Supreme Court Allows Challenge to Colorado Notice Requirements on Sales Tax Collection

The U.S. Supreme Court decided unanimously Tuesday that the Direct Marketing Association, a trade association of retailers, was not barred by the federal Tax Injunction Act from bringing a suit against the Colorado Department of Revenue attacking Colorado’s notification and reporting requirements for non-collecting retailers of sales tax.

Colorado requires residents who purchase tangible personal property from a retailer that does not collect sales or use taxes to file a return and remit those taxes directly to the State Department of Revenue. To improve compliance, Colorado passed a law requiring retailers that do not collect the tax to notify Colorado customers of their use-tax liability and to report tax-related information to customers and to the Department of Revenue.

In Direct Marketing Association v. Brohl, the Supreme Court decided that the Tax Injunction Act, which provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law,” bars a suit to enjoin the enforcement of this law. The court held that it does not.

The issue decided by the Supreme Court was very narrow, according to Duane Morris LLP partner Stanley Kaminski, CPA, Esq.

“The court held that the Tax Injunction Act’s restriction on bringing cases in federal court for actions that sought the injunction, suspension or restraint of state tax collection or levy did not encompass an action that merely challenged the notice and reporting provisions that Colorado imposed on non-Colorado retailers in order to help Colorado collect sales and use taxes,” he said. “The Supreme Court interpreted the word ‘restrain’ more narrowly than the Tenth Circuit Federal Appeals Court and basically concluded that the action did not try to stop collection or levy of a tax so it was not barred by the Tax Injunction Act. As the court explained, ‘a suit cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities.’”

“I’m not surprised that the decision was unanimous,” said Kaminski. “What was surprising was the concurrence by Justice Kennedy, who felt that the decision in Quill [the 1992 case that imposed the physical presence test to require remote sellers to collect tax] should be revisited.”

“Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill,” stated Kennedy. “A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.”

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