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DMA v. Brohl: US Supreme Court Holds In Favor of DMA

Overview

On Tuesday March 3, 2015, the Supreme Court handed down a unanimous decision in favor of the Direct Marketing Association, (“DMA”) in DMA v. Brohl (575 U.S. ____ )(March 3, 2015) and remanded the case back to the Tenth Circuit for further consideration. Although the decision did not come as a surprise, dicta in Justice Kennedy’s concurring opinion called into question the Supreme Court’s 23-year old holding in Quill Corp. v. North Dakota.

Takeaway

The Supreme Court’s holding likely suggests that the Tax Injunction Act (“TIA”) is not a bar to federal jurisdiction for certain challenges to state’s pre-assessment, information-reporting statutes, even if challenge would inhibit state tax assessments.

DMA v. Brohl

Procedural Posture

The DMA brought suit against the Colorado Department of Revenue (the “Department”) in United States District Court for the District of Colorado challenging the constitutionality of Colorado’s sales and use tax reporting law. The DMA challenged the law on the grounds that it violates the Commerce Clause of the U.S. Constitution. The Federal District Court agreed with the DMA, so the Department appealed to the Tenth Circuit.

The Tenth Circuit reversed for lack of jurisdiction because the TIA barred federal jurisdiction over DMA’s challenge. The DMA appealed to the Supreme Court, which unanimously held that the TIA did not bar federal jurisdiction. The Supreme Court reversed and remanded the case back to the Tenth Circuit for further consideration.

Colorado’s Sales and Use Tax Law

Colorado’s law requires that retailers that do not collect Colorado sales or use tax to notify Colorado customers of their use-tax liability and to report tax-related information to customers and the Department. The law seeks to obtain information from out-of-state retailers, so that the state of Colorado can seek use taxes from Colorado purchasers that fail to report and remit use tax.

Scope of the TIA

The TIA bars federal jurisdiction over suits that would “enjoin, suspend, or restrain” a state’s “assessment, levy, or collection” of any taxes imposed by the state, so long as the challenger can obtain a remedy in the court of that state. The Tenth Circuit held that the relief sought by the DMA would “restrain” Colorado’s ability to assess a Colorado tax, so the TIA barred jurisdiction in federal courts. The Supreme Court disagreed.

Supreme Court’s Analysis

The Supreme Court held that the term “restrain” should be narrowly construed in order to prevent “enjoin and suspend”, terms parallel to restrain in the TIA, from be rendered “mere surplusage.” The Court held that the term restrain means “to prohibit from action,” rather than the broad definition “to inhibit” used by the Tenth Circuit. The DMA’s suit would not prohibit Colorado from assessing, levying, or collect the Colorado sales and use tax, so the TIA did not apply to DMA’s suit.

In addition, the Supreme Court determined that the terms “assessment, levy, or collection” should be construed in terms of their usages throughout the Federal Tax Code. Those terms have been construed elsewhere to be discrete phases of the taxation system.

Information gathering, including tax returns, were deemed to be a phase of the tax system that is separate and apart from “assessment, levy, or collection.” Generally, the information gathering stage comes before the assessment phase. Therefore, Colorado’s statute seeking “information returns” did not fall within the scope of “assessment, levy, or collection” and the TIA does not bar federal jurisdiction over DMA’s challenge.

Justice Kennedy’s Concurrence Questions Quill

The most interesting statement from the DMA case was found within Justice Kennedy’s concurrence. In his opinion, Justice Kennedy called into question the Court’s 23-year old holding in Quill Corp. v. North Dakota, 504 U. S. 298, 311 (1992).

In Quill, the Court determined that, under its Commerce Clause jurisprudence, states cannot require a business to collect use taxes if the business does not have a physical presence in the state. The Court held that North Dakota could not require a mail-order business to collect and pay use taxes because the business had no physical presence in North Dakota.

Justice Kennedy questioned the reasoning in Quill and stated the Supreme Court should reexamine the Quill holding because of the changes in the economy. To make his point, Justice Kennedy noted that mail-order sales in the United States totaled $180 billion when Quill was decided, but e-commerce sales totaled $3.16 trillion per year in the United States in 2008.

Justice Kennedy noted that changes in technology and consumer sophistication have caused States to be unable to collect many of the use taxes due on out-of-state purchases.

Justice Kennedy noted that the “Internet has caused far-reaching systemic and structural changes in the economy” and it has in many ways “brought the average American closer to most major retailers,” even if major retailers lack a physical presence in some states.

As a result, Quill is “a holding now inflicting extreme harm and unfairness on the States.”[1]

Comity

On remand from the Supreme Court, the DMA will face an additional jurisdictional hurdle before the case can be decided on the merits. The Tenth Circuit’s holding mentioned that the comity doctrine “militates in favor of dismissal.” The issue was not raised by Colorado in the District Court or in the Tenth Circuit. However, the Supreme Court punted and left “it to the Tenth Circuit to decide on remand whether the comity argument remains available to Colorado.”

Notes:

[1] If the Supreme Court altered the nexus test from Quill and its predecessor (Bellas Hess), then states may be able to pursue enforcement against out-of-state retailers that direct sales into the state. Arguably, this is a remedy that the U.S. Congress, under its Commerce Clause power, could have provided after Quill. However, Congress has not been able to pass such legislation.

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