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Colorado subjects online purchases to sales and use tax. Taking this a few steps further in 2010, the state passed a law designed to facilitate collection of these taxes. The Direct Marketing Association (DMA) filed a lawsuit in response, and the case has made its way to the United States Supreme Court. Last week, in Direct Marketing Association v. Brohl, the Court heard oral arguments in that challenge.




The Colorado Department of Revenue’s FYI publication, General 10 informs readers that the state imposes a 2.9 percent use tax on Internet purchases, payable when tax is due but not collected by the retailer. The sales tax, which retailers collect at the time of a purchase, is also 2.9 percent.

Another FYI publication, Sales 5, states that a remote seller, defined as an out-of-state business with no physical presence in Colorado, is not required to actually collect and remit taxes. This is so because of a 1992 Supreme Court case, Quill Corp. v North Dakota, prohibiting such requirements. Instead, Colorado requires consumers, who purchase items from remote sellers that are subject to the tax, report and pay it with their income tax returns.

In an attempt to bolster compliance, the General Assembly passed the above-mentioned 2010 law that required out-of-state online retailers that do not collect Colorado state sales and use taxes to notify customers 1) of the amount of taxes they owe; and 2) that they are obligated to pay those taxes. In addition, the law requires remote sellers with sales of more than $100,000 to report the amount of tax owed to the state.

Thus, between the requirements imposed on remote sellers and Colorado residents, the state attempted to mitigate lost sales tax revenues through legislative action. A Colorado Statesman article revealed that by one estimate, Colorado lost $352.6 million in sales and use taxes that went uncollected from customers of online and catalog retailers in 2012.

Direct Marketing Association v. Brohl

When the DMA sued the Executive Director of the Colorado Department of Revenue in federal court, claiming that the 2010 law was unconstitutional, the court agreed, and Colorado appealed to the 10th Circuit Court. There, the appellate court determined that it lacked the authority to hear the case. It reasoned that the Tax Injunction Act (TIA), which prohibits the federal courts from enjoining, suspending or restraining “the assessment, levy or collection of any tax under state law where a remedy exists in a state court,” bars the federal courts from prohibiting tax collection efforts in the first place.

The DMA appealed the 10th Circuit’s conclusion to the United States Supreme Court. In its petition for certiorari, the DMA argued that it was not attempting to get in the way of tax collection, “but rather to prevent the imposition of discriminatory and burdensome regulatory obligations...”

The oral argument

Ronald Mann, a contributor to, characterized the oral arguments as “puzzling,” because of the justices’ skepticism of both sides’ reasoning.

For example, one line of questioning concerned whether the 2010 law’s notification and reporting requirement constitutes the “collection” of taxes. If it does, then the 2010 law falls under the purview of the TIA, which would then strip the federal court of jurisdiction. Justice Breyer indicated that he thought a better way to enforce the collection of taxes would be to ask citizens, politely, to “pay”, and if they don’t, send them to prison. Acknowledging that this is a “not perfect” way of handling it, he observed that the method “does tend to encourage people to pay the taxes that they believe that they owe.”

On the other hand, Justices Ginsburg and Kagan wondered what was different about previous decisions allowing a state to facilitate its tax collection efforts via a reporting requirement. Counsel for the DMA suggested the difference was in whom the requirement was being imposed on: a citizen rather than, say, an employer.

Observers indicated that it was not easy to read the Justices, and it will likely be several months before we expect an opinion.