Supreme Court
Reverses Tenth Circuit Court of Appeal in Direct Marketing Association v. Brohl[1]
By
Mark Muntean[2]
Normally, I would expect a court
decision involving the Tax Injunction Act[3] (“TIA”)
which bars federal courts from restraining the assessment, levy, or collection
of state taxes, to be about as exciting as a trip to the dentist. However, the Supreme Court’s opinion in Direct Marketing Association v. Brohl[4]
(“DMA” or “Direct Marketing”) is a real win for taxpayers. Moreover, Justice Kennedy’s concurring
opinion sets the stage for future interesting developments.
§ 1.01 Background
[1] Amazon Tax.
DMA was originally an “Amazon tax”
case involving Colorado’s attempt to collect taxes on internet purchases. Colorado has a complementary sales-and-use
tax regime which imposes a sale tax on the purchase of tangible personal
property within the state, and an equivalent use tax for tangible personal
property purchased outside the state and used or consumed in the state.[5] Retailers with a brick and motor physical presence
in the state collect sales tax at the point of sale.[6]
Retailers
lacking a brick and mortar physical presence in the state were not required to
collect Colorado taxes because of the negative Commerce Clause precedents.[7]
For this
reason Colorado required taxpayers who reside within the state and make
purchases from out of state retailers to voluntarily fill out a return and
remit the applicable use taxes to the state directly.[8] Because of a perceived lack of use tax
compliance, in 2010 Colorado enacted legislation that imposed reporting
obligations on out of state retailers whose gross sales in Colorado exceed
$100,000.
[2] Lower Court Decisions
DMA (a business trade
association) challenged the statue in federal district court arguing, among
other things that the Colorado statute: (1)
discriminated against interstate commerce, and (2) impose undue burdens on
interstate commerce, all in violation of the Commerce Clause. DMA did
not seek to bar the collection or assessment of any tax. The district court granted partial summary
judgment in favor of DMA, and partially enjoined enforcement the statute.[9] The Tenth Circuit Court of Appeal reversed
holding that the District Court lacked jurisdiction pursuant to the TIA, 28
U.S.C. Section 1341.[10] The Court of Appeal did not address the
Commerce Clause issues but rather disposed of the case ruling against DMA, and
holding that Direct Marketing was seeking to enjoin the enforcement of a
statute which the court held was prohibited under 28 U.S.C. Section 1341.
§ 1.03 United States Supreme Court
Reversed.
[1] Direct Marketing’s challenge to the
Colorado statute is not barred by the TIA.
On March 3, 2015, the United
States Supreme Court unanimously reversed the Tenth Circuit Court of Appeal,
holding that Direct Marketing’s challenge to the Colorado statute is not barred
by the TIA.[11] The Court stated that the relief sought by DMA
would not "enjoin, suspend or restrain the assessment, levy or
collection" of Colorado's sales and use taxes.[12] The Court remanded the case to the Court of
Appeal expressing no view on the merits of the substantive Commerce Clause claims. The case was remanded for further proceedings
consistent with the Supreme Court’s opinion.
[2] Tax Injunction Act.
The
decision in Direct Marketing Association
v. Brohl[13] turns
on the definition of the terms in the TIA.
In defining the terms under the TIA, the Supreme Court looked to federal
tax law as a guide.[14] Although the TIA does not concern federal
taxes, it was modeled on the federal Anti-Injunction Act (“AIA”) of the
Internal Revenue Code (“IRC” or “Code”).[15] The AIA provides that “no suit for the purpose
of restraining the assessment or collection of any tax shall be maintained in
any court by any person.”[16]
The
Court held that the words used in the TIA and the AIA are generally used in the
same way, and the meaning of the terms in the AIA can be defined by reference
to the broader Code.[17] Read in light of the Code at the time the TIA
was enacted (as well as today), the terms found in the TIA refer to discrete
phases of the taxation process that do not include informational notices or private
reports of information relevant to tax liability.
[3] TIA Narrowly Interpreted.
DMA’s suit challenged the
Colorado sales and use tax notice and reporting requirements for out-of-state
retailers. In analyzing DMA’s claims in
the context of the TIA, the Court reasoned that Direct Marketing’s suit cannot
be understood to "restrain" the "assessment, levy or
collection" of Colorado's sales and use taxes merely because it may
inhibit those activities. In reaching its
conclusion, the Court applied a narrower meaning to the words as used in
equity, which captures only those challenges that seek to stop acts of
assessment, levy, or collection consistent with the Court's recognition that
the TIA "has its roots in equity practice,"[18]
and with the principle that "[j]urisdictional rules should be clear,"[19]
[4] Hibbs
v. Winn Relied On.
The Court relied on Hibbs v. Winn[20]
for the definition of terms under the TIA.
In Hibbs v. Winn, the Court
noted that “assessment,” as used in the Code, involves a recording of an amount
owed by the taxpayer to the government, as well as the process by which that
amount is calculated.[21] As such, assessment was understood as a step
in the taxation process that occurred after, and was distinct from, the step of
reporting information pertaining to tax liability. Under Hibbs
v. Winn, "collection" is the act of obtaining payment of taxes
due, which is a step in the taxation process that occurs after a formal
assessment.[22] The Court previously described collection as a
part of the enforcement process that assessment sets in motion. In defining the terms as defined in Hibbs v. Winn, the Court found that the
action brought by DMA did not seek to enjoin the collection or assessment of a
tax.[23]
From
the government’s perspective, the decision in DMA is a decisive loss. The narrow definition of the TIA is a
substantive win for taxpayers since prior to DMA, the government had liberally
used the TIA as a shield against many types of taxpayer challenges.
§
1.04 Concurring Opinions.
[1] Justice Kennedy
Concurring
That notwithstanding, the
concurring options in the DMA decisions are the most interesting. While the decision of the Supreme Court was
unanimous, Justice Kennedy wrote a concurring opinion that address the Commerce
Clause precedent that relate to the substantive issues rose in the underlying
case. In his concurring opinion, Justice
Kennedy noted that for almost half a century the Commerce Clause barred states from
requiring a business to collect use taxes (which are the equivalent of sales taxes
for out-of-state purchases), if the business does not have a physical presence
in the state.[24] Instead, use taxes must be collected from and
paid by the customer, not the out-of-state seller.[25]
Kennedy;
however, turned against the precedents of the Court beginning with Quill Corp. v. North Dakota.[26] and
extending to Complete Auto Transit, Inc.
v. Brady,[27] and National Bellas Hess v. Department of
Revenue of Ill.,[28] encouraging
the Court to revisit its holdings in Quill
Corp. v. North Dakota and its
progeny in an effort to allow states to raise more tax revenue. Justice Kennedy’s comments echo language from
other courts where similar concerns have been raised.[29] Notwithstanding Justice Kennedy’s comments, often
taxpayers look to these authorities as protection from states exceeding their
taxing authority under the Commerce Clause of the United State Constitution.[30]
But,
Justice Kennedy notes that the DMA case does not see this issue up in a manner
appropriate for the Court to address it. As such, this issue is saved for another
day. It does, however, allow Justice
Kennedy the platform to voice his concerns and the importance of reconsidering what
he calls “doubtful authority.”
[2] Justice Ginsberg Concurring.
Justice Ginsberg, joined by
Justice Breyer (and Justice Sotomayor in connection with Justice Ginsberg’s
first point) wrote a separate opinion raising two points in connection with the
TIA and the Court’s prior decision in Hibbs
v. Winn.[31] Justice Ginsburg’s first point is to make
clear that the Court’s decision in DMA does not undermine the Congressional
intent in enacting the TIA. Her second point
is that the Court’s decision in DMA is consistent with the Court’s decision in Hibbs v. Winn, and that the DMA decision
does not cast a shadow over on Hibbs v.
Winn’s conclusion that a suit further removed from the TIA’s “state-revenue-protective
moorings," remains outside the TIA’s scope.
§ 1.05 Conclusion
This
case is far from over. Justice Kennedy opened the door for the Tenth
Circuit, in deciding the case on the Commerce Clause issues to move away from
the traditional ground of Quill and Complete Auto. Such a decision might put this case again
before the Supreme Court possibly providing Justice Kennedy with a platform to
make changes.
[1] 135 S. Ct. 1124;
191 L. Ed. 2d 97; 2015 U.S. LEXIS 1738; 83 USLW 4133 (March 3, 2015).
[2]
Mark Muntean, J.D. LL.M. Taxation (Georgetown) is a business
and tax lawyer in the San Francisco/Bay Area
of California with over 30 years’ experience in federal, state and
international tax matters. He represents
clients in connection with federal and state income and excise tax matters; corporate,
real estate, mergers and acquisitions, private equity, and business law matters;
and criminal tax issues.
[4]
135 S. Ct. 1124; 191 L. Ed. 2d 97; 2015 U.S. LEXIS 1738; 83
USLW 4133 (March 3, 2015).
[5]
Colo. Rev. Stat. Sections 39-26-104(1)(a), 39-26-106(1) (a)(II) (2014), Sections 39-26-202(1)(b), 39-26-204(1).
[7]
U.S.
Const.. Art. I, Section 8, Cl. 3. See also, Quill Corp. v. North Dakota, 504 U. S. 298, 315-318, 112 S. Ct. 1904,
119 L. Ed. 2d 91 (1992).
[9]
Direct
Marketing Association v. Huber, No. 10 CV 10546-REB-CBS (D. Colo. 2012). Roxy Huber was the former Executive Director
of the Colorado Department of Revenue replaced by Barbara Brohl.
[10]
Direct
Marketing Association v. Brohl, 735
F.3d 904, 913 (10th Cir. 2013).
[11]
Slip Opin.
at Pp. 4-13.
[12]
Slip Opin.
at Pp. 4-12.
[13]
135 S. Ct.
1124; 191 L. Ed. 2d 97; 2015 U.S. LEXIS 1738; 83 USLW 4133 (March 3, 2015).
[14]
See, e.g.,
Hibbs v. Winn, 542 U. S. 88, 100, 124 S. Ct. 2276, 159 L. Ed. 2d 172 (2004).
[15]
See
Jefferson County v. Acker, 527 U. S. 423, 434-435, 119 S. Ct. 2069, 144 L. Ed.
2d 408 (1999).
[16]
IRC
Section 7421(a).
[17]
Hibbs,
supra, at 102-105, 124 S. Ct. 2276, 159 L. Ed. 2d 172; id., at 115, 124 S. Ct.
2276, 159 L. Ed. 2d 172.
[18]
Tully v.
Griffin, Inc., 429 U.S. 68, 73, 97 S. Ct. 219, 50 L. Ed. 2d 227
[19]
Grable
& Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U. S. 308,
321, 125 S. Ct. 2363,
162
L. Ed. 2d 257. 10-12.
[20]
542 U. S.
88, 100, 124 S. Ct. 2276, 159 L. Ed. 2d 172 (2004).
[21]
542 U. S.,
at 100, 124 S. Ct. 2276, 159 L. Ed. 2d 172.
See also United States v. Galletti, 541 U. S. 114, 122, 124 S. Ct. 1548,
158 L. Ed. 2d 279 (2004);
[23]
Slip Opin.
At 24-15..
[24] National Bellas Hess, Inc. v. Department of Revenue
of Ill., 386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 505 (1967).
[26]
504 U.S.,
at 311, 112 S. Ct. 1904, 119 L. Ed. 2d 91.
[27]
430 U.S.
274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977).
[28]
386 U.S.
753, 87 S. Ct. 1389, 18 L. Ed. 2d 505 (1967).
[29]
See
Commissioner v. MBNA Am. Bank, N.A., 640 S.E.2d 226, 235–236 (W. Va. 2006),
cert. denied, 551 U.S. 1141 (2007) where the
court gave four reasons to refuse to limit the physical presence requirement: (1)
the Quill decision was based on principles of stare decisis and not on sound
policy; (2) the Quill Court itself limited the language of the physical
presence standard to include only sales and use taxes (not income taxes); (3)
the compliance burdens imposed by state income taxes are far less than for
sales and use taxes; and (4) the technological innovations and economic
realities that emerged since Quill have rendered the physical presence standard
ineffective and obsolete.
[30]
See Barclays
Bank PLC v. Franchise Tax Board, (1994) 512 U.S. 298, 303, 129 L.Ed.2d 244, 253,
114 S. Ct. 2268, 2272; Kraft General Foods, Inc. v. Iowa Department of Revenue,
505 U.S. 71 (1992) holding that a statute that treated dividends received from
foreign (international) subsidiaries less favorably than those received from
domestic subsidiaries facially discriminated against foreign commerce in
violation of the Commerce Clause); American Trucking Associations v. Scheiner,
484 U.S. 266, 286 (1987) (holding a state tax that favors in-state businesses
over out-of-state businesses for no other reason than the location of its business
is prohibited by the Commerce Clause); Complete Auto Transit, Inc. v. Brady, 430
U.S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977); Farmer Bros. Co. v.
Franchise Tax Board, 08 Cal. App. 4th 976 (2003), cert. denied, No. S117131,
2003 Cal. LEXIS 6515 (Aug. 27, 2003), cert. denied, 124 S. Ct. 1411 (Feb. 23,
2004)(holding that California Revenue and Taxation Code section 24402 (section
24402), known as the “dividends received deduction,” violates the commerce
clause of the United States Constitution (commerce clause) by discriminating
against corporations engaged in interstate commerce); American Business USA
Corp. v. Dept. of Revenue, Florida Fourth District Court of Appeal, No.
4D13-1472 (2014); Cutler v. Franchise Tax Board, (2012) 208 Cal. App. 4th 1247,
holding that California’s personal income tax deferral of capital gain from the
sale of qualified small business stock (QSBS) was unconstitutional because it
was only available to taxpayers who invested in corporations that had a
significant presence in California.
[31]
542 U. S.
88, 105, 124 S. Ct. 2276, 159 L. Ed. 2d 172 (2004).
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