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Tax Injunction Act Doesn't Bar Suit Against Colorado Internet Sales Reporting

10 March 2015

Out-of-state retailers aren't barred from challenging a Colorado law requiring them to report to the state online sales to in-state residents, the U.S. Supreme Court held March 3 (Direct Mktg. Ass'n v. Brohl, U.S., 2015 BL 55671, No. 13-1032, 3/3/15).

The court said in a unanimous opinion authored by Justice Clarence Thomas that the Tax Injunction Act didn't prevent the retailers from pursuing relief from the reporting statute, because the reporting requirement was part of the information-gathering step preceding state revenue activities protected by the act.

“The decision gives state tax practitioners certain rules on challenges to state laws in federal courts,” Stephen P. Kranz, a partner at McDermott Will & Emery LLP in Washington, told Bloomberg BNA March 3.

“There is still room to discuss how directly related to collection a statute must be to be protected by the TIA, but the decision draws a line to inform practitioners in litigation. It also informs state legislators on how to draft legislation to avoid federal litigation,” Kranz said.

Merits Not Decided
The opinion was limited to the applicability of the TIA and didn't express any views on the merits of the retailers' claims that the reporting requirements discriminated against out-of-state sellers by imposing unique burdens on those sellers.

The TIA bars a federal court from enjoining, suspending or restraining the assessment, levy or collection of a state tax when an efficient remedy is available under state law. Congress enacted the TIA to prevent taxpayers from using federal courts to interfere with state taxing authority.

In 2012, the U.S. District Court for the District of Colorado permanently enjoined Colorado from enforcing its “Amazon” law, which obligated those retailers to report to the state's Department of Revenue the names, addresses and total annual online sales of their Colorado resident customers.

Colorado argued that its reporting requirements fell within protected collection measures under the TIA. The U.S. Court of Appeals for the Tenth Circuit agreed and overturned the injunction in 2013 ruling that the retailers' lawsuit was barred by the TIA because the action sought to restrain the state's collection of taxes.

The Supreme Court said it didn't need to comprehensively define assessment, levy or collection “to conclude that they do not encompass enforcement of the notice and reporting requirements at issue.”

“The question—at least for negative injunctions—is whether the relief to some degree stops ‘assessment, levy or collection,' not whether it merely inhibits them. The Court of Appeals’ definition of ‘restrain,' by contrast, produces a ‘vague and obscure’ boundary that would result in both needless litigation and uncalled-for dismissal,” the court said.

Statutory Interpretation
Thomas H. Dupree Jr., a partner and Supreme Court litigator with Gibson, Dunn & Crutcher LLP in Washington, said in a March 3 e-mail, “based on the questions from the bench, the decision is not a surprise.”

“The Court expressed skepticism with the government's position and seemed receptive to the arguments advanced by the petitioner. The unanimity does not surprise me,” Dupree said.
Dupree and Allyson N. Ho, a partner at Morgan, Lewis & Bockius LLP in Dallas, described the court's approach as one of straightforward statutory interpretation.

“They really focused on how you would interpret the statute if you were to uphold the Tenth Circuit decision. The court asked how would you read the statute without reading out most of the terms in the statute, and how would you give weight to each of the statutory terms in a way that was consistent with the plain meaning of the statute,” Matt Larsen, a partner at Baker Botts LLP in Dallas, said in an interview with Bloomberg BNA March 3.

Fred Nicely, senior tax counsel at the Council on State Taxation, said that he was surprised that there wasn't a test that set out when there would be access to federal courts, but the court's focus on interpretation was the right path.

Dupree said he thought “the potential impact of this case could be quite significant. At a minimum, it will deter states from following the approach Colorado took here.”

The court didn't rule on whether the lawsuit might be barred under the comity doctrine and left that issue to the U.S. Court of Appeals for the Tenth Circuit to decide on remand.

Kennedy's Attack on ‘Quill.'
Several of the experts contacted by Bloomberg BNA were concerned with Justice Anthony M. Kennedy's concurrence in which he essentially invited states to bring a case challenging Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and Nat'l Bellas Hess, Inc. v. Dep't of Revenue of Ill., 386 U.S. 753 (1967).

Both cases provided that a state couldn't require an out-of-state seller to collect use taxes—the equivalent of sales taxes collected on sales of property by an out-of-state seller—if the seller didn't have a physical presence in the state.

Today's online access to most retailers results in those retailers being “present in a State in a meaningful way without that presence being physical in the traditional sense of the term,” Kennedy said.
Kennedy said, “it is unwise to delay any longer a reconsideration of the Court's holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.”

Remarkable Invitation
Kranz called Kennedy's invitation to challenge Quill remarkable. “He's saying Congress hasn't fixed it so we're inviting states to litigate it. We don't how the other justices feel about it, but his dicta is fairly pointed. It doesn't change the legal landscape today, but I'm guessing states will react it to it. How they do it remains to be seen.”

Charles A. Rothfeld, who is special counsel at Mayer Brown, Washington, and has argued 31 cases before the Supreme Court, told Bloomberg BNA March 3 that it's hard to say whether the overruling of Quill “is a real prospect.”

“Quill has been challenged several times over the years and the petitions all have been denied without dissent,” Rothfeld said.

“And no one joined Justice Kennedy's concurrence” here, not even other justices “who expressed reservations in Quill itself,” he said.

“But maybe his dangling the possibility will give encouragement to congressional action to modify the Quill rule,” Rothfeld said.

Ho said that while the votes to overrule Quill “just haven't been there,” the “rise of e-commerce and the growing volume of internet purchases” could lead the high court “to take a look at this issue again in the future.”

The result “could have significant implications for online and brick-and-mortar retailers alike,” Ho said.

Anti-Injunction Act Implications
Pat Smith, a partner at Ivins, Phillips & Barker, Chartered in Washington, told Bloomberg BNA March 3, “The decision has clear implications for interpreting the Anti-Injunction Act, which reads in a parallel fashion.”

Smith said the decision is important for federal tax practitioners because the “AIA has been read to be interpreted that any suit could affect collection. This decision implies a narrower interpretation. Any tax practitioner engaged in litigation should be pleased with the decision.”

“The decision should take the AIA off the table in Florida Bankers Ass'n v. United States” currently pending in the U.S. Court of Appeals for the District of Columbia, Smith said. He added that the Florida Bankers case also deals with a reporting requirement—that banks report interest on earned on accounts by persons residing foreign in foreign countries.

Reproduced with permission from The United States Law Week, 83 USLW 1311 (March 10, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033)

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