Supreme Court Grants Cert In DMA Tax Case

On July 1, 2014, the U.S. Supreme Court granted the petition for a writ of certiorari filed by the Direct Marketing Association. The DMA is represented by Brann & Isaacson partners George S. Isaacson and Matthew P. Schaefer.

The DMA seeks review of a Tenth Circuit ruling that the Tax Injunction Act bars federal court jurisdiction over a constitutional challenge brought by the DMA to a 2010 Colorado law that requires out-of-state retailers to comply with burdensome notice and reporting obligations that are only indirectly related to the payment of use tax on remote sales. Brann & Isaacson is tax counsel to the DMA and represents over 100 multichannel and online companies.  The United State Supreme Court accepts review in only about 70 out of 7000 petitions filed each session.

Our readers can review previous posts on this topic here.

State Court Suspends Colorado Notice and Reporting Law

On Tuesday, February 18, 2014, Judge Morris Hoffman of the Colorado District Court for the City and County of Denver granted the motion for a preliminary injunction filed by the Direct Marketing Association (“DMA”) in its suit challenging the 2010 Colorado statute that imposes onerous notice and reporting obligations upon out-of-state retailers that do not collect Colorado sales tax. The Court suspended, effective immediately, all of the Colorado law’s requirements (referred to in the ligation as the “Transactional Notice,” the “Annual Purchase Summary,” and the “Customer Information Report”). Judge Hoffman explained that “Plaintiff has proved to my satisfaction at this stage that each of the Act’s three notification and reporting requirements are facially discriminatory” in violation of the Commerce Clause of the United States Constitution. As a result, remote sellers that do not collect Colorado sales tax are not required to comply with the law’s provisions, pending further action by the Court as the case proceeds.

Readers will recall that the DMA previously obtained both a preliminary and permanent injunction against the Colorado law’s enforcement from the federal District Court for the District of Colorado. The injunction was dissolved in late 2013 after the federal Court of Appeals for the Tenth Circuit ruled that the Tax Injunction Act (“TIA”) deprived the federal District Court of jurisdiction to enter the injunction. In response, the DMA filed an action in state court in November 2013, challenging the law.

The DMA is represented in the case by Brann & Isaacson partners George Isaacson and Matthew Schaefer.

The state court will hold a status conference in the next few weeks to determine further proceedings in the case. We will keep readers apprised of further developments in the case.

The Year In Review

As the year draws to a close, it’s worth looking back over a range of important legal developments in the world of electronic commerce, a number of which set the stage for fireworks in the months and years ahead.  Wishing all of our readers a wonderful holiday season, and the best and brightest New Year, we hope you enjoy our “top five” list.

Coming in at number five ...

Direct Marketing Association Re-files Challenge to Colorado Notice and Reporting Law in State Court

We have been updating readers on developments regarding the court challenge brought by the Direct Marketing Association (“DMA”) to a 2010 Colorado law that purported to require Internet retailers and other remote sellers that do not collect Colorado sales tax to: (1) give certain notices to their Colorado customers regarding the purchaser’s obligation to self-report Colorado use tax; and (2) file reports with the Colorado Department of Revenue detailing the private purchasing information of their Colorado customers. The DMA won a preliminary injunction in January 2011 in federal District Court suspending the law on the grounds that it violated the Commerce Clause. The Court later made the injunction permanent when it awarded the DMA summary judgment in March 2012. The State appealed.

In August 2013, the Court of Appeals for the Tenth Circuit ruled on its own initiative that the Tax Injunction Act (“TIA”) barred federal court jurisdiction over the DMA’s claims. The Court of Appeals did not reach the merits of the DMA’s Commerce Clause claims, but rather ordered that the claims be dismissed on procedural grounds. The Court held that the DMA was required under the TIA to bring its claims in Colorado state court. The DMA requested rehearing on the jurisdictional issue, but the Tenth Circuit declined in early October to rehear the matter. The Court of Appeals then issued a mandate to the District Court on October 9, directing the lower court to dissolve the injunction and dismiss the claims. (The District Court has not yet implemented the mandate, so for now the federal injunction remains in place.)

On November 5, 2013, the DMA re-filed its challenge to the Colorado notice and reporting law in state District Court in Denver. At the same time, the DMA moved for a preliminary injunction, in order to continue the suspension of the law after the federal court injunction is lifted. Briefing on the motion for a preliminary injunction is expected to conclude in December, with a hearing on the motion likely to be scheduled for early January 2014. The DMA will request that the state court rule on the injunction request prior to January 31, the deadline under the law for retailers to send certain annual notices to customers who purchased at least $500 in goods from the retailers in the prior year.

Brann & Isaacson partners George Isaacson and Matthew Schaefer are co-counsel to the DMA in connection with the appeal.

We will keep you apprised of further developments in the state court proceeding.

Amicus Briefs Filed in Amazon.com and Overstock.com Supreme Court Case

On September 23, 2013, several organizations and companies filed briefs as amici curiae in support of the petitions for a writ of certiorari filed by Overstock.Com, Inc., Amazon.com., Inc., and Amazon Services, LLC, requesting review by the United States Supreme Court of the New York Court of Appeals decision in Overstock.com, Inc. v. New York Department of Taxation and Finance, 20 N.Y.3d 586, 987 N.E.2d 621 (2013). Among the briefs filed was the Brief of Newegg, Inc. and the Direct Marketing Association, Inc. (the "DMA") as Amici Curiae in Support of the Petitioners. In their brief, Newegg and the DMA argue that the New York “click through affiliate nexus” statute, N.Y. Tax Law sec. 1101(b)(8)(vi), through an improper legislative presumption, narrows the zone of protected interstate advertising activity for out-of-state retailers under the Commerce Clause by shifting onto the retailers the burden of disproving “substantial nexus” with the state, in violation of the due process rights of retailers. Newegg and the DMA argue that the Constitution’s Due Process Clause prohibits states from using presumptions to interfere with matters that are removed from their authority by the Constitution, such as the regulation of interstate commerce. Brann & Isaacson partners Martin I. Eisenstein, George S. Isaacson, and Matthew P. Schaefer prepared the brief of amici on behalf of Newegg and the DMA.

Among the other organizations filing briefs were the Tax Foundation and the National Taxpayers Union, the American Legislative Exchange Council, the American Association of Attorney-Certified Public Accountants, and Scrapbook.com, Assisted Living Store, Inc., et al.

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.

Despite Unconstitutionality, Kentucky Enacts Consumer Use Tax Notification Requirement for Out-Of-State Retailers

On April 4, 2013, Kentucky Governor Steve Beshear signed into law HB 440. The bill includes an amendment to Kentucky’s tax code which will impose a new requirement on every retailer that makes sales into Kentucky from outside the state and that is not required to collect Kentucky use tax. The law requires that these retailers provide a notice to their customers that Kentucky purchasers are required to report and pay use tax directly to the Kentucky Department of Revenue. A similar provision enacted in Colorado in 2010 as part of a broader notification and reporting bill was declared unconstitutional by a federal judge in Direct Marketing Association v. Huber, a case now on Appeal before the 10th Circuit Court of Appeals. Brann & Isaacson is counsel to the DMA in the Colorado litigation.

While three other states—Oklahoma, South Dakota, and Vermont—have similar consumer use tax notification requirements on the books, Kentucky’s new law is more aggressive:

First, on its face, Kentucky’s law requires retailers to use “the exact required use tax notification language” set forth in the statute concerning compliance with Kentucky law, and does not include a substantial compliance provision likes other states. According to the statute, even if a seller already has a notice provision for other states, that notice provision is only adequate for purposes of Kentucky law “if the consolidated notification meets the requirements of this section.” In other words, only the “exact” language of the Kentucky law, and not something substantially similar that a retailer adopts in response to another state’s notification law, appears to be allowed.

Committee Hearings Held on Remote Collection Bills; Coalition Forms to Demand True Simplification Of State Sales Tax Systems, Defend Quill

We have written previously about attempts by Congress to overturn the physical presence nexus standard of Quill Corp. v. North Dakota via the Main Street Fairness Act, the Marketplace Fairness Act, and the Marketplace Equity Act. The bills vary in their specifics as we discuss here and here, but most simply put, all three bills would permit states to require remote sellers to collect and remit sales and use tax despite such sellers having no physical presence in the state. While it is difficult to predict what Congress may do in an election year, it appears that so far, the Main Street Fairness Act has not made much progress through Congress since being introduced. The other two bills have seen some committee action lately, however, as discussed below.

Meanwhile, a coalition has formed to help protect remote sellers’ interests. The TrueSimplification of Taxation (“TruST”) Coalition was formed jointly by the Direct Marketing Association, the American Catalog Mailers Association, the Electronic Retailing Association, and NetChoice to represent “American businesses in the fight to keep interstate commerce and competition free from unfair tax burdens imposed by states where our businesses have no operations or representation.” Brann & Isaacson partners George Isaacson and Martin Eisenstein assisted in forming the coalition and provide ongoing advice regarding the sales and use tax collection implications to remote sellers.

Colorado Federal Court to Consider Possible Final Judgment on DMA’s Constitutional Challenge to the Colorado Notice and Reporting Law in DMA v. Huber

This post is to update our readers regarding the status of the Direct Marketing Association’s challenge to the constitutionality of Colorado HB 10-1193, the law enacted in 2010 that imposes discriminatory notice and reporting obligations on out-of-state retailers that do not collect Colorado sales tax. Brann & Isaacson attorneys George Isaacson and Matt Schaefer are counsel to the DMA in the case

In January 2011, the federal District Court for the District of Colorado granted the DMA’ s motion for a preliminary injunction and suspended enforcement of the law on the grounds that it likely violates the Commerce Clause of the United States Constitution on two separate, and independent grounds. In February, the Defendant appealed to the Tenth Circuit, but subsequently withdrew the appeal after the District Court approved a proposal by the parties to file cross-motions for summary judgment seeking a final ruling by the Court on the Commerce Clause issues, while staying further proceedings on all other claims in the case. The District Court agreed that, if it awards summary judgment to either party, it will certify the matter for immediate appeal to the Tenth Circuit Court of Appeals, so that the Commerce Clause issues may be finally resolved.

Each party filed a motion for summary judgment with the District Court on May 6. Responses are due May 27, and replies are due June 10. A ruling by the Court on the motions, and likely an appeal to the Tenth Circuit, will follow. We will continue to update readers with further developments.

States on the Warpath

In the last few months, three states (Illinois, Arkansas and South Dakota) have enacted “nexus expanding” legislation effective on July 1, 2011. Other states are considering adopting such legislation. The legislation falls into three categories: (1) click-through nexus; (2) reporting obligations; and (3) “affiliate” or “attributional nexus.”

We have previously written about the Illinois click-through nexus law (here and here), which we believe is unconstitutional since it purports to establish nexus (with no opportunity to rebut the determination) for any retailer that contracts with a person “located in Illinois” who receives a commission from the retailer based on sales of goods facilitated by a link from the person to the retailer’s web site. We will not describe here the details as to why the statute is unconstitutional, other than to note that mere national advertising, which is what the click-through represents, has never been deemed to create nexus, as pointed out in the Quill v. North Dakota case. In addition, online retailers should carefully review the Illinois statute and its requirements before deciding whether it applies to them.

The other recently-adopted nexus click-through legislation is the Arkansas law, which, unlike the Illinois statute, creates only a presumption of nexus that can be rebutted by a showing that the person maintaining the web site that provides a link does not engage in solicitation on behalf of the retailer. The statute is modeled after the New York statute, and it is possible for a retailer to structure its program with its Arkansas affiliates so as not to be subject to Arkansas sales tax collection obligations.

DMA v. Huber Update: Huber Appeals to Tenth Circuit

As we reported in January, the Direct Marketing Association (the "DMA") recently won a landmark preliminary injunction in its lawsuit against the State of Colorado.  The preliminary injunction prohibits the Executive Director of the Colorado Department of Revenue from enforcing Colorado’s new notice and reporting law, H.B. 10-1193, which would require out-of-state direct marketers and online sellers who do not collect Colorado sales and use taxes to inform Colorado purchasers of their obligation to self-report tax and to provide Colorado customers summaries of their purchases, and also would require sellers to report specific customer purchase information to the State.  As we wrote previously, the Court, in granting the preliminary injunction, found that the requirements of H.B. 10-1193 likely both violated the Commerce Clause and would cause irreparable harm to out-of-state retailers if enforced

On February 25, the Defendant filed an interlocutory appeal of the District Court’s order granting the preliminary injunction, seeking review of the injunction by the Tenth Circuit Court of Appeals.  It will likely be six to nine months before the Tenth Circuit issues its ruling in the matter, but we will keep you updated as developments arise.

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.

DMA Wins Landmark Injunction Against State of Colorado

On behalf of the Direct Marketing Association, Brann & Isaacson partners George Isaacson and Matthew Schaefer won a landmark preliminary injunction in federal court in a lawsuit that affects thousands of direct marketers across the country. The ruling prohibits the State of Colorado from enforcing its controversial new law, H.B. 10-1193, that required direct marketers to -- among other things -- report to the state the names, addresses, and purchase amounts of their customers.

To be clear, so long as the injunction remains in place, out-of-state retailers that do not have nexus with Colorado and do not collect Colorado sales tax are no longer required to: (1) give notice to their Colorado customers, in connection with each sale, that the customer must report Colorado use tax (the “Transactional Notice”); (2) send via First Class mail by January 31, to each customer that purchased more than $500 of goods for delivery to Colorado during 2010, a summary of their purchases for the year (the “Annual Purchase Summary”); or (3) submit a report to the Colorado Department of Revenue, by March 1, listing the name, billing and shipping addresses, and total amount of purchases of all customers who purchased goods for delivery to Colorado (the “Customer Information Report”).  See http://www.colorado.gov/cs/Satellite/Revenue/REVX/1251581938320.

The DMA argued that the law violates the Commerce Clause of the United States Constitution by (a) imposing discriminatory obligations upon out-of-state retailers that do not apply to in-state Colorado retailers, and (b) unduly burdening interstate commerce under principles set forth by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court accepted these arguments in finding that the DMA had a likelihood of success on both Commerce Clause counts, and concluded that out-of-state retailers subject to the new law would suffer irreparable harm if enforcement of the statute is not barred.

The preliminary injunction entered by the Court does not end the case, but it effectively suspends the law while the litigation continues and until the Court makes a final ruling regarding the law’s constitutionality.

You can read a copy of the order here.

Read previous posts about the lawsuit here and here.

DMA’s Constitutional Challenge to Colorado’s Notice and Reporting Law Will Be Argued In Federal District Court on January 13

A happy new year to our readers. Many internet and catalog retailers have been following with interest the constitutional challenge of the Direct Marketing Association (“DMA”) to Colorado’s new notice and reporting law, H.B. 10-1193, enacted in 2010. In addition to burdensome consumer notice requirements that went into effect last year, the law requires out-of-state retailers that do not collect Colorado sales and use tax to send (by January 31, 2011) annual purchase summaries to customers purchasing $500 or more of goods for shipment to Colorado and, worst of all, to file (by March 1, 2011) with the Colorado Department of Revenue a listing of all of the retailer’s customers who have purchased goods for shipment to a Colorado location, regardless of where the customer resides.

As we previously reported (see our July 2, 2010 post), the DMA contends that the Colorado law violates multiple provisions of the United States Constitution, because it discriminates against interstate commerce, exceeds the State’s regulatory authority over out-of-state businesses, violates the privacy rights of Colorado consumers, infringes the free speech and due process rights of retailers and consumers, and deprives retailers of their valuable customer list information without due process or fair compensation. The DMA has filed a motion for preliminary injunction based on the law’s violations of the Commerce Clause, asking the Court to suspend enforcement of the law’s notice and reporting requirements pending a full adjudication of the law’s constitutionality.

The federal District Court for the District of Colorado has scheduled a hearing on the DMA’s motion to be held on January 13, 2011, at 10:00 a.m. in Denver. B&I senior partner and lead counsel for the DMA, George Isaacson, will argue the motion on behalf of the DMA. We will report on further developments after the hearing.

B&I Files Constitutional Challenge to Colorado Notice and Reporting Law for The Direct Marketing Association

We've blogged frequently about Colorado's new notice and reporting law (see here and here).

Since our last posts on the topic, Brann & Isaacson's George Isaacson and Matthew Schaefer filed suit in federal district court in Colorado on behalf of The Direct Marketing Association in The Direct Marketing Association v. Roxy Huber.  Filed on June 30, the suit challenges the constitutionality of the new Colorado law.

The Colorado statute, which targets out-of-state retailers, purports to require those retailers to notify Colorado customers of their obligation to self-report use tax and to require those same retailers to turn over confidential purchasing information regarding Colorado customers to the Colorado Department of Revenue. In the complaint, the DMA, the leading global trade association of direct marketing businesses and nonprofit organizations, asserts that the Colorado statute discriminates against interstate commerce, exceeds the State’s regulatory authority over out-of-state businesses, violates the privacy rights of Colorado consumers, infringes the free speech and due process rights of retailers and consumers, and exposes confidential consumer information to the risk of unauthorized disclosure.

We'll continue updating you as developments arise.

Have a safe and happy Independence Day!

Oklahoma’s New “Colorado-Like” Statute

As we have written in several previous posts, Colorado enacted an onerous reporting requirement for those remote sellers that do not collect and remit the Colorado sales and use tax. The Colorado statute requires such remote sellers to provide three types of notices that they do not collect the Colorado sales and use tax, even though they do not have nexus with Colorado under the Quill standard.  Brann & Isaacson, on behalf of the Direct Marketing Association, will be challenging the constitutionality of the statute in a suit to be filed shortly, because the Colorado statute applies to companies that lack nexus.

On June 9, Oklahoma enacted a “Colorado-like” statute, HB 2359, that requires that any retailer that sells tangible personal property to Oklahoma residents must “provide notification on its retail Internet web site or retail catalog and invoices provided to its customers that use tax is imposed and must be paid by the purchaser.” (emphasis added). The statute is Colorado-like in the sense that retailers without nexus are required to provide notice regarding the fact that sales and use tax is due on purchases, but it does not contain the Colorado provisions requiring retailers to provide annual notice (i) to purchasers of the volume of their purchases and that tax should be remitted to the Department of Revenue; and (ii) to the Department of Revenue of their Colorado purchasers and the volume of purchases made during the preceding year. Thus, the Oklahoma statute does not require annual notice to customers of their purchases in the preceding year or an annual report to the Oklahoma Tax Commission, the agency responsible for enforcing the sales tax law, of Oklahoma purchasers from the retailer.

NEXUS: Quill Physical Presence Test Should Apply to Gross Receipts Taxes

Since National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967), was decided in 1967, states have attempted to avoid the physical presence test of nexus that the National Bellas Hess case established.  Thus, in the 1980’s, the Pennsylvania Department of Revenue argued that that our client, L. L. Bean, Inc., was required to collect Pennsylvania sales and use tax on all of its sales into the state because the mail order industry had changed since National Bellas Hess was decided.  The Pennsylvania Commonwealth Court squarely rejected this challenge to National Bellas Hess.  L. L. Bean, Inc. v. Department of Revenue, 516 A.2d 820 (Pa. Cmwlth. 1986).

Similarly, the State of California threatened assessment of 300 direct marketers on the ground that they had nexus with California because of their use of 1-800 numbers and acceptance of credit cards.  On behalf of the Direct Marketing Association, Brann & Isaacson sued in federal court, and the Ninth Circuit issued a judgment in favor of the DMA, on behalf of its members, declaring that in the absence of a physical presence in a state, a company is not liable for sales and use tax in that state.  DMA v. Bennett, 916 F.2d 1451 (9th Cir. 1990), cert. denied, 500 U.S. 905 (1991).

The states’ next test case, Quill v. North Dakota, 504 U.S. 298 (1992) (Brann & Isaacson filed an amicus curiae brief on behalf of the DMA in Quill), was yet another unsuccessful effort by the states to overrule and/or limit the physical presence test.

The states’ latest efforts to limit the nexus test under the Commerce Clause by adoption of an economic presence test to measure nexus for gross receipts tax should also be rejected.