In a recent decision, Direct Mktg. Ass’n v. Brohl, the United States Supreme Court held that the Tax Injunction Act (“TIA”) does not bar out-of-state retailers from challenging Colorado’s notice and reporting requirements in federal court. In 2010, amid an explosion in online retail sales to Colorado residents from out-of-state retailers that were not liable for collecting sales tax, the Colorado legislature enacted a statutory notice and reporting requirement for non-collecting retailers. Colorado’s notice and reporting requirement required out-of-state retailers to provide the state with information regarding all sales of $500 or more to Colorado residents if at the point of sale, they were not subject to collecting and remitting sales tax. The notice and reporting requirements impose three obligations on out-of-state retailers whose gross sales in Colorado exceed $100,000: they must (1) provide transactional notices to Colorado purchasers, (2) send annual purchase summaries to Colorado customers, and (3) annually report Colorado purchaser information to the Colorado Department of Revenue.
The issue stems from the doctrine announced in a 1992 opinion, Quill v. North Dakota, where the United States Supreme Court held that a state violates the dormant Commerce Clause if it requires an out-of-state retailer to collect and remit sales and use taxes if there is no “substantial nexus” between the out-of-state retailer and the taxing state. Quill protects out-of-state retailers from collecting and remitting sales and use taxes merely because they do not to have a brick and mortar presence in the state. Under this doctrine, currently out-of-state retailers have an advantage over in-state retailers because out-of-state retailers can sell their products at a lower total price, which excludes sales tax.
Colorado’s notice and reporting requirements were a clear attempt to work around the Quill doctrine by requiring informational reporting instead of imposing a tax. The TIA provides that federal district courts “shall not enjoin, suspend, or restrain the assessment, levy or collection of any tax under State law.” In reversing the Tenth Circuit, the Supreme Court determined that Direct Marketing Association’s (“DMA”) suit seeking to enjoin Colorado from imposing its notice and reporting requirements on out-of-state retailers without a “substantial nexus” to Colorado would not “enjoin, suspend or restrain the assessment, levy or collection” of Colorado taxes. Specifically, the Court held that Colorado’s notice and reporting requirements were not an assessment, levy or collection when read in light of the Internal Revenue Code. The Court found that assessment, levy and collection refer to “discrete phases” of the taxation process and did not include informational reporting relevant to tax liability. Furthermore, the Court determined that DMA’s suit would not “restrain” assessment, levy or collection because “restraints” under TIA refer to orders by the federal district courts that stopped, rather than merely inhibited, acts of assessment, levy or collection.
The Court correctly reversed the Tenth Circuit and permitted DMA’s suit to remain in federal court. This decision permits online retailers to maintain challenges to similar notice and reporting requirements in federal district court rather than state court. Additionally, by permitting DMA to maintain its suit and enjoin the notice and reporting requirements, the Court has, for now, effectively protected consumers by banning the State of Colorado from forcing out-of-state retailers to submit confidential consumer information to the Colorado Department of Revenue.
Justice Kennedy’s concurring opinion may be the most important part of the decision as it called the Quill doctrine into question and asked for an appropriate vehicle for the Court to make a decision on the merits. In his concurrence, Justice Kennedy stated that the “the legal system should find an appropriate case for this Court to reexamine Quill.” As such, the Court put the “legal system” on notice that Quill is outdated in the technological era, since it is possible for an out-of-state retailer to have a substantial nexus to a state through the internet even if the retailer does not have a physical presence in that state.
Although not explicitly stated, the Quill doctrine gives out-of-state retailers a competitive advantage since they do not have to collect and remit sales taxes as in-state retailers are forced to collect and remit. The decision may have been correct in 1992 when the internet was in its infancy stages, but the “physical presence” requirement of Quill was outdated in as early as 2000 when e-commerce accounted for over $29 billion in retail sale revenue nationwide. By at least 2011, Quill was entirely obsolete when “nearly 70% of American consumers shopped online.” Furthermore, Colorado’s sales and use tax losses —in 2012 alone— were estimated to be around $170 million.
The Court’s narrow definition of the TIA and Justice Kennedy’s message that the Quill doctrine should be reexamined, serves as a warning to the states to tread lightly when enacting similar notice and reporting requirements, and puts out-of-state retailers on notice that their competitive advantage over in-state retailers is coming to an end. Practitioners and courts alike should be on the lookout for the Supreme Court to take up and revise its decision in Quill so that states do not continue to lose massive revenue in the future.
Adam Young is a third year law student at Widener University School of Law and will be pursuing an LL.M. in Taxation at Georgetown University Law Center in the Fall of 2015. During his third year of law school, Adam interned for the Honorable Christopher S. Sontchi in the United States Bankruptcy Court for the District of Delaware as well as for the Internal Revenue Service, Large Business and International Division.
Suggested Citation: Adam Young, Direct Mktg. Ass’n v. Brohl: A Temporary Win for On-Line Retailers, Del. J. Corp. L (May 18, 2015), www.djcl.org/blog.