Direct Mktg. Ass'n v. Brohl

Decision Date20 August 2013
Docket NumberNo. 12–1175.,12–1175.
Citation735 F.3d 904
PartiesDIRECT MARKETING ASSOCIATION, Plaintiff–Appellee, v. Barbara BROHL, in her capacity as Executive Director, Colorado Department of Revenue, Defendant–Appellant, and Multistate Tax Commission, Amicus–Curiae.
CourtU.S. Court of Appeals — Tenth Circuit


Melanie J. Snyder, Deputy Attorney General (John W. Suthers, Attorney General; Daniel D. Domenico, Solicitor General; Stephanie Lindquist Scoville, Senior Assistant Attorney General; and Grant T. Sullivan, Assistant Attorney General, with her on the briefs), Denver, CO, appearing for Appellant.

George S. Isaacson (Matthew P. Schaefer with him on the briefs), Brann & Isaacson, Lewiston, ME, appearing for Appellee.

Sheldon Laskin, Counsel, and Shirley Sicilian, General Counsel, Washington, D.C., filed an amicus curiae brief on behalf of Multistate Tax Commission.

Before BRISCOE, Chief Judge, GORSUCH and MATHESON, Circuit Judges.

MATHESON, Circuit Judge.

This appeal arises from Colorado's efforts to collect sales and use taxes during the expansion of e-commerce.

Appellant Barbara Brohl, Executive Director of the Colorado Department of Revenue (the Department), appeals from an order enjoining the enforcement of state notice and reporting requirements imposed on retailers who do not collect taxes on sales to Colorado purchasers (“non-collecting retailers”). Most, if not all, of these non-collecting retailers sell products to Colorado purchasers by mail or online.

Appellee Direct Marketing Association (DMA)—a group of businesses and organizations that market products via catalogs, advertisements, broadcast media, and the Internet—urges us to uphold the district court's determination that Colorado's notice and reporting obligations are unconstitutional. 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 of the United States Constitution. It therefore entered a permanent injunction prohibiting enforcement of the state requirements.

The issue in this appeal is whether Colorado's notice and reporting obligations for non-collecting retailers violate the Commerce Clause. However, we do not reach that merits question. Because the Tax Injunction Act, 28 U.S.C. § 1341, deprived the district court of jurisdiction to enjoin Colorado's tax collection effort, we remand to the district court to dismiss DMA's Commerce Clause claims.

A. Colorado's Sales and Use Taxes

Colorado imposes a 2.9 percent tax on the sale of tangible goods within the state. Colo.Rev.Stat. §§ 39–26–104(1)(a), –106(1)(a)(II). Retailers with a physical presence in the state are required by law to collect sales tax from purchasers 1 and remit it to the Department. Id. § 39–26–105, – 106(2)(a). The sales tax statute imposes additional duties on Colorado retailers such as recordkeeping, id.§ 39– 26– 116, and penalties for deficient remittance of sales tax, id.§ 39– 26– 115.

If Colorado purchasers have not paid sales tax on tangible goods—as occurs in some online and mail-order purchases from retailers with no in-state physical presence—they must pay a 2.9 percent use tax “for the privilege of storing, using, or consuming” the goods in Colorado. Id.§ 39–26–202(1)(b). The use tax complements the sales tax and is designed to “prevent[ ] consumers of retail products from purchasing out of state in order to avoid paying a Colorado sales tax.” Walgreen Co. v. Charnes, 819 P.2d 1039, 1043 (Colo.1991) (en banc); see also Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 66, 83 S.Ct. 1201, 10 L.Ed.2d 202 (1963) ([T]he purpose of ... a sales-use tax scheme is to make all tangible property used or consumed in [a] State subject to a uniform tax burden irrespective of whether it is acquired within the State.”).

Although Colorado's sales and use taxes have equivalent rates, they are collected differently. Whereas retailers with a physical presence in the state must collect and remit sales tax to the Department, the onus is on the purchaser to report and pay use tax. See J.A. Tobin Const. Co. v. Weed, 158 Colo. 430, 407 P.2d 350, 353 (1965) (en banc). This difference results from the Supreme Court's bright-line rule in Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). In Quill, the Court reaffirmed that it is unconstitutional under the “negative” or “dormant” aspect of the Commerce Clause for a state to require a retailer with no in-state physical presence to collect the state's sales or use taxes. Id. at 315–18, 112 S.Ct. 1904 (reaffirming Commerce Clause holding in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967)). Because Quill 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. SeeColo.Rev.Stat. § 39–26–204(1)(b). The failure to report and pay use tax is a criminal offense. Id.§ 39–26–206; id.§ 39–21–118.

Nonetheless, use tax collection is elusive. Most Colorado residents do not report or remit use tax despite the legal obligation to do so. A 2010 report submitted as part of this litigation estimated that Colorado state and local governments would lose $172.7 million in 2012 because of residents' failure to pay use tax on e-commerce purchases from out-of-state, non-collecting retailers.

B. Notice and Reporting Requirements

To increase use tax collection, in 2010 the Colorado legislature enacted statutory requirements for non-collecting retailers.2 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.

Under the first requirement, non-collecting retailers must “notify Colorado purchasers that sales or use tax is due on certain purchases ... and that the state of Colorado requires the purchaser to file a sales or use tax return.” Colo.Rev.Stat. 39–21–112(3.5)(c)(I). The notice must be included in every transaction with a Colorado purchaser, 1 Colo.Code Regs. § 201–1:39–21–112.3.5(2)(a), and shall inform the purchaser that (1) the retailer has not collected sales or use tax, (2) the purchase is not exempt from Colorado sales or use tax, and (3) Colorado law requires the purchaser to file a sales or use tax return and to pay tax owed. Id. § 201–1:39–21–112.3.5(2)(b). 3 According to the Department, the transactional notice “serves to educate consumers about their state use tax liability with the aim of increasing voluntary compliance.” Aplt. Br. at 12.

Under the second requirement, non-collecting retailers must mail annual notices to Colorado customers who purchased more than $500 in goods from them in the preceding calendar year. 1 Colo.Code Regs. § 201–1:39–21–112.3.5(3)(a), (c). The summary must be sent by January 31 of each year and the envelope containing it must be “prominently marked with the words ‘Important tax document enclosed.’ Id. § 201–1:3 9–21–112.3.5(3)(a)(i), (vi). The summary must inform Colorado consumers of purchase dates, items bought, and the amount of each purchase made in the preceding calendar year. Id. § 201–1:39–21–112.3.5(3)(a)(ii). The annual summary tells purchasers they have a duty to “file a sales or use tax return at the end of every year” in Colorado and must inform customers that the retailer is required to report to the Department the customers' total purchase amounts from the preceding calendar year. Id. § 201–1:39–21–112.3.5(3)(a)(iii), (iv). According to the Department, the annual summary “arms the consumer with accurate information to facilitate reporting and paying the use tax.” Aplt. Br. at 13.

Third, non-collecting retailers must annually report information on Colorado purchasers to the Department. Colo.Rev.Stat. § 39–21–112(3.5)(d)(II)(A). The annual report shall include purchasers' names, billing addresses, shipping addresses, and total purchase amounts for the previous calendar year. 1 Colo.Code Regs. § 201–1:39–21–112.3.5(4)(a). According to the Department, this customer information report “allows [it] to pursue audit and collection actions against taxpayers who fail to pay the tax” and “is designed to increase voluntary consumer compliance with state tax laws because consumers know that a third party has reported their taxable activity to the taxing authority.” Aplt. Br. at 13.

Non-collecting retailers who do not comply with any one of Colorado's notice and reporting obligations are subject to penalties. Colo.Rev.Stat. § 39–21–112(3.5)(c)(II), (d)(III)(A)-(B). Alternatively, retailers may choose to collect and remit sales tax from Colorado purchasers to forgo the notice and reporting obligations.

C. Procedural History

In June 2010, DMA sued the Department's executive director,4 challenging the constitutionality of Colorado's notice and reporting requirements. Claims I and II of DMA's complaint alleged that Colorado's statutory and regulatory obligations are unconstitutional under the Commerce Clause because they (1) discriminate against interstate commerce (“Discrimination Claim”), and (2) impose undue burdens on interstate commerce (“Undue Burden Claim”).5

The district court granted DMA a preliminary injunction prohibiting the enforcement of the notice and reporting requirements. The parties then agreed to an expedited process for resolving the two Commerce Clause claims and filed cross-motions for summary judgment on those claims.

On March 30, 2012, the district court granted DMA's motion for summary judgment and denied the Department's motion for summary judgment. On the...

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3 firm's commentaries
  • State + Local Tax Insights: Winter 2014
    • United States
    • Mondaq United States
    • January 21, 2014
    ...the permanent injunction based on the decision of the U.S. Court of Appeals for the 10th Circuit in The Direct Marketing Ass'n v. Brohl, 735 F.3d 904 (10th Cir. 2013), rehearing denied, Oct. 1, 2013)); see The Direct Marketing Ass'n v. Colo. Dep't of Revenue, No. 13 CV 34855 (Denver Dist. C......
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    • Mondaq United States
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    ...of Colorado from ruling on the Direct Marketing Association's (DMA) challenge to Colorado's use tax notice and reporting requirements.735 F.3d 904 (10th Cir. 2013). The Supreme Court of the United States has granted certiorari and will hear the case during its October 2014 State Court Bias ......
  • U.S. Supreme Court Holds Challenge To Colorado’s Sales And Use Tax Notice And Reporting Requirements Not Barred By Tax Injunction Act
    • United States
    • Mondaq United States
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    ...Association v. Huber, U.S. District Court, D. Colorado, No. 10-cv-01546-REB-CBS, March, 30, 2012. 6 Direct Marketing Association v. Brohl, 735 F.3d 904 (10th Cir. 7 28 U.S.C. § 1341. 8 H.B. 10-1193, Laws 2010, which is now codified at COLO. REV. STAT. § 39-21-112(3.5). 9 COLO. REV. STAT. § ......
2 books & journal articles
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    • United States
    • Emory University School of Law Emory Law Journal No. 66-4, 2017
    • Invalid date
    ...court, holding that the federal Tax Injunction Act (TIA) barred federal court jurisdiction over the case. Direct Mktg. Ass'n v. Brohl, 735 F.3d 904, 920-21 (10th Cir. 2013), cert. granted, 134 S. Ct. 2901 (2014), rev'd, 135 S. Ct. 1124 (2015). TIA prohibits federal courts from enforcing any......
  • What to expect when you are expecting state tax reform.
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    ...134 S. Ct. 682 (2013) (25.) Performance Marketing Ass'n, Inc. v. Hamer, 998 N.E.2d. 54 (111. 2013). (26.) Direct Marketing Ass'n v. Brohl, 735 F.3d 904 (10th Cir. Ct. 2013), reh'g denied (Oct. 1, (27.) N.M. Taxation & Revenue Dep't v. LLC, 303 P.3d 824 (N.M. 2013). (2......

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