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Tenth Circuit Revives Colorado’s Use Tax Notification Statute: Appellate Court Orders District Court to Dissolve Injunction on Procedural Grounds

A federal appellate court may have breathed new life into Colorado’s controversial use tax notification statute earlier this month, when it ordered a federal district court to dissolve a permanent injunction that barred the Colorado Department of Revenue (the Department) from enforcing the use tax notification statute.

In Direct Marketing Association v. Brohl, ___ F.3d ___ (10th Cir., Aug. 20, 2013), the U.S. Court of Appeals for the Tenth Circuit did not rule on the merits of Colorado’s aggressive use tax notification statute, which requires certain retailers to notify Colorado customers of their obligation to pay state use tax and to provide the Department with information concerning the retailer’s Colorado customers.  Instead, the Tenth Circuit held that the federal Tax Injunction Act (the TIA) deprived the federal district court of jurisdiction to hear the case in the first place.

Lawyers for the Direct Marketing Association (the DMA), a group of businesses that market goods via mail-order catalogs, advertisements, television and the Internet, told local media shortly after the decision that they were reviewing their legal options, which include requesting  en banc  review in the Tenth Circuit or re-filing the case in a Colorado state court.  The Department, meanwhile, has not said whether it will resume enforcing the use tax notification statute once the federal district court formally dissolves the permanent injunction.


Colorado imposes a 2.9% tax on the sale of tangible personal property within the state.  Retailers with a physical presence within Colorado are required to collect the tax from purchasers and remit the tax to the Department.  If a Colorado buyer does not pay sales tax on the purchase of tangible personal property—in the case of an online purchase from an out-of-state retailer, for example—Colorado imposes a complementary use tax, which requires the Colorado buyer to pay a 2.9% tax for the privilege of storing, using or consuming the property in Colorado.

Colorado residents are required to report and pay use tax.  Indeed, failure to report and pay use tax is a criminal offense in Colorado.  Nevertheless, most Colorado residents do not report or pay use tax, and the tax is difficult for the Department to enforce because it typically has no information regarding state residents’ purchases from out-of-state retailers.  According to an estimate prepared in connection with the litigation, Colorado state and local governments lost nearly $173 million in 2012 due to residents’ failure to pay use tax on goods purchased online from out-of-state retailers that did not collect sales tax.

In 2010, to increase use tax collection and to prevent out-of-state retailers from gaining an unfair advantage vis-à-vis Colorado brick-and-mortar retailers, the Colorado legislature imposed certain requirements on so-called non-collecting retailers, which generally include out-of-state retailers that sell tangible personal property to Colorado residents without collecting sales tax.  Specifically, the statute imposed three requirements on non-collecting retailers:  First, the retailers were required to provide notice to Colorado purchasers of their obligation to report and pay state use tax.  Second, the retailers were required to send annual purchase summaries to their Colorado customers.  Third, the retailers were required to report certain information with respect to their Colorado purchasers, including the purchasers’ names, billing addresses, shipping addresses, and the total amount of purchases, to the Department.  Retailers with less than $100,000 of gross annual sales in Colorado were exempt from the use tax notification statute’s provisions.  Non-collecting retailers who failed to comply with the law were subject to penalties.

At least four other states—Oklahoma, South Carolina, South Dakota and Vermont—followed Colorado’s lead and enacted use tax notification statutes.  However, the other states’ laws are not as aggressive as Colorado’s statute.  For example, the Oklahoma, South Carolina, South Dakota and Vermont statutes require out-of-state retailers to notify customers in the respective states of their obligation to report and pay state use tax but do not require the retailer to send a notice to the state’s taxing authority.  Moreover, Vermont’s use tax notification provision specifically provides that no criminal or civil liability may be applied or assessed for failure to comply with the statute.

The District Court’s Opinion

In June 2010, the DMA filed a lawsuit in the U.S. District Court for the District of Colorado, challenging the constitutionality of Colorado’s use tax notification provisions.  Specifically, the DMA’s lawsuit alleged that the statute was unconstitutional under the Commerce Clause of the U.S. Constitution because it discriminated against, and imposed undue burdens on, interstate commerce. In March 2012, the district court granted the DMA’s motion for summary judgment and denied the Department’s motion for summary judgment.  On the discrimination claim, the court held that the statute’s notice and reporting requirements facially discriminated against interstate commerce.  Such discrimination was unconstitutional, the court concluded, because Colorado had not demonstrated that the use tax notification statute served a legitimate state purpose that could not be served adequately by reasonable nondiscriminatory alternatives.  With respect to the undue burden claim, the district court ruled that a state government cannot constitutionally impose burdens on businesses that lack an in-state physical presence.  Accordingly, the court entered a permanent injunction barring the Department of Revenue from enforcing the notice and reporting requirements.  The district court noted that it had jurisdiction over the case because it presented a federal question, and it did not address the TIA.

The Tenth Circuit’s Opinion

On appeal, the issue before the Tenth Circuit was whether Colorado’s notice and reporting requirements for non-collecting retailers violated the dormant Commerce Clause by discriminating against interstate commerce.  Before the Tenth Circuit could reach that issue, however, the court first considered whether the TIA precluded the federal district court from hearing the case in the first instance.  

The TIA provides that federal “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.”  The TIA was enacted to prevent federal district courts from interfering with state tax collection efforts.

With respect to the first requirement of the TIA, the Tenth Circuit held that the DMA was seeking to restrain the collection of Colorado use tax, notwithstanding that the DMA was not a taxpayer seeking to avoid a tax and the challenged notice and reporting requirements were not assessments of tax.  The Tenth Circuit relied on its prior decisions interpreting the TIA, in which it held that the TIA is not limited to cases in which a taxpayer challenges its own liability for state tax.  Rather, according to the Tenth Circuit, the TIA applies whenever a plaintiff seeks to prevent a state from exercising its sovereign power to collect revenue.  

Moreover, with respect to the notice and reporting requirements, the Tenth Circuit held that the DMA’s challenge to the way in which Colorado proposed to enforce the use tax (i.e., by requiring out-of-state retailers to furnish the Department with information regarding instate buyers) was akin to challenging the tax itself.

Turning to the latter requirement of TIA, the Tenth Circuit held that the DMA had a plain, speedy and efficient remedy to challenge the constitutionality of the notice and reporting requirements in Colorado.  Specifically, the DMA could have challenged the state’s notice and reporting requirements in an administrative hearing before the Colorado Department of Revenue and/or in the state’s courts.  In order to do so, the DMA’s members presumably would have had to collect Colorado sales tax on sales to Colorado residents, then file a claim for refund with the Department.  Alternatively, a DMA member could have waited for the Department to assess a penalty for failure to comply with the use tax notification requirements, then challenge the penalty in a state administrative or court proceeding.  In either case, the Tenth Circuit was satisfied that the remedies provided under state law met the requirements of the TIA.

Accordingly, the Tenth Circuit remanded the case to the district court with instructions to dismiss the DMA’s Commerce Clause claims for lack of jurisdiction, dissolve the permanent injunction against the Department, and take appropriate further action consistent with the Tenth Circuit’s opinion.

As a technical matter, the permanent injunction remains in effect, and the Department has not indicated whether it will resume enforcing the use tax notification statute once the federal district court has formally dissolved the injunction.  The DMA, meanwhile, has not announced whether it will seek  en banc review of the Tenth Circuit’s decision, re-file the case in a Colorado state court, or pursue some other remedy that would allow the DMA to challenge the constitutionality of Colorado’s use tax notice provision.  Assuming Colorado’s use tax notification statute survives further challenge, however, it could provide a new model for states and local jurisdictions seeking to enforce the collection of sales and use taxes.

© 2020 Schiff Hardin LLPNational Law Review, Volume III, Number 242


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Virtually no business or investment activity is free from federal and state tax considerations and pitfalls. Schiff Hardin's tax attorneys advise clients on the tax aspects of the formation, financing, operation and termination of their business activities, and in the structuring of their investments.