D.C. Circuit Cites Quill as Instructive in Analyzing the Due Process Ramifications of a National Tax Scheme

The Supreme Court’s analysis in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) has been cited favorably again, this time with regard to a Due Process challenge to a federal statute. On February 18, the United States Court of Appeals for the District of Columbia Circuit vacated the denial of a motion for a preliminary injunction brought by a plaintiff challenging the constitutionality of a federal law regulating online sales of tobacco products, and remanded the case for further proceedings. Gordon v. Holder, 2011 WL559002 (D.C. Cir. Feb. 18, 2011). Previewing the issues to be addressed by the District Court on remand, the Court of Appeals cited Quill as “instructive” in analyzing the plaintiff’s claim that the federal statute violates the Due Process Clause.

In a statement likely to send shivers up the spines of the members of the Governing Board of the Streamlined Sales and Use Tax Agreement and other advocates for federal legislation to override Quill’s “physical presence” requirement arising under the Commerce Clause, the D.C. Circuit commented that “there remains an open question whether a national authorization of disparate state levies on e-commerce renders concerns about presence and burden obsolete” as a matter of Due Process. Id. at *4 (emphasis added). While this statement, and the Court’s opinion, does not alter the analysis under Quill of the constitutionality of state tax (and tax-related) laws under the Commerce Clause, it suggests that the concerns about “presence and burden” presented in Quill are potentially also relevant to determining whether a federal law authorizing state tax levies is consistent with the Due Process Clause.

Arbitration Clauses, Class Actions and State Tax

What a funny combination of terms. You might be asking what state tax has to do with arbitration and class action suits. Two recent court decisions illustrate the connection.

In particular, a “bad day” for a corporate executive is receiving the complaint and summons for a class action lawsuit. While there have been fewer class action lawsuits in connection with state taxes than there have been in other areas of the law, the plaintiff’s bar has looked at state tax as a development opportunity and has commenced suits for inappropriate collection of state taxes. The basis commonly used for such a suit is that the state’s unfair and deceptive trade practices statute is violated by the collection of sales tax if such tax is not due. For example, a company might be collecting tax on food in a state in which food is not taxable. A better example would be collecting tax on Internet access, which is prohibited under a federal statute, the Internet Tax Freedom Act, 47 U.S.C. § 151n (1998) (“ITFA”), as amended, unless a state is grandfathered.

AT&T found out the hard way about class action lawsuits in the state tax area. It was collecting tax on Internet access services. Under the ITFA, it was prohibited from collecting such tax in all but a few states. Thus, as I wrote in my blog post of September 17, 2010, AT&T was slammed with a class action lawsuit, and settled for payment of millions of dollars of attorneys’ fees and other costs.

Maine Introduces Modified, Colorado-Style Notice and Reporting Law, Which Also Likely Violates The Commerce Clause

On February 9, 2011, the Maine Legislature introduced a bill (LD 469) which would impose upon certain out-of-state retailers a set of notice and reporting obligations that closely parallel the requirements of Colorado’s 2010 law, H.B. 10-1193. Enforcement of H.B. 10-1193 was recently enjoined by a federal judge in Denver on the grounds that such requirements are likely unconstitutional and in violation of the Commerce Clause. As we have reported in prior posts, Brann & Isaacson represents the Direct Marketing Association in the federal court challenge to the now-suspended Colorado law, after which the Maine bill is patterned.

Maine’s LD 469 includes all three of the Colorado law’s notice and reporting requirements – retailers must provide the Transactional Notice, Annual Purchase Summaries to customers, and Customer Information Reports to revenue officials – and would impose penalties on affected retailers for non-compliance with the law.  Notably, however, unlike the Colorado law, the Maine bill includes no $500 annual minimum purchase threshold to trigger the requirement that an affected retailer must send a customer an Annual Purchase Summary. Similar to Colorado’s law, under LD 469 such annual summaries to customers must include, if available, “[d]escriptions of items purchased,” as well as dates and amounts.  Also in contrast to Colorado, the report to Maine Revenue Services must include all of the information provided to each purchaser in the annual summary – thereby requiring that at least descriptions of the items purchased by customers of an affected out-of-state retailer be turned over to Maine Revenue Services. The Maine bill thus raises even more significant privacy concerns for Maine consumers buying from affected retailers than does the privacy-invading Colorado law.