High court to eye taxes on online purchases

Soon, the U.S. Supreme Court will announce an opinion about a Colorado sales and use tax law with implications for many businesses.
In 2010, Gov. Bill Ritter signed into law House Bill 10-1193. This bill allows the Colorado Department of Revenue to collect sales and use taxes from Colorado residents who purchase products online from remote vendors, rather than collecting sales taxes from the vendors directly.
The law requires considerable, burdensome cooperation from the affected vendors. Among other things, vendors (including Amazon.com, for example) must send an annual notice to each Colorado purchaser by Jan. 31, showing the amount paid for Colorado purchases in the previous year, including the dates, amounts and category of the purchase and, if known by the retailer, whether the purchase is tax exempt. The notice must inform each Colorado purchaser that Colorado law requires the filing of a sales or use tax return, and the notice must be sent by first-class mail, separate from product shipments, to each Colorado purchaser.
Predictably, the law was challenged. The Direct Marketing Association sued the executive director of the Department of Revenue in June 2010, alleging unconstitutional discrimination against interstate commerce and imposition of undue burdens on interstate commerce. The U.S. District Court for the District of Colorado granted a preliminary injunction to DMA, prohibiting the enforcement of the law. In March 2012, the district court granted DMA’s motion for summary judgment against the Department of Revenue, concluding that the law’s notice and reporting requirements discriminate against interstate commerce and place undue burdens that interfere with it. The district court entered a permanent injunction, prohibiting Colorado from enforcing the notice and reporting requirements of the law.
The Department of Revenue appealed the district court’s rulings, and the case went to the 10th Circuit Court of Appeals to decide whether the notice and reporting requirements for remote retailers unconstitutionally violate the dormant Commerce Clause. In August 2013, the circult court issued its opinion without reaching the merits about the Commerce Clause violations. Instead, the 10th Circuit focused on a federal law known as the Tax Injunction Act, which provides that “district courts shall not … 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 10th Circuit concluded that the district court did not have jurisdiction, finding that DMA’s action sought to restrain the collection of Colorado state taxes and that “Colorado provides avenues for remote retailers to challenge the scheme, allegedly forcing them to choose between collecting sales tax or complying with the notice and reporting requirements. Colorado’s administrative remedies provide for hearings and appeals to state court, as well as ultimate review in the United States Supreme Court.” The case was remanded to the district court for dismissal of DMA’s claims for lack of jurisdiction.
Clearly, the Department of Revenue would prefer to fight this matter out in Colorado state courts rather than in the federal courts. However, DMA petitioned the U.S. Supreme Court for relief. Because the 10th Circuit’s decision is contrary to decisions in similar cases from other federal circuit courts of appeals and differs from the Supreme Court’s leading precedent, the Supreme Court agreed last summer to hear DMA’s appeal. The Supreme Court will decide “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.”
The Supreme Court heard oral arguments in this case, known as Direct Marketing Association v. Brohl, last month. If the Department of Revenue prevails there, it will mean that DMA must fight Colorado’s law in Colorado courts, where the Department of Revenue may have an advantage.
Stay tuned. Businesses around the nation may be affected by the outcome of this case.

Dan Jones is an attorney at Coan, Payton and Payne LLC in Greeley. He can be reached at 970-339-3500 or djones@cp2law.com.