Direct Marketing Association v. Brohl to address Whether Online Shopping Taxes Violate the Commerce Clause

This week, the U.S. Supreme Court considered whether you should have paid taxes on your Cyber Monday purchases. The issue before the Court in Direct Marketing Association v. Brohl is whether the federal courts can enjoin a tax scheme in Colorado that requires retailers, among other reporting requirements, to send an annual notice to the Colorado Department of Revenue identifying all purchases made by Colorado residents and sent into the State that year.

With the goal of bolstering the likelihood that consumers will remit the use tax owed on purchases made online, Colorado passed legislation establishing three reporting obligations for out-of-state retailers that do not collect sales tax. First, at the time of purchase, the retailer must notify the purchaser that although the retailer does not collect Colorado sales tax, the purchaser is obligated to self-report Colorado use tax. Second, the retailer must provide an annual notice to Colorado residents who purchased over $500 reminding them that they are obligated to report use tax on such purchases. Finally, the retailer must provide an annual report to the Colorado Department of Revenue that details customer names, addresses, and total amounts spent.

Shortly after the law was passed, the Direct Marketing Association (DMA) filed suit in the United States District Court for the District of Colorado, challenging its constitutionality. The complaint included claims under the Commerce Clause, the First Amendment, the right of privacy of Colorado consumers, and the Takings Clause. It also sought a preliminary injunction against the law’s enforcement based on the Commerce Clause violations.

The district court ruled in favor of the DMA on each of the Commerce Clause claims and entered a permanent injunction. The Tenth Circuit Court of Appeal subsequently vacated the judgment, but declined to address the merits of the district court’s Commerce Clause analysis. Rather, the appeals court found that the Tax Injunction Act (TIA) divested the federal courts of jurisdiction over the case.

The TIA provides, with regard to federal court jurisdiction, 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 intent of the federal law is to deter federal court challenges brought by taxpayers seeking to circumvent state administrative procedures for contested state tax assessments.

Colorado was forced to get creative when crafting its sales tax legislation, in large part due to a prior Supreme Court ruling. In Quill v. North Dakota, the Court held that it is a violation of the dormant Commerce Clause for a state to require any retailer that does not have a physical presence in the state to collect a use tax. Since Quill holds that online sellers can’t be forced to collect taxes, Colorado’s law seeks to circumvent the ruling by only requiring them to collect information.

The Tenth Circuit Court of Appeals held that the TIA bars the exercise of federal court jurisdiction over the suit, creating a Circuit regarding the scope of the TIA. Accordingly, specific question before the Court is:

Whether the TIA bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the informational notice and reporting requirements of a state law that neither imposes a tax, nor requires the collection of a tax, but serves only as a secondary aspect of state tax administration?

So while the Supreme Court will not address the Commerce Clause issues in the case, it will still consider an important question of federalism.