August 22, 2014

Tenth Circuit: Tax Injunction Act Precluded Federal Jurisdiction in Colorado’s E-Commerce Use Tax Reporting Requirements Case

The Tenth Circuit Court of Appeals published its opinion in Direct Marketing Ass’n v. Brohl on Tuesday, August 20 2013.

Colorado imposes a 2.9% use tax on tangible goods stored, used, or consumed in the state when no sales tax has been paid. Because the dormant Commerce Clause prohibits Colorado from forcing retailers with no in-state physical presence to collect and remit taxes on sales to Colorado consumers, the state requires its residents to report and pay use taxes to the Department with their income tax returns. In 2010 the Colorado legislature enacted statutory requirements for non-collecting retailers. The statute and its implementing regulations impose three principal obligations on non-collecting retailers whose gross sales in Colorado exceed $100,000: they must (1) provide transactional notices to Colorado purchasers, (2) send annual purchase summaries to Colorado customers, and (3) annually report Colorado purchaser information to the Department.

The Direct Marketing Association (DMA) sued the Department of Revenue’s executive director, challenging the constitutionality of the state’s new notice and reporting requirements. The district court concluded that Colorado’s requirements for non-collecting retailers discriminated against and placed undue burdens on interstate commerce, in violation of the Commerce Clause and entered a permanent injunction prohibiting enforcement of the state requirements. The Department appealed.

The Tenth Circuit did not reach the Commerce Clause issue on appeal because it held that the Tax Injunction Act (TIA) precluded federal jurisdiction over DMA’s claims. The TIA provides that “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 DMA argued that it sought to avoid notice and reporting obligations, not a tax, so the TIA did not apply. The court disagreed. “The purposes of the TIA apply both to a lawsuit that would directly enjoin a tax and one that would enjoin a procedure required by the state’s tax statutes and regulations that aims to enforce and increase tax collection.” The court also found that a plain, speedy and efficient remedy is available to retailers subject to the Colorado law.

The court remanded to the district court to dismiss DMA’s Commerce Clause claims for lack of jurisdiction and to dissolve the permanent injunction.

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