District Court Injunction against Colorado Allowed to Stand On March 3, 2015 the United States Supreme Court announced its decision in Direct Marketing Association v. Brohl (575 U.S. (2015). In this case, a trade association for retailers challenged legislation enacted by the state of Colorado in 2010 that required sellers that do not have a tax collection and remittance obligation (i.e. nexus) with the state of Colorado, but who have gross sales in Colorado exceeding $100,000, perform the following activities with respect to their sales to Colorado residents:
- Notify purchasers at the time of the sale that tax is not being collected by the seller and may be due and payable by the purchaser to the Department of Revenue.
- Provide all Colorado customers who purchased more than $500 worth of goods in a given year, an annual report showing their purchases broken down by date, category and amount. The report is also required to reiterate the use tax reporting and remittance obligation imposed on the customer.
- Provide the Department of Revenue an annual report showing the names of all Colorado customers, their known address, and the total dollar amount of purchases in the prior calendar year.
Penalties were to be imposed for failure to comply with any of these requirements. Colorado is not the only jurisdiction to enact such a notice provision, but they are unique in their requirement of having the seller report all sales made to their residents to the Department of Revenue. The Colorado rules were largely based upon a model provision proposed by the Multistate Tax Commission, the work on which was suspended once the Colorado litigation began. The foundational rationale for enacting this type of rule lies in the inability of states, based on existing legal jurisprudence, to impose tax collection and remittance obligations on sellers unless that seller has a substantial physical presence within their jurisdiction. Over the last few years, as Congress continues to debate the Marketplace Fairness Act, states have looked for avenues to increase their tax collections while still abiding by requirements affirmed in Quill v. N.D. (504 US 298, 112 S Ct 1904 (1992)). Notice provisions seek to increase voluntary compliance with existing consumer’s use liability rules among private individuals and potentially provide the DOR an avenue to collect from said individuals. The District Court which first heard this case granted partial summary judgment to the plaintiff and permanently enjoined Colorado from enforcing the notice requirement. However, the Tenth Circuit Court of Appeals reversed, holding that the District Court did not have the legal authority to impose such an injunction. The US Supreme Court reversed the decision of the 10th Circuit, holding that authority to impose the injunction in fact exists. The legal rationale for the Court’s decision lies in an interpretation of the scope of the Tax Injunction Act which prohibits the federal courts from enjoining, suspending or restraining the assessment, levy or collection of any tax under state law where a plain, speedy and efficient remedy may be had at the state level. In sum, the Court held that a “notice” provision did not constitute a “collection, assessment or levy” activity. The most interesting element of the decision, at least from our perspective, lies in the concurring opinion of Justice Kennedy who took this opportunity to opine on the line of existing cases that articulate the physical presence/nexus requirement. Noting that the original decision defining such a requirement was decided more than 50 years ago, that being National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), and that the more recent Quill case affirming the decision was based significantly on the principal of stare decisis (meaning that past Court precedent rather than the specific merits of the underlying argument dictate the correct result), Justice Kennedy believes that the Quill court should have taken the opportunity to re-evaluate its prior decision, especially “in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy.” Justice Kennedy opines that the current rules “create a startling revenue shortfall in many states, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.” Further, in light of the substantial economic presence that retailers are able to create through the use of modern technology, “[T]here is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.” After all, “interstate commerce may be required to pay its fair share of state taxes.” With all this in mind, Kennedy considers it “unwise to delay any longer a reconsideration of the Court’s holding in Quill” and suggests “[t]he legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.” Sovos Compliance will continue to monitor developments within the Supreme Court and update our clients accordingly.
