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.

Background

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

Commentary

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.

Footnotes

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. 

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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