WASHINGTON — The Supreme Court handed down a unanimous decision Tuesday allowing a retail association to challenge in federal court a Colorado sales-tax law.
The law requires out-of-state retailers to notify Colorado customers of their sales-tax liability and report related information to consumers and state authorities at the end of each year.
The case, Direct Marketing Association v. Brohl, could have implications for how states collect information on Internet and other remote sales.
The DMA, which has members that sell to consumers in Colorado via catalogues, print advertising, broadcast media and the Internet, but do not collect sales taxes, sued Barbara Brohl, executive director of the Colorado Department of Revenue, in federal district court in Denver in 2010, alleging the state’s notification and reporting law violated the Commerce Clause of the U.S. Constitution. The district court ruled in favor of DMA and issued an injunction against Colorado’s reporting and notification requirements for out-of-state retailers. But the Tenth Circuit Court of Appeals in Denver reversed the lower court ruling in 2013 and held that the federal court did not have jurisdiction over the state’s tax laws.
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“In an effort to improve the collection of sales and use taxes for items purchased online, the State of Colorado passed a law requiring retailers that do not collect Colorado sales or use tax to notify Colorado customers of their use-tax liability and to report tax-related information to customers and the Colorado Department of Revenue,” wrote Justice Clarence Thomas in the court’s opinion. “We must decide whether the Tax Injunction Act, which provides that federal district courts ‘shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under state law,’…bars a suit to enjoin the enforcement of this law. We hold that it does not.”
Thomas wrote that the federal statute that bars entities from challenging state tax laws in federal court does not “encompass” enforcement of the notice and reporting requirements at issue in the case.
While the case does not have direct implications for the decades-old debate over taxing Internet sales, it could have longer-term implications. Retail groups that have been pressing Congress to pass legislation enabling states to collect sales taxes from out-of-state online sellers, regardless of their physical presence in the state, lauded an opinion Justice Anthony Kennedy wrote on the case.
Congress has been unable to find a resolution on the issue of taxing Internet sales, as states have been enacting their own laws to close what they say is a loophole created in 1992 in Quill v. North Dakota, a Supreme Court ruling that stated retailers were required to collect sales tax from out-of-state customers only if they have a “physical presence” in the customer’s state. E-tailers such as eBay and others that don’t have distribution centers or offices in a certain state have relied on that decision to avoid collecting sales tax on online orders. Brick-and-mortar retailers argue that puts them at a competitive price disadvantage and have lobbied for federal legislation to resolve the issue.
Kennedy wrote that the Quill decision should be “reexamined.”
Kennedy added: “Although online businesses may not have a physical presence in some states, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away — regardless of how close or far the nearest storefront. Given these changes 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.”
David French, senior vice president at the National Retail Federation, said: “By not acting, Congress has allowed states to fill the void with a patchwork of inconsistent and incongruous laws affecting retailers, big and small, online and off-line. These state laws are complex, confusing and often increase the compliance burden on retailers. Today’s Supreme Court decision demonstrates that Congress — and Congress alone — must act on this retail industry priority.”