Multi-State Tax Law Blog
Direct Marketing Association has continued its fight for consumer privacy with Colorado. In September, 2014, I wrote about how DMA has taken its challenge up to the Supreme Court of the United States. DMA filed its opening DMA Brief.pdfin the Supreme Court of the United States on September 9, 2014 and argued that the case should be allowed to be heard in federal court. A summary can be found DMA Summary.pdf. The Supreme Court heard the case in its recent term and announced its opinion on March 3, 2015. From a state and local tax perspective, the case has broad and interesting constitutional issues.
At its heart, Colorado thought it would effective to enact a law that affected “non-collecting retailer.” In Colorado’s eyes, if a company made sales in Colorado over $100,000, then it was subject to a host of regulation, including: provide notices to Colorado purchasers, send annual purchase summaries to the customers and send the report to Colorado. This all had to be done despite the fact the company had no nexus, or connection, with Colorado. DMA, agroup of businesses and organizations that markets products using advertisements, thought this was incredibly onerous and unfair, so it challenged the Colorado law in federal court. At trial, the DMA convinced the trial court that this law was impermissible because it convinced a judge that the law discriminated against, and placed an undue burden on interstate commerce.
Colorado was unhappy, to say the least, that some $172.7 million of tax was not being accounted for on e-commerce sales. Consequently, Colorado appealed the ruling to the 10th Circuit Court of Appeals and argued the Tax Injunction Act (“TIA”) which is a federal law that says a federal court must defer to a state court in a state tax case. The appellate court punted the ball and said it lacked the power (also called “jurisdiction”) to hear the case to begin with. Therefore, the 10th Circuit Court of Appeals reversed the ruling and did not discuss the merits of the case.
On July 1st, 2014, the Supreme Court of the United States announced it would hear DMA’s appeal. Specifically, the Supreme Court will look to whether a federal court can hear a constitutional challenge to a state tax.
As stated above, the Supreme Court of the United States (“SCOTUS”) announced its opinion March 3, 2015. In relative concise opinion from SCOTUS (yes 22 pages is concise for this group), Justice Thomas spoke for the court. At its core, the TIA states that federal courts “shall not enjoin suspend or retrain the assessment, levy of collection of any tax under state law.” In a very methodical fashion, the Court went through each of those words and defined them. Following a definition journey, the Court decided that the limitations prescribed by the TIA do not encompass Colorado’s notice and reporting requirements because it did not have anything to do with the assessment, levy, or collection of taxes. Therefore, a federal court could hear the case.
Despite winning the case, the DMA’s quest is far from over. Now that SCOTUS announced a federal court can hear the case, the case will be sent back down to the lower court to be heard on the merits. As such, it could be several years before the DMA has a useable opinion.
In response to the decision, Colorado was understandably unhappy about the ruling, while DMA’s attorney stated that “The decision today was gratifying not only to the direct marketing industry, but to all businesses in securing access to federal court.” Also of note, Justice Kennedy wrote an interesting concurring opinion. In his view, due to the Internet, it is time for the Court to entrain a sales tax nexus case since Quill in 1992. Reading between the lines, practitioners should beware to rush to the courthouse because the tone of Justice Kennedy concurrence seem to indicate a pro-state approach to the problem.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390.