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Argument analysis: Justices look for a third way in Colorado’s tax injunction dispute with online retailers

The Justices had tough questions for both sides Monday morning in Direct Marketing Association v. Brohl. Although the legal issues seem relatively simple, several of the Justices appeared frustrated during the course of the argument, and the end result could be a decision that relies heavily on reasoning that neither side advanced.

The case involves the intersection of the federal Tax Injunction Act (known as the TIA) and Colorado’s scheme for collecting use taxes – the taxes we owe our state government when we buy from an out-of-state online retailer that doesn’t collect sales tax. The TIA prevents federal courts from (among other things) enjoining or restraining the “collection” of any state tax. Colorado’s innovative scheme for collecting use taxes requires online retailers to keep a variety of records and send a variety of notices, the most important of which is a Form-1099-like notice sent to the state each year detailing all of the online purchases of each Colorado resident. When the Direct Marketing Association (a retailer trade group) challenged the scheme under the Commerce Clause, the Tenth Circuit held that the TIA barred any injunction against the Colorado regime.

Attorney George Isaacson (appearing for the DMA) faced persistent and sometimes strongly worded questioning from the Justices. Although the DMA brief had emphasized a straight and literal approach, Isaacson started his argument with the assertion that Colorado had waived its right to rely on the TIA in the lower courts. [The Tenth Circuit had raised this point on its own.] That contention sparked an extended colloquy with Justices Antonin Scalia and Sonia Sotomayor, which ended up using about a quarter of Isaacson’s argument time. Justice Scalia in particular thought it untenable to suggest that a party could waive the effects of a statute, like the TIA, addressed directly to the courts; the TIA, for example, specifically prohibits the district courts from enjoining the “collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”

Eventually, Justice Ruth Bader Ginsburg changed the topic, asking Isaacson to “get to the nub of this question.” She suggested that DMA’s weakest point was a series of lower-court cases that extend the TIA to prevent an injunction against an employer reporting an employee’s taxable income.  Isaacson did not directly address those cases. Rather, following the path taken in DMA’s brief, Isaacson responded that the TIA only protected the state from suits by taxpayers, not from suits by third parties. That drew objections from Justices Sotomayor, Stephen Breyer, and Scalia.

Justice Breyer went first, beginning a lengthy interchange, generally designed to underscore the incoherence he saw in DMA’s position. Breyer’s first point was to emphasize the functional similarity between the employer-reporting cases and the present case: the employer-reporting cases barred injunctions that, “because it would stop the employer from telling the state how much has been earned, [and] would make it more difficult to collect the tax.” Juxtaposed to this case, why shouldn’t the statute bar an injunction that, “by stopping sellers from telling the state how much the Colorado citizen has bought, would make it more difficult for them to collect the tax”?

Turning at that point to the suggested distinction between suits by taxpayers and third parties, he emphasized that the statute “doesn’t care who brings the suit. In terms of the word ‘collection,’ they seem identical.” If the injunction restrains “collection” when the employer complains, why wouldn’t the same injunction restrain “collection” when it is some other party that complains?

When Justice Breyer offered Isaacson an opportunity to respond, Isaacson suggested that “you have to read the word ‘injunction.’” But, Breyer countered, the statute “doesn’t anywhere say ‘injunction.’” Isaacson’s shift to the word “enjoin” didn’t make Breyer any more receptive.

There is an injunction that says the State cannot enforce its provision requiring out-of-State sellers to report what Colorado customers buy. I don’t see how you can deny that’s an injunction. I think you could deny that it enjoins the collection of a tax. But to do that, you will have to go right back to the question that Justice Ginsburg asked, and tell me how to distinguish the two cases she mentioned.

But Isaacson stuck with his position that the TIA protects the state only when the taxpayer is the plaintiff. Justice Elena Kagan joined in with a similar view: “But where do you get, Mr. Isaacson, this idea that the plaintiff has to be the taxpayer? Because certainly the text of the statute does not say that. The text of the statute speaks to what kinds of remedies a court can give. It does not speak to what kind of plaintiffs have to bring the lawsuit.”

When Isaacson continued to stand by the third-party/taxpayer discussion, Justice Kagan turned the discussion back to the text of the statute, and specifically the meaning of the word “collection.” Why, she wondered, isn’t the process of “identifying and informing the people who to pay” part of the collection process? When Isaacson responded that “collection” is a “ter[m] of art” in “tax parlance,” Justice Sotomayor asked if he wasn’t saying that “collection is only as the money changes hands?” Isaacson explained that in the world of tax administration, “collection” is a special phase of activity that starts only after the formal “assessment” of the tax. Because the injunction here did not “constrain” assessment, he suggested, it did not amount to collection.

Chief Justice John Roberts then asked if Isaacson was limiting the TIA to “garnishment and things like that.” Emphasizing the importance of the point of assessment, Isaacson explained that the injunction would protect “any activities . . . once the taxpayer’s liability has been determined.” The Chief Justice then summarized: “So [your position is that] you’ve got to know that he or she owes $1,482 because they’ve done the calculations.”

Responding to the practical implications of that point, Justice Kagan emphasized the centrality of the notice requirements to the state process: “Essentially the state is saying we’re not going to be able to collect this tax unless we do these things, unless we tell people that they, in fact, owe the tax . . . . And that’s what all these forms are all about. It’s about collecting a tax that most people do not pay.” When he suggested that the information and recordkeeping requirements were only peripheral to the process of assessment and collection (as he understood them), Kagan closed. Isaacson’s time at the lectern by pressing the same point again: “But wouldn’t you agree that in any case in which a government goes about collection the tax it has to say how are we going to collect this tax. And this is just this state’s answer to the ‘how are we going to collect this tax.’”

After the tough questioning for Isaacson, with no obvious supporters revealing themselves on the bench, you would have expected something of a cakewalk for Colorado’s solicitor general, Daniel Domenico. But Justice Scalia immediately challenged Domenico’s assertion that the procedures were essential to collecting the tax: If it was “so essential to the tax system,” Scalia suggested, he would have expected all of the states to be using the process: “It can’t be that central if no other state has it.”

Somewhat introspectively, Justice Scalia remarked that the circumstances make him cautious about accepting Colorado’s position: “The fact that it’s one of a kind gives me some pause. This is certainly a very important case because I have no doubt that if we come out agreeing with you, every one of the states is going to pass laws like this.”

Testing the limits of Domenico’s broad conception of “collection,” Justice Scalia offered a hypothetical about a funding statute:

Let’s assume a state law that gives the state taxing authority a lot of money for new computers, and somebody challenges that law on some . . . federal ground. Would that challenge not be able to be brought in federal court because the computers are going to help the tax service to get more delinquent taxpayers, and, therefore, you are restraining the collection of taxes?

Domenico responded that he didn’t think the TIA would bar that litigation, but he then had to explain to Justice Scalia exactly why. He concluded that the relevant inquiry whether the activity is “intended to culminate in assessment or collection of taxes” – an answer that apparently would have justified an injunction against the statute Justice Scalia had just hypothesized. So it was no surprise when Justice Breyer interjected: “That isn’t a very narrowing thing.” For his part, he saw wisdom in an old Second Circuit opinion:

Henry Friendly, some years ago, said of course you can use the term collection to refer to any method of helping to secure payment. But Congress was referring to methods similar to assessing and levy that would produce money or other property directly rather than indirectly. The reason being, once we start down your road, there is no stopping place.

Pausing only for a moment, Breyer went on to emphasize the breadth of the concept of “collection” inherent in Domenico’s information requirements.

GDP consists of about $16 trillion. It’s very hard to think of even one of those trillion dollars that you couldn’t figure out passed through somebody’s hands who owed a tax and then later went into somebody else’s hands and it would help the state or the federal government to know from that second or third person how it got the money from the first person’s hands. . . . It’s true of everything you can think of. . . . unless you are going to start line drawing, and I don’t know what lines to draw. Therefore, said Henry Friendly, let’s not. Let us read collection to mean what it means in context. . . . That, I think, is the strongest argument against you and, therefore, I would like to hear your response.

Domenico “agree[d]” with Breyer that the Friendly argument is “the strongest argument against us.” He did not, though, offer a textual reading opposed to the Friendly argument. Rather, he reiterated that the injunction “makes it impossible for Colorado . . . to do any form of assessment, any form of collection.”

But Justice Breyer’s response to that assertion was deeply skeptical:

Really? You can’t ask your citizens the same way that the federal government asks us? “Pay,” that’s their polite way of saying it. And by the way, if you fill out our form incorrectly, depending on your state of mind, you may discover you are in prison. Now, that seems to be a not-perfect way of doing it, but it does tend to encourage people to pay the taxes that they believe that they owe.

And lest the audience think that Justice Breyer was speaking for himself, Justice Scalia added a rhetorical flourish on the limited capabilities of state courts:

[W]e accept minuscule, minuscule percentage of appeals from state supreme courts. And as a practical matter, if the state court rules in a manner that violates federal law they’re not going to come up here – 90% of them aren’t going to come up. So it is important that it begin in federal court when what is at issue is the selfish state’s assessment and collection of taxes.

And so the argument wound down. In a lot of ways, the session was puzzling. On the one hand, Justices Scalia, Breyer, Kagan, and Sotomayor were critical of DMA’s argument. At the same time, Justices Scalia and Breyer were perhaps even more dubious about accepting Colorado’s argument. So it is not at all easy to read the Justices.

One possibility, though, is that several of the Justices would like to vote for DMA, but were frustrated that DMA’s lawyer would not agree with the argument they found most acceptable. On this reading, Justices Scalia, Kennedy, Breyer, and Kagan were unwilling to accept the broad reading of “collection” urged by Colorado. At the same time, they were not willing to endorse the “taxpayer/third party” distinction on which DMA relied. Those Justices, perhaps, preferred Judge Friendly’s approach for developing a textually tenable narrowing conception of the TIA. If I am right about that, we can expect, several months from now, an opinion reversing the judgment of the court of appeals and ruling for DMA, but adopting little or none of the reasoning it offered.


Recommended Citation: Ronald Mann, Argument analysis: Justices look for a third way in Colorado’s tax injunction dispute with online retailers, SCOTUSblog (Dec. 9, 2014, 3:06 PM),