The U.S. Supreme Court has held that a federal district court has jurisdiction over the lawsuit challenging the constitutionality of Colorado’s reporting requirements legislation for out-of-state retailers and may enjoin enforcement of the requirements.
What was being challenged in this case was the Tax Injunction Act, which is a federal provision that restricts a taxpayer from challenging state tax cases in federal courts. The federal district court’s enjoinder of the law would not prevent the state from assessing, levying, or collecting tax, as prohibited under the federal Tax Injunction Act because the notice and reporting requirements involve information gathering, not tax assessment, levy or collection. The lawsuit would not restrain assessment, levy or collection of tax merely because it might inhibit those activities.
The case raises the question of how close a state law can get to the tax administration process before it is covered by the Tax Injunction Act which prohibits federal court challenges.
In the Supreme Court’s decision, Justice Kennedy concurred with an unqualified opinion, but included a surprising statement.He explained the National Bellas Hess and Quill decisions then said “Given these challenges in technology and consumer sophistication, 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”. He closed his opinion by saying “The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsider ing doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.” It is unclear if this could be a request for a nexus case to come before the Court.
It remains to be seen if the Colorado reporting requirements statute is constitutional. The case has been remanded to the Tenth Circuit to decide whether comity argument remains available to Colorado. For now, the Colorado reporting requirement is on hold and in limited situations, taxpayers can now bring state tax cases into Federal Courts.
For our previous news item on this case, see Injunction Blocking Colorado Reporting Requirements For Out-of-State Retailers is Lifted.
For an update on this news item, see Colorado Use Tax Notice and Reporting Requirements Become Effective July 1, 2017.
(Direct Marketing Association v. Brohl, U.S. Supreme Court, No. 13-1032, March 3, 2015)