Tenth Circuit: Colorado’s use tax reporting requirements

Colorado's use tax reporting rules

The U.S. Court of Appeals for the Tenth Circuit today issued a decision finding that Colorado’s use tax reporting requirements did not discriminate against or unduly burden interstate commerce. The Tenth Circuit—in this latest decision in the litigation concerning the constitutionality of Colorado’s use tax reporting requirements (adopted in 2010 but yet to be enforced)—reversed a federal district court.

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The case is: Direct Marketing Ass'n v. Brohl, No. 12-1175 (10th Cir. February 22, 2016).  Read the Tenth Circuit’s decision [PDF 124 KB]

KPMG observation

In prior litigation in this case, the U.S. Supreme Court in March 2015 held that the Tax Injunction Act (TIA) did not bar the use tax reporting case from being heard in federal court. Read TaxNewsFlash-United States


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

  • The first is that the noncollecting retailer is required to inform the buyer at the time a purchase is made that use tax may be due and that Colorado requires purchasers to file returns and pay use tax directly to the state. 
  • The second requirement is that the noncollecting retailer 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. This statement must warn the buyer that use tax may be owed on such purchases. 
  • Finally, noncollecting retailers are required to file an annual report with the Department of Revenue identifying the name and address of each Colorado purchaser and the general type and volume of purchases made by such customer.

Shortly after these provisions were enacted, the Direct Marketing Association (DMA) filed suit in Colorado federal district court asserting that the use tax reporting requirements violated the dormant Commerce Clause. Specifically, DMA sought to enjoin the state tax department from enforcing the revised law. Eventually, a federal judge permanently enjoined the department from enforcing the use tax reporting rules. Upon review, however, the Tenth Circuit concluded that the TIA barred the DMA from bringing its suit in federal court.  

The U.S. Supreme Court disagreed, holding in March 2015 that the TIA did not bar an action in federal court to enjoin the enforcement of Colorado’s use tax reporting requirements. The case was then remanded back to the Tenth Circuit for consideration on the technical merits—i.e., whether the use tax reporting requirements imposed on noncollecting retailers violated the dormant Commerce Clause. 

Tenth Circuit's decision

After reviewing the scope of the dormant Commerce Clause, the circuit court first held that the district court erred when it held that Quill extends to situations outside the scope of sales and use tax collection. In the appeals court’s view, Quill has been, and should continue to be, applied narrowly to issues involving the collection and remittance of sales and use taxes. Having made this determination, the court addressed DMA’s discrimination claim.

Because the Tenth Circuit addressed collecting retailers versus noncollecting retailers and did not make any distinctions based on geographical location, the use tax reporting statute was found to be not facially discriminatory. However, as explained by the appeals court further, a state law can violate the dormant Commerce Clause “...when its effect is to favor in-state economic interests over out-of-state interests.”  In addressing whether Colorado’s use tax reporting statute had a discriminatory effect, the appeals court noted that because Colorado purchasers owed use tax when sales tax was not collected, the reporting requirements did not put noncollecting retailers at a competitive disadvantage. The appeals court also noted that noncollecting out-of-state retailers were not similarly situated to in-state retailers required to comply with Colorado’s tax collection and reporting requirements.

In sum, the Tenth Circuit concluded that DMA failed to establish that the reporting requirements posed a discriminatory economic burden on out-of-state vendors when viewed against the backdrop of the collecting retailers’ tax collection and reporting obligations.  

The Tenth Circuit next addressed DMA’s claim that Colorado’s use tax reporting statute unduly burdened interstate commerce. The district court had found that the burdens established under the use tax reporting statute were related “in kind and in purpose” to the burdens condemned in Quill (imposing a collection requirement on a retailer lacking an in-state physical presence). Therefore, applying Quill, the lower court concluded the Colorado use tax reporting statute unduly burdened interstate commerce.  The Tenth Circuit disagreed. In its view, Quill was limited to the narrow context of tax collection, and the U.S. Supreme Court’s decision on the TIA essentially precluded any other holding.  Specifically, the appeals court found that the TIA 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.”  

Specifically, in addressing whether the TIA barred DMA from bringing suit in federal court, the U.S. Supreme Court repeatedly stated that the Colorado use tax reporting statute did not require noncollecting retailers to asses, levy, or collect use tax on behalf of Colorado. The notice and reporting requirements were not the equivalent of an assessment because the state would have to take further action before a purchaser would be billed for use tax on any purchases reported by noncollecting retailers.  

In the Tenth Circuit’s view, the holding in Quill did not apply here because this was not a case—as consistently reinforced by the US Supreme Court in the TIA decision—that involved the collection of a tax. The Tenth Circuit could not “…identify any good reason to sua sponte extend the bright-line rule of Quill to the notice and reporting requirements of the Colorado Law.” 

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