Federal Appeals Court Rules Lower Court Lacked Jurisdiction to Enjoin Colorado Notice and Reporting Law; Direct Marketing Association Will Seek Rehearing En Banc

Many of our readers have been following closely the litigation challenging the Colorado law passed in 2010, which required remote sellers to inform consumers of their obligation to self-report sales and use tax and also required direct marketers to turn over to the Colorado Department of Revenue the names of their Colorado customers along with sales transaction information. In 2012, the United States District Court in Denver declared the Colorado law unconstitutional, as a violation of the Commerce Clause. The Colorado Department of Revenue appealed the District Court decision to the Tenth Circuit Court of Appeals.

On Tuesday, August 20, 2013, the Tenth Circuit issued its decision in Direct Marketing Association v. Brohl. The three judge panel hearing the case did not reach, or address in any way, the constitutional issues in the case. Instead, the Court ruled solely on the question of whether the District Court had jurisdiction to hear the case.

Although the jurisdiction of the federal courts was not contested by the parties, the appellate court concluded that the United States District Court in Denver did not have jurisdiction because of the so-called Tax Injunction Act (28 U.S.C. sec. 1341) (“TIA”). This jurisdictional statute prevents federal courts from entering judgments that restrain the collection of state taxes, and the Tenth Circuit ruled that it applied in this case. The Court stated that the challenge to the constitutionality of the Colorado law must be filed in state court rather than federal court. Therefore, the Court of Appeals remanded the case back to the District Court and directed it to dismiss the DMA’s Commerce Clause claims and to dissolve the permanent injunction against the Department of Revenue’s enforcement of the law.

The effect of the Court of Appeals’ ruling that the case should be dismissed does not take immediate effect, despite some media reports that suggest the contrary. Rather, as in any appeal, the ruling of the Court of Appeals is not implemented until it issues a “mandate” to the District Court. The Tenth Circuit Court of Appeals has not yet issued a mandate in the DMA’s case, and will not do so until after certain deadlines have passed.

In addition, the DMA has decided that it will petition for rehearing “en banc” by the full group of active judges serving on the Tenth Circuit Court of Appeals. The filing of the petition for rehearing en banc will further extend the period during which the Court of Appeals will withhold issuance of the mandate to the District Court. If the petition is granted by the Court, the mandate would not issue until after the rehearing of the case by the full court.

For now, therefore, the injunction entered by the District Court remains in place, and remote sellers are not yet required to comply with the requirements of the Colorado notice and reporting law. We will keep readers apprised of developments in the case in connection with the DMA’s petition for rehearing.

Brann & Isaacson partners George Isaacson and Matthew Schaefer represent the DMA in the case.