The U.S. District Court of Appeals for the 10th Circuit has ruled that a lower federal court overstepped its jurisdiction when it declared unconstitutional and issued a permanent injunction against enforcement of a statute and regulations that impose notice and reporting requirements pertaining to use tax on out-of-state sellers. To view our previous news item on the injunction, click here. The lower court’s decision to impose the permanent injunction was based upon the court’s reasoning that the law placed an undue burden on interstate commerce.The U.S. Court of Appeals remanded the case to the federal district court to dismiss the plaintiff’s claims and to lift the permanent injunction. The court cited the Tax Injunction Act, which states that federal courts should not enjoin, suspend or restrain any state tax assessments or collections if the disputed matter can be resolved by lower courts. The court noted that although its decision was based on the Tax Injunction Act, the doctrine of comity also favored the state. The doctrine of comity is intended to “restrain federal courts from entertaining claims for relief that risk disrupting state tax administration.” We will monitor the DMA response and Colorado’s enforcement provisions. At this point, it appears the law is valid and affected sellers should evaluate their requirements to provide the appropriate notice on each invoice due to the significant potential penalties.
UPDATE: On December 13, 2013, a federal district court judge issued an order dissolving the permanent injunction entered against the Colorado Department of Revenue regarding notice and reporting requirements pertaining to use tax on out-of-state sellers. The Colorado Department of Revenue has issued a notice stating that it will not enforce any penalties for failure to comply during the period the injunction was in place. The Department also will not assess penalties for a retailer’s failure to comply with the January 31, 2014 deadline to provide annual purchase summaries to their customers or the March 1, 2014 deadline to provide the annual report to the Department for their 2013 purchases. (Direct Marketing Association v. Brohl, U.S. Court of Appeals, Tenth Circuit, Dkt. 12-1175, August 20, 2013, The Direct Marketing Association v. Huber, U.S. District Court for the District of Colorado, Dkt. No. 10-cv-01546-REB-DBS, December 10, 2013)
UPDATE: A Denver district court judge has granted Direct Marketing Association’s motion for a preliminary injunction against Colorado imposing notice and reporting requirements on remote sellers. The court found that the law discriminated against remote sellers who were required to collect sales tax or required to notify customers of use tax obligations. According to the Colorado Department of Revenue, retailers are not required to comply with the remote vendor reporting requirements at this time. However, the court’s decision does not affect a Colorado consumer’s liability for tax on any purchase on which sales tax was not collected. Customers are still required to file a Consumer Use Tax Return and pay the tax due.(Direct Marketing Association v. Department of Revenue, Denver District Court, No. 13CV34855, February 18, 2014, and Release – Internet Sales/Non-Collecting Retailers, Colorado Department of Revenue, February 19, 2014)
UPDATE: The U.S. Supreme Court has been asked to review the decision by the U.S. District Court of Appeals for the 10th Circuit which held that the federal Tax Injunction Act barred the exercise of federal court jurisdiction over the lawsuit challenging the constitutionality of the Colorado law. (Direct Marketing Association v. Brohl, U.S. Supreme Court, Dkt. 13-1032, petition for certiorari filed February 25, 2014)
UPDATE: The U.S. Supreme Court has agreed to review the decision of the U.S. District Court of Appeals for the 10th Circuit. (Direct Marketing Association v. Brohl, U.S. Supreme Court, Dkt. 13-1032, petition for certiorari granted July 1, 2014)
UPDATE: Oral arguments are scheduled to take place before the U.S. Supreme Court on December 8, 2014.
For an update on this news item, see Colorado Use Tax Notice and Reporting Requirements Become Effective July 1, 2017.