In a blow to opponents of Colorado’s expansive sales and use tax regime, the Tenth Circuit reversed the decision of the district court in Direct Marketing Association v. Huber and dismissed the trade group’s case against Colorado’s reporting and notice requirements for e-commerce vendors outside of Colorado. In Direct Marketing Association v. Brohl (August 20, 2013), the Tenth Circuit declined to rule on the merits of the plaintiff’s Commerce Clause claims against Colorado, instead turning its decision on the Tax Injunction Act, which deprives federal courts of jurisdiction in cases seeking to enjoin or restrain the assessment, levy, or collection of state taxes.
Colorado, like almost all states, requires retailers with physical presence in the state to collect sales tax and remit it to the Colorado Department of Revenue. Similarly, Colorado purchasers who do not pay sales tax are required to pay use tax on purchased goods used within the state. Colorado, like most states, has struggled to enforce use tax collection from individual residents in the state, particularly with regard to internet purchases. So, to increase compliance, Colorado passed legislation in 2010 requiring all non-collecting retailers to: 1) provide notice to Colorado customers that use tax is owed on each transaction; 2) provide annual purchase summaries to Colorado customers; and 3) report that same annual customer information to the Colorado Department of Revenue.
The Direct Marketing Association, a trade group of catalog and internet marketers, challenged the constitutionality of the statute under the Commerce Clause, suing in the U.S. District Court for the District of Colorado. In one of the first victories against these types of statutes nationwide, the Court granted the DMA’s motion for summary judgment and permanently enjoined the state’s enforcement of the law. The Court ruled that there was “no evidence to show that the legitimate interests advanced by [the Department] cannot be served adequately by reasonable nondiscriminatory alternatives.” For more on the District Court’s 2012 ruling, see this contemporary article discussing the case.
On appeal, the Tenth Circuit found that before the federal court could address whether the notice and reporting requirements violated the Commerce Clause, it had to determine whether the Tax Injunction Act precluded federal jurisdiction over the claims. Specifically, the Act’s “broad language prohibits federal courts from interfering with state tax administration through injunctive relief, declaratory relief, or damages awards.” Because the DMA sought to enjoin Colorado’s notice and reporting requirements – Colorado’s “chosen means of enforcing use tax collection” – the statute was “squarely within the TIA’s protection.” And because the DMA had a plain, speedy, and efficient remedy in the Colorado courts, the federal court had no jurisdiction. Accordingly, the Court ordered the district court to dismiss the DMA’s case for lack of jurisdiction and dissolve the permanent injunction.
As a result of the decision, once the district court lifts the injunction, retailers who sell to Colorado customers and who do not collect Colorado sales tax will once again be required to provide the three types of notice required by the statute. Retailers should be aware of the requirements and ensure that they are in compliance. Although the federal courts lack jurisdiction to hear a challenge to Colorado’s statute under the Tenth Circuit’s ruling, retailers can still challenge the statute in the Colorado courts. Either way, this case will probably not be the last word in the ongoing feud between states and online retailers.