By Craig Henson
The U.S. Supreme Court recently heard argument in a case that could have far-reaching implications for online retailers and their customers.
On December 8, 2014, the Court heard oral argument in Direct Marketing Association v. Brohl. Plaintiff Direct Marketing Association (DMA)—a trade organization composed of businesses that market products via catalogs, advertisements, broadcast media, and the Internet—sued the Colorado Department of Revenue (Department) in federal district court, seeking to enjoin enforcement of Colorado’s reporting and information regulations related to the state’s use tax.
Colorado requires its residents to pay a use tax on purchases of tangible goods from retailers with no physical in-state presence. This use tax primarily targets purchases from out-of-state online retailers that do not collect Colorado sales tax. The state requires its taxpayers to self-report any transactions with such non-collecting retailers on their tax returns. The state requires taxpayer self-reporting because the Supreme Court held, in Quill Corp. v. North Dakota, that the “negative” or “dormant” Commerce Clause prohibits a state from requiring an out-of-state retailer with no physical in-state presence to collect the state’s sales or use tax.
Colorado discovered that its taxpayers often failed to report their qualifying e-commerce transactions. The Department submitted one report during the course of litigation that estimated Colorado would lose $172.7 million in 2012 alone due to taxpayers’ failure to report and pay the use tax on their e-commerce purchases. Colorado responded to this problem by promulgating statutory notice and reporting requirements for non-collecting retailers. The law requires non-collecting retailers to notify Colorado customers that the retailer has not collected Colorado sales tax and that the purchaser must report the transaction on their tax return and pay the state’s use tax. The law also requires non-collecting retailers to report certain information to the Department, including annual summaries of purchases by Colorado customers. Non-collecting retailers that fail to comply with these requirements face substantial penalties.
DMA filed the current suit in June, 2010, challenging the constitutionality of Colorado’s notice and reporting requirements. DMA alleged that the requirements violated the Commerce Clause by discriminating against, and imposing undue burdens on, interstate commerce. On cross motions for summary judgment, the district court found that Colorado’s requirements violated the Commerce Clause and issued an injunction prohibiting Colorado from enforcing them.
On appeal, the Tenth Circuit declined to reach the merits of the case. The court held that the district court lacked jurisdiction to hear the dispute under the federal Tax Injunction Act (TIA), which provides that “[t]he 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.” The Supreme Court granted certiorari because “[t]he Tenth Circuit’s ruling diverges from this Court’s leading precedent and creates a split among the Circuit Courts of Appeals regarding the scope of the TIA’s limitation on federal court jurisdiction.”
Although the Court only granted certiorari to decide the scope of the TIA, the ultimate outcome of the case could potentially affect every Internet retailer in the country. During argument, the Colorado solicitor general confirmed that Colorado’s notice and reporting law is the only one of its kind among the states. In response, Justice Scalia noted that “[t]his is certainly a very important case because I have no doubt that if we come out agreeing with you, every one of the states is going to pass laws like this.” Should Justice Scalia’s prediction come to pass, Internet retailers may face identical or substantially similar requirements in each and every state in the country, regardless of whether that retailer has any physical presence in those states. But how the Court decides the case, and where the litigation may go from there, remains to be seen.