Tax Injunction Act, Colorado’s use tax reporting requirements

Tax Injunction Act, Colorado’s use tax reporting

The U.S. Supreme Court today held that the Tax Injunction Act (TIA) did not bar an action in federal court to enjoin the enforcement of Colorado’s use tax reporting statute. This statute, enacted in 2010, but never enforced, requires retailers that do not collect Colorado sales or use tax to notify Colorado customers of their potential use tax liability and to report tax-related information to customers and the Colorado Department of Revenue. In holding that the TIA did not bar the suit, the U.S. Supreme Court reversed a decision of the U.S. Court of Appeals for the Tenth Circuit and remanded the case back to that court for further consideration.

Related content

The case is: Direct Marketing Assn v. Brohl, No. 13-1032 (S. Ct. March 3, 2015)


Read the Court’s unanimous opinion [PDF 137 KB] that includes concurring opinions.


Under Colorado’s use tax reporting statute and regulations, retailers that are not required to collect tax on sales to Colorado purchasers are required to adhere to three reporting requirements:

  • Effective beginning March 1, 2010, inform the buyer at the time of the purchase that use tax may be due and that Colorado requires purchasers to file returns and pay use tax directly to the state
  • Provide each Colorado purchaser with a statement by January 31 of each year showing the general types and volume of purchases made during the prior year and stating that the buyer may owe use tax on such purchases
  • File an annual report by March 31 with the Department showing the name and address of each Colorado purchaser and the general type and volume of purchases made by such customer*

*Implementing regulations adopted by the Department of Revenue limited these reporting requirements to sellers with over $100,000 in sales in Colorado. Colo. Code Regs. § 39-21-112.3.5 also provides that the January report is provided only to customers with $500 or more in purchases from the seller in the preceding year. Absent the injunction, the first annual statements would have been due on January 1, 2011, and the first annual reports to the Department would have been due on March 31, 2011.


Shortly after the reporting requirements were enacted, the Direct Marketing Association (DMA) filed suit in federal district court, seeking to enjoin enforcement of the use tax reporting regime. Eventually, the federal district court judge held that the use tax reporting statute was unconstitutional and permanently enjoined the Colorado Department of Revenue from enforcing the use tax reporting rules.

On appeal, however, the Tenth Circuit concluded that the TIA barred DMA from bringing its suit in federal court. It was this decision that was appealed to the U.S. Supreme Court, which granted certiorari on June 30, 2014.

In the interim, DMA refiled its suit in a Colorado state court. On February 18, 2014, a state judge issued a preliminary injunction further preventing enforcement of the reporting requirements. The state court litigation has been stayed pending the outcome of the U.S. Supreme Court case.

Supreme Court’s decision

Justice Thomas delivered the opinion for a unanimous court.

The Tax Injunction Act (TIA), enacted in 1937, provides that “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341.

The question before the Court was whether enforcement of the reporting requirements was an act of “assessment, levy or collection” the enjoinment of which was barred by the TIA. In other words, if the reporting requirements were enforced would this be akin to assessing, levying, or collecting a tax.

Using federal tax law to define the terms “assessment, levy and collection,” the Court concluded that these terms, as used in the TIA, would not encompass Colorado’s enforcement of the notice and reporting requirements. In the Court’s view, information gathering is a separate and distinct phase of tax administration that precedes the steps of “assessment” and “collection.” Even after the non-collecting retailers would have reported the required information, the Colorado taxing authorities would need to take additional actions to assess (or actually determine and record) an individual taxpayer’s use tax liability and even further steps to collect the amount of use tax determined to be owed. The Court also noted that the reporting requirements could not be considered to fall within the meaning of the term “levy” which is to be read to mean some official government act to impose, assess or collect a tax.

The Court observed that while the use tax reporting requirements, if enforced, may have improved Colorado’s ability to assess and ultimately collect use taxes from consumers, the TIA is “not keyed to all activities that may improve a State’s ability to assess and collect taxes.”

The Tenth Circuit, the Court noted, erroneously focused on a broad reading of the term “restrain” when it held that the TIA bars any suit that would “limit, restrict, or hold back the collection of state taxes.” In the Supreme Court’s view, a narrower reading of the term “restrain” was consistent with the legislative history of the TIA and the Court’s policy rule “favoring clear boundaries in the interpretation of jurisdictional statutes”.

The Supreme Court next stated that it was taking no position as to whether the suit was barred under the “comity doctrine.” This doctrine counsels lower federal courts to resist engagement in certain cases that interfere with the fiscal operations of state governments when the federal rights of the persons remain unimpaired. The Court noted that it will be up to the Tenth Circuit to decide on remand whether the comity argument is available to Colorado.

Justice Kennedy’s concurrence

One of the most interesting aspects of the decision is Justice Kennedy’s concurring opinion.

Justice Kennedy used his concurrence to argue that the Court should overturn Quill. He noted that the majority opinion in Quill should always have been considered tenuous given that three justices (including himself) had upheld Bellas Hess on principles of stare decisis alone. He continued by saying (stated emphatically) that Quill—which in his view has inflicted extreme harm and unfairness on the states—should have been decided differently in light of Complete Auto and the “dramatic technological and social changes that had taken place in our increasingly interconnected economy.”

Justice Kennedy then points out the magnitude by which internet commerce has grown since Quilland the significant revenue loss that states have experienced as a result. He stated:


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.


Finally, Justice Kennedy noted that although the present case (the DMA case) does not raise the underlying issue, the “…legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”

Next steps

The case will now be remanded to the Tenth Circuit for that court to presumably address the comity argument and, if necessary, address the substantive issue as to whether the federal district court properly concluded that Colorado’s use tax reporting requirements violated the dormant Commerce Clause. In the interim, the Colorado Department of Revenue remains enjoined from enforcing the reporting requirements.

KPMG observation

The more interesting next steps, however, could be those articulated by Justice Kennedy, who clearly believes that the Supreme Court should revisit Quill. If an “appropriate case” were to be presented before the Court, there is certainly no guarantee that certiorari would be granted because there are justices who likely do not share Kennedy’s views. In fact, in December 2013, the U.S. Supreme Court declined to review two cases addressing the constitutionality of New York’s click-through nexus statute.

In the interim, Congress continues to grapple with the issue of remote sales and use tax collection, and states continue to look for ways to collect use taxes owed on internet purchases.


For more information, contact a tax professional with KPMG’s State and Local Tax practice:

Stephen Metz | +1 303-382-7177 |

Rod Martinez | +1 303-382-7703 |

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