly to the U.S. Supreme Court; or (iii) acquiesce to the Tenth Circuit's decision. Each approach carries possibilities and risks. If history is a guide, DMA's request for an en banc hearing by the entire Tenth Circuit may not be granted, though at the very least, such action would provide DMA additional time to consider its remaining alternatives. If an appeal to the U.S. Supreme Court is taken, a review is far from guaranteed. However, the probability that certiorari would be granted by the Court is somewhat higher than usual, given that the Court heard the prior litigation that resulted in the case being heard by the federal courts. At the very least, Justice Anthony Kennedy's statement in a concurring opinion22 in the U.S. Supreme Court's DMA decision that the "legal system should find an appropriate case" to challenge Quill makes it likely that at least one justice wants to grant certiorari.

The biggest risk that DMA may face in appealing the decision to the Court is that the Court ultimately grants certiorari, and finds not only that the Colorado collection and reporting requirements are legal, but that the Quill physical presence standard is obsolete. Having said that, any presumption about what the Court might do with this case is fraught with a great deal of uncertainty, in large part due to the recent death of U.S. Supreme Court Justice Antonin Scalia. The expected lengthy nomination process for his successor may impact the Court's workload in the short term, and, depending upon the identity of Justice Scalia's successor, may have implications on whether, and if so, how the Court approaches the litigation.

Out-of-state retailers will likely not be disappointed to hear that the Department has not yet fired up the machinery to administer the Colorado reporting requirements, having taken a "wait and see" approach as this plays out.


1 Direct Marketing Association v. Brohl, U.S. Court of Appeals, 10th Circuit, No. 12-1175, Feb. 22, 2016.

2 504 U.S. 298 (1992).

3 Citing COLO. REV. STAT. §§ 39-26-104, 39-26-202, 39-26-204(1).

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

5 Certain de minimis retailers, or retailers with de minimis purchasers, are not subject to these requirements. 1 COLO. CODE REGS. § 39-21-112.3.5(1)(a) provides that retailers who made less than $100,000 in total gross sales in Colorado in the previous calendar year, and who reasonably expect gross sales in the current calendar year to be less than $100,000, are exempt from the notice and reporting obligations.

6 1 COLO. CODE REGS. § 39-21-112.3.5(1)(a) defines a "non-collecting retailer" as "a retailer that sells goods to Colorado purchasers and that does not collect Colorado sales or use tax."

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

8 COLO. REV. STAT. § 39-21-112(3.5)(d)(I); 1 COLO. CODE REGS. § 39-21-112.3.5(3).

9 COLO. REV. STAT. § 39-21-112(3.5)(d)(II); 1 COLO. CODE REGS. § 39-21-112.3.5(4).

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

11 28 U.S.C. § 1341. 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."

12 Direct Marketing Association v. Brohl, 735 F.3d 904 (10th Cir. 2013).

13 The District Court dismissed DMA's claims and dissolved the permanent injunction on Dec. 10, 2013.

14 Direct Marketing Association v. Department of Revenue, Colo. District Court, No. 13CV34855, Feb. 18, 2014. The state District Court preliminarily enjoined enforcement of the Colorado notice and reporting requirements based on DMA's dormant Commerce Clause constitutional argument claiming facial discrimination. After the U.S. Supreme Court granted certiorari, the state court stayed its proceedings.

15 Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2015).

16 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

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

18 199 F.3d 1241 (10th Cir. 2000).

19 Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1 (2009); MeadWestvaco Corp. v. Illinois Department of Revenue, 553 U.S. 16 (2008); Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564 (1997).

20 Citing to Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573 (1986).

21 Referencing the undue burden test set forth by the U.S. Supreme Court in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).

22 135 S. Ct. 1124 (2015) (Kennedy, J., concurring). For a discussion of this case, see GT SALT Alert: U.S. Supreme Court Holds Challenge to Colorado's Sales and Use Tax Notice and Reporting Requirements Not Barred by Tax Injunction Act. 

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