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Supreme Court Puts Toe in Online Sales Tax Waters

  • Dec 9, 2014 | Gail Cole

 Let the debate begin.

The Supreme Court heard oral arguments yesterday for Direct Marketing Association v. Brohl, which grew out of a challenge to the Colorado use tax notification requirement. The Colorado law requires out-of-state sellers with no obligation to collect Colorado sales tax to either voluntarily collect the tax or: 1) Provide customers with a year-end summary of their purchases, AND 2) Provide the Colorado Department of Revenue with an annual report of the total dollar amount of all purchases made by Colorado residents. That information would then be used by the department to enhance use tax compliance, which is difficult for all states to enforce.

From the inception of the law in 2010, it has been challenged by the DMA, an independent organization for data-driven marketers. After lengthy court battles, the Colorado Tenth Circuit Court of Appeals determined last summer that it had no jurisdiction to hear the case because of the Tax Injunction Act (TIA), which states 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 question now facing the Supreme Court is this: “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 Department of Revenue argued that the TIA does bar the DMA’s lawsuit because the suit is attempting to “enjoin and restrain the methods Colorado uses to assess and collect its sales and use tax.” The DMA argued that the TIA does not apply here.

Both attorneys faced tough questions from the justices.

When Mr. George S. Isaacson (representing DMA) said the TIA does not apply here, Justice Ginsburg said: “But you recognize that the TIA does cover regulations that require an employer to report … an employee’s taxable income. That’s a straight reporting requirement, and you recognize that that’s covered by the TIA. So this is another information reporting that will enable or facilitate the State’s collection of its tax. So what’s the difference? Why—why is it that the one comes under the TIA and not the other?”

When Mr. Daniel D. Domenico (for the Department of Revenue) argued that the injunction against the Colorado use tax notification law “is stopping us from using the tool—the means provided under Colorado law for assessing and collecting that tax.” Justice Breyer said: “Really, you can’t ask your citizens the same way that the Federal government asks us? ‘Pay,’ that’s their polite way of saying it. And by the way, if you fill out your form incorrectly, depending upon your state of mind, you may discover you are in prison…. Now that seems to be a not-perfect way of doing it, but it does tend to encourage people to pay the taxes that they believe they owe.”

Yet overall, the justices seemed to turn a more favorable eye toward the DMA. Chief Justice Roberts told Mr. Domenico that the injunction against the Colorado use tax notification requirement doesn’t prohibit the state from collecting the tax it is owed by the taxpayer. He noted, “John Q. Public owes this money and the way you get it from him is the same way you get other taxes that are due from him or you—you can. You just want to have a more efficient way. But it doesn’t interfere with [the relationship between the State and the taxpayer].”

Certainly the DMA took the proceedings as a favorable sign. Regarding the Supreme Court oral arguments on December 8, the DMA made this statement:

“Based on this morning’s questions from the Court’s Justices, it is clear they understand the boundless ramifications of this decision…. If 50 different states were to issue 50 different requirements for out-of-state businesses, the compliance requirements for businesses would be extraordinary.”

The justices will reveal their decision in time. Meanwhile, a transcript of the oral arguments is available here.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.