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.
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]
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:
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.
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.”
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.