FEATURED ARTICLES
THE SUPREME COURT WEIGHS IN ON COLORADO’S ATTEMPT TO
CIRCUMVENT QUILL IN DIRECT MARKETING ASSOCIATION v. BROHL
By Tyler Murray, Esq. 1 and Michelle McCarthy, Esq 2
On March 3, 2015 the Supreme Court of the United States decided Colorado’s
latest contribution to Supreme Court jurisprudence - Direct Marketing Association v. Brohl. 3 The
case focuses on the interaction between the Colorado Collection Act and the Tax Injunction Act
(“TIA”). Colorado enacted its Collection Act in 2010, which requires out-of-state retailers to
report sales to in-state residents even when no sales tax is collected. 4 This legislation was
enacted to circumvent the requirements of Quill Corp. v. North Dakota which prevent a state
from forcing out-of-state retailers to collect and remit sales tax due on online purchases delivered
across state lines. The Collection Act exempts out-of-state retailers who collect sales tax from
these reporting requirements. 5 Direct Marketing Association (“DMA”) sought an injunction
against the regulations issued under the Collection Act in Federal District Court on grounds that
they violated the Constitution’s dormant commerce clause. 6 The Colorado Department of
Revenue appealed to the Tenth Circuit Court of Appeals, who remanded the case back to the
District Court on the grounds that it lacked jurisdiction as a result of the TIA. The Department of
Revenue ultimately appealed the Tenth Circuit decision to the Supreme Court of the United
States.
The issue on appeal before our nation’s highest court was whether the TIA barred
federal courts from enjoining Colorado’s efforts to impose additional tax reporting requirements
through its Collection Act. DMA did not challenge Colorado’s use tax, only the regulations on
reporting transactions aimed at out-of-state retailers.
The TIA provides that “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 Collection Act targets retailers who do not
collect Colorado state sales tax and have a minimum threshold of sales to Colorado customers.
These targeted retailers do not have an obligation to collect sales or use taxes under Quill.
The National Governors Association, National Conference of State Legislatures,
Council of State Governments, National League of Cities, United States Conference of Mayors,
National Association of Counties, International City/County Management Association, the
Government Finance Officers Association, the Multistate Tax Commission, and twenty-one
1
Tyler Murray, Esq., is a senior associate at Gantenbein Law Firm practicing in business, corporate and taxation law
Michelle McCarthy, Esq. is an associate at the Gantenbein Law Firm practicing business and taxation law
3
Direct Marketing Association v. Brohl, Executive Director of the Colorado Department of Revenue, 135 S. Ct.
1124 (March 3, 2015).
4
CRS § 39-21-112.
5
See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
6
Petitioners DMA filed a separate suit in state court.
7
28 USC § 1341
2
6
states plus the District of Columbia filed briefs in support of the Department of Revenue. The
state and its supporters argued that the rise of internet and online shopping has hurt state
governments’ ability to collect revenue since many internet retailers do not collect sales tax on
sales delivered to states in which they do not have a physical presence. While the purchasers are
subject to use tax, most do not file a use tax return. Furthermore, most states do not have an
efficient means of enforcing use tax collection. More specifically they argued that the
information reporting required by the Collection Act is part of the process of assessment and
collection of tax.
The Chamber of Commerce, the Council on State Taxation and the Institute for
Tax Professionals filed supporting briefs for DMA. They argued that the TIA only applies to
taxpayers contesting their own liability, under Hibbs, Director, Arizona Department of Revenue
v. Winn et. al., 542 U.S. 88 at 100 (2004). They also argued that the text of the TIA applies to
actions that directly thwart state tax “collection.” The information notices required by the
Collection Act were not truly part of the assessment, levy or collection of tax. DMA further
argued that Colorado was free to assess, collect, and levy the taxes owed regardless of the
outcome of the suit at hand. As a result, the action was not directly affecting state tax collection.
The appellee also argued that the Tenth Circuit ignored statutory history. The TIA was enacted
to stop federal courts from interfering with state tax collection efforts, and the many state laws
requiring tax protests be filed as refund suits, after taxes have been paid. Because out-of-state
taxpayers could use the diversity jurisdiction of federal courts to easily circumvent state laws
requiring refund claims, Congress felt compelled to step in. The Tax Injunction Act is similar to
the Anti-Injunction Act (AIA), which is designed to stop taxpayers from contesting their federal
tax liability without payment.
The Supreme Court reasoned that under the TIA, information notices, or private
reports of information relevant to tax liability, do not rise to the level of an assessment,
collection, or levy. In doing so, they examined the definition of these terms for purposes of
federal tax law. Information gathering occurs prior to any of these acts. Assessment occurs after
information gathering, and refers to the official recording of a taxpayer’s liability. 8 Assessment
is also the official action taken based on the information reported to the taxing authority. As so
defined, these terms do not encompass informational reporting. Colorado argued that information
reporting is part of assessment and collection, even though the notices precede both acts. After
the notices, the state must continue to act to assess and collect. While notices may help with
collection and assessments, the Supreme Court concluded that the TIA does not apply to
activities that only improve the ability of a state to collect and assess taxes.
The Tenth Circuit had focused on the TIA’s use of the term “restrain” to hold that
the statute bars any suit that would “limit, restrict, or hold back” collection efforts. The Supreme
Court determined that this was an error and that the Ten Circuit had defined restrain too broadly.
In the statute, enjoin, suspend, or restrain are terms of art that refer to different equitable
remedies. Restrain refers to the specific technical acts, of assessment, levy, or collection. It is not
an all-encompassing term. Such a definition would render the terms enjoin and suspend
superfluous, which is contrary to TIA interpretation principles. The Supreme Court ultimately
concluded that not every case that negatively impacts a state’s revenues is subject to the TIA.
8
See Hibbs at 100.
7
The Supreme Court did not rule on the comity issues and instructed the Tenth
Circuit to resolve that issue on remand. Since the TIA does not bar DMA’s injunction suit, the
Supreme Court reversed and remanded the case to the Tenth Circuit. Court watchers expect that
the Tenth Circuit will uphold the District Court’s injunction and ultimately find that these
regulations violate the Constitution’s dormant commerce clause. Similar regulations have been
found unconstitutional by every court that has analyzed such regulations.
The implications of Direct Marketing may extend beyond the mere technical
application of the TIA to Colorado’s Collection Act. Certain concurring opinions issued with the
ruling suggest that the winds may be changing with respect to the Quill doctrine more generally.
Justice Kennedy agreed with the majority in result, but noted that Quill is significantly harmful
to state budgets. Quill was based largely on National Bellas Hess, Inc. v. Department of Revenue
of Illinois, 386 U.S. 753 (1967). He noted that commerce has changed greatly since 1967. It will
be interesting to see whether the Supreme Court grants cert on any cases that directly challenge
the Quill doctrine in upcoming years. A re-examination of Quill could have a profound impact
on online retailers and the entire internet economy.
8