US Supreme Court holds that the Tax Injunction Act does not bar a federal lawsuit

Last December, the United States Supreme Court (the Court) heard oral arguments in the case Direct Marketing Association v. Brohl. There, the Court considered whether the Direct Marketing Association (DMA) had standing to assert its claim that a 2010 Colorado law is unconstitutional, as previously detailed.

The law at issue requires out-of-state online retailers that do not collect Colorado state sales and use taxes to notify customers of the amount of taxes they owe; and that they are obligated to pay those taxes. It also requires remote sellers with sales of more than $100,000 to report the amount of tax owed to the state.

The DMA challenged this law as violation of the Commerce Clause, arguing that it imposes unduly burdensome information collecting and reporting requirements. The district court agreed, and Colorado appealed to the 10th Circuit Court of Appeals (the 10th Circuit). That court determined that the Tax Injunction Act (TIA) barred it from hearing the case in the first place, based on TIA language providing that the federal courts lack the authority to interfere with the assessment, levy, or collection of any tax under state law when the same could be done in state court.

The DMA appealed this decision to the United States Supreme Court, where the only issue was whether the 10th Circuit was correct in concluding that the DMA could not bring its suit to a federal court.

The holding

Reversing the 10th Circuit, the Supreme Court held that the federal court does have jurisdiction over the lawsuit. Writing a unanimous opinion for the Court, Justice Thomas concluded that the terms “assessment,” “levy,” and “collection” in the TIA “do not encompass Colorado’s enforcement of its notice and reporting requirements.” Instead, these terms “refer to discrete phases of the taxation process.” Such phases do not include the sort of informational notices and private reports addressed in the law that have “long been treated as a phase of tax administration that occurs before assessment, levy, or collection.”

Implications

According to SCOTUSBlog, what makes this case exciting is Justice Kennedy’s concurrence. Proclaiming that “[t]he opinion of the Court has my unqualified join and assent, for in my view it is complete and correct,” he added that his separate statement was appropriate and necessary “concerning what may well be a serious, continuing injustice faced by Colorado and many other states.”

The injustice to which Justice Kenney refers is the holding in the 1992 case Quill Corp. v. North Dakota, which reaffirmed a 1967 decision denying states the ability to require a business to collect use taxes if that business does not have an in-state physical presence. Though the use taxes are still due, Quill affirmed the proposition that the state may not require businesses to collect them.

Justice Kennedy suggested that “contemporary Commerce Clause jurisprudence might not dictate the same result.” He reasoned that “there is a powerful case to be made” for imposing a “minor tax collection duty” when a retailer does extensive business in a state, even if via the mail or Internet. That powerful case, in part, exists in lost revenues. Justice Kennedy noted that Colorado collects only about four percent of the tax revenues due on sales from out of state vendors, and in 2012, it lost an estimated $170 million.

In addition, Justice Kennedy advanced the idea that “a business may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term.” He concluded that “(g)iven these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill,” which harms states more than was anticipated.

The case now returns to the circuit court for a decision on the merits.