Tuesday, May 5, 2015

Supreme Court Reverses Tenth Circuit Court of Appeal in Direct Marketing Association v. Brohl



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.
[3]  28 U.S.C. Section 1341.
[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).
[6] Colo. Rev. Stat. Sections 39-26-105(1), 39-26-106(2)(a).
[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). 
[8] Colo. Rev. Stat. Section 39-26-204(1).  
[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);
[22] Hibbs, supra, at 102, n. 4, 124 S. Ct. 2276, 159 L. Ed. 2d 172.
[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).
[25] National Bellas Hess, at 758, 87 S. Ct. 1389, 18 L. Ed. 2d 505.
[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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