DMA Wins Battle Over CO Sales Tax Law, But May Lose War As Supreme Court Opens Door to Revisiting Quill

DMA Wins Battle Over CO Sales Tax Law

But May Lose War As Supreme Court Opens Door to Revisiting Quill

In late 2010, Colorado passed an onerous reporting scheme applicable to out-of-state retailers who did not collect sales tax.  The Direct Marketing Association (DMA) immediately challenged the law in federal court and won a preliminary injunction in 2011. The next year, the court granted the DMA summary judgment finding that the law violated the Commerce Clause for two reasons:

First, the Act and the Regulations directly regulate and discriminate against out-of-state retailers and interstate commerce.  . . Second, the Act and the Regulations impose an undue burden on interstate commerce.

In 2013, the 10th Circuit reversed the ruling on a technicality finding that the suit was barred by the federal Tax Injunction Act (TIA), which provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law,”  28 U. S. C. §134. Acknowledging that the suit “differs from the prototypical TIA case,” the Court of Appeals nevertheless found it barred by the TIA because, if successful, it “would limit, restrict, or hold back the state’s chosen method of enforcing its tax laws and generating revenue.”

This week a unanimous Supreme Court reversed.  Justice Thomas rejected the Court of Appeals rationale that because the Coloroado notice and reporting system facilitated the collection of taxes that restraining it would “limit, restrict, or hold back” the Department’s collection efforts. 

What has everyone talking, however, was Justice Kennedy’s concurrence regarding the continued vitality of the decision in Quill Corp. v. North Dakota, 504 U. S. 298, 311 (1992) which affirmed a bright line rule that retailers need not collect sales tax in states in which they do not have a physical presence.  He begins by stressing the volume of sales taxes lost to states via e-commerce as a result of Quill.

But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States. App. 28.

Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on these purchases. California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors. See California State Board of Equalization, Revenue Estimate: Electronic Commerce and Mail Order Sales, Rev. 8/13, p. 7 (2013) (Table 3). The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register. The facts of this case exemplify that trend: Colorado’s losses in 2012 are estimated to be around $170 million. See D. Bruce, W. Fox, & L. Luna, State and Local Government Sales Tax Revenue Losses from Electronic Commerce 11 (2009) (Table 5). States’ education systems, healthcare services, and infrastructure are weakened as a result.

Then Kennedy says having a presence that is a mere click away may constitute having a presence regardless of where the retailer may be physically located.

The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront. See PricewaterhouseCoopers, Understanding How U. S. Online Shoppers Are Reshaping the Retail Experience 3 (Mar. 2012) (nearly 70% of American consumers shopped online in 2011). Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.

Based on these considerations, Kennedy concludes it is time to reevaluate Quill.

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. See Pearson v. Callahan, 555 U. S. 223, 233 (2009) (stare decisis weakened where “experience has pointed up the precedent’s shortcomings”). It should be left in place only if a powerful showing can be made that its rationale is still correct. The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.

Such a pronouncement is somewhat surprising since the Supreme Court had the perfect vehicle to revisit Quill when Amazon’s petitioned the court to review the New York law which began the wave of state “Amazon tax” laws, but it declined to review the case.

The prospect of a looming Supreme Court review might give renewed impetus to the Marketplace Fairness Act, a federal legislative solution to enable states to collect sales taxes subject to certain conditions which passed the Senate last year, but I suspect that the same ideological objections that blocked its passage in the past will continue to do so.