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Argument preview: Justices to consider online retailers’ challenge to Colorado tax scheme

Direct Marketing Association v. Brohl drops the Court into a dispute between states and Internet retailers that has been simmering for the last twenty years. We’re all familiar with the meme that the “Internet wants to be free.” Putting the pathetic fallacy to the side, there is a basic truth to the idea that the Internet’s facilitation of remote interaction has made it much harder, in many contexts, for governments to exercise the degree of supervision and control that was customary for much of the last century. For the states, one of the most important areas in which this plays out is sales taxes. If you have a revenue model that depends on the collection of sales tax from retailers, the ability of online retailers to sell things to your residents without paying sales tax posed a serious threat from the earliest days of Internet commerce.

From the legal perspective, that threat drew a lot of support from the Court’s 1992 Commerce Clause holding in Quill Corp. v. North Dakota that the states cannot force mail-order retailers to collect sales (or use) tax on goods that they ship into the jurisdiction; the significance of that decision grew markedly with the rise of online commerce shortly after the Court’s ruling. The severity of the problem has increased steadily since 1992. State budgets are under increasing strain for all the reasons we know too well; this means that state policymakers are desperate for every sales tax dollar they can find. At the same time, the steady shift of commerce from brick-and-mortar retailers to online retailers means that each year a smaller share of the state’s economy is subject to the sales tax.

To be clear, Quill does not say that North Dakota cannot impose a tax on the purchases Fargo residents make from It just says that North Dakota cannot make collect the tax. So most states have responded by enacting use taxes that require their residents to pay use taxes on goods that they purchase from out-of-state retailers. Unfortunately, as we all would admit after a moment of self-reflection, most of us do not voluntarily send in a use-tax return to our state of residence each year paying taxes on our online purchases from the previous year. Against that setting, Colorado adopted a statute that requires retailers to keep track of the sales they make to Colorado residents and at the end of each year send a statement of the total sales to each resident, with a copy to the state. With that information, the state readily can pursue residents who don’t pay the use tax voluntarily; the system is modeled directly on the IRS’s Form 1099 and well might turn out to be just as effective.

On Monday the Court will consider the litigation that results from Colorado’s creative statute. The retailers, predictably enough, complain that the Colorado tax system is a flagrant violation of the Commerce Clause, attempting to circumvent Quill by imposing a burden of information collection and reporting that applies only to out-of-state retailers. Colorado, just as predictably, regards the system as a routine and unexceptionable aspect of tax administration.

Unfortunately for first-year constitutional law teachers, this case will not resolve that dispute. Rather, it will answer a question more typical of a “federal courts” course: does the Tax Injunction Act (referred to in the briefs as the TIA) prevent the retailers from filing suit in federal court to challenge the Colorado tax scheme? The Tenth Circuit held that it did, and the Supreme Court granted review to address that question.

I am sure that the parties do not see it this way, but I see a pretty standard text versus policy problem. What the retailers have on their side is the text of the TIA. The only thing that the TIA limits is an order that would “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” The lawsuit here challenges the information collection and reporting obligations of the Colorado statute; it is hard to see information collection and reporting as the “assessment, levy or collection” of a tax. That intuition is bolstered by a comparison to similar statutes, the most notable of which is the Anti-Injunction Act. The TIA’s limitation to suits about “assessment, levy or collection” is not common to those statutes, several of which predate the adoption of the TIA. All of this suggests that the language should be read to make the TIA’s protection relatively narrow – powerful points for the retailers.

Colorado has two points in its favor: the practicalities of the situation and the Court’s long tradition of articulating atextual “federalist” doctrines to protect the states from intrusive federal action. On the first point, I already mentioned above the catastrophic consequences online retailing has had upon the states; the briefs suggest that the annual uncollected use taxes exceed $10 billion. As you would expect when a party is relying heavily on claims that the sky is falling, Colorado can draw upon a series of powerful amici: a large group of state government trade groups for one (the National Governors Association, National League of Cities, etc.); a brief filed by a large group of states; and even a brief filed by a group of law professors emphasizing how integral the reporting requirements are to the collection of any use tax.

On the second point, Colorado calls on the Court’s tradition of comity to justify extending the TIA to protect its system. And that tradition will be at its zenith in a case involving the state’s taxing power. Given the vagueness and lack of textual grounding of the Court’s common forays into doctrinal areas like “Our Federalism” and the Eleventh Amendment, it is difficult to predict how those arguments will play to the Justices.

So I’ll be most interested to see what this case looks like at the argument next week. My best guess is that Colorado will have a hard time. As emphasized above, this is not a case that involves a heavily malleable constitutional provision like the Commerce Clause; when that case arrives, the practical concerns well might make the Court think twice before extending Quill to ban this system. What the Court has here, rather, is a statutory case, and the statutory text is simply not broad enough to make this an easy case for Colorado.   Surely the practical concerns will motivate some of the Justices to search for a way to read the language more broadly. And perhaps the federalism and comity concerns will drive some of the Justices in the same direction. But I’m guessing – in the era of the centralizing Roberts Court – that the Justices will think Colorado has no real complaint if the federal district court moves this case forward to adjudication of the Commerce Clause challenge on the merits.

Recommended Citation: Ronald Mann, Argument preview: Justices to consider online retailers’ challenge to Colorado tax scheme, SCOTUSblog (Dec. 4, 2014, 12:06 PM),