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.

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.

MFA Update: Rep. Goodlatte’s Seven Principles and an Interview with George Isaacson

Although the Marketplace Fairness Act (S. 743) ("MFA") has not yet progressed out of a House committee since its Senate passage last spring, it continues to make headlines. In late September, the House Judiciary Committee, chaired by Rep. Bob Goodlatte (R-Va.), released seven “Principles on Internet Sales Tax.” Brann & Isaacson senior partner George Isaacson was recently profiled by State Tax Notes discussing both the MFA and Goodlatte’s Seven Principles.

The Seven Principles outlined by Representative Goodlatte provide for:

1. Tax Relief – “no new or discriminatory taxes not faced in the offline world”
2. Tech Neutrality – brick and mortar and online businesses “should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less…than that on similarly situated offline businesses”
3. No Regulation Without Representation – taxpayers “should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement”
4. Simplicity – no “onerous compliance requirements,” “laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary”
5. Tax Competition – “Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-à-vis their foreign competitors”
6. States’ Rights – “States should be sovereign” and “the federal government should not mandate that States impose any sales tax compliance burdens” and
7. Privacy Rights – “Sensitive customer data must be protected.”

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 Incredible Shrinking Jurisdiction?

On June 1, 2010, the United States Supreme Court in Levin v. Commerce Energy, Inc., 560 U.S. __ (2010), issued as close as it gets these days to a unanimous decision. Though fractured into four separate opinions, all of the Justices reached the same conclusion: that the United States District Court for the Southern District of Ohio correctly dismissed a state tax-related case. But, the distinction between the majority opinion and a concurrence by the Court’s most conservative Justices reveals that the door to federal court involvement in state tax matters remains open.

For direct marketers, access to federal courts for challenges to the constitutionality of state and local taxes and related enforcement efforts by the states is especially important. Not only are federal courts often more experienced in regards to federal constitutional issues, including Commerce Clause disputes, but they offer at least the appearance of a more neutral playing field since the federal courts are not funded by state tax revenue and are often called upon to play the role of arbiter in jurisdictional battles between the states. Thus, any decision that appears to restrict access to federal courts needs to be reviewed very closely.