Opinion analysis: Online retailers win big in use-tax dispute – for now
on Mar 4, 2015 at 10:16 am
Justice Clarence Thomas’s opinion for the Court Tuesday in Direct Marketing Association v. Brohl gave online retailers a big victory – something that certainly wasn’t all that clear after the rocky time their counsel experienced at the oral argument. The case involves a question of paramount importance to online retailers, at least those whose business model depends on not charging sales taxes. Colorado has a statute that requires online retailers selling to Colorado customers to file a report each year advising Colorado tax authorities of the purchases local residents have made from that retailer. Collectively, the reports would facilitate the state’s collection of use taxes from local taxpayers for their online purchases; because the use taxes substitute directly for the sales taxes charged on retail purchases, effective enforcement would end the advantage online retailers have when they can sell tax free.
The Direct Marketing Association (a trade group for online retailers) promptly filed suit seeking an injunction against the tax; the defendant is the head of Colorado’s taxing authority. The retailers argued that the statute violates the Commerce Clause; they said it is nothing more than a device to avoid the Supreme Court’s holding in Quill v. North Dakota that online retailers ordinarily don’t have to pay sales tax. The district court agreed and issued an order enjoining enforcement of the statute. On appeal, though, the Tenth Circuit held that the order violated the Tax Injunction Act; it did not reach the merits of the statute’s constitutionality.
The thing most in doubt after the argument was what the Court would say to justify a ruling in favor of the retailers. It seemed clear at the argument that the Court did not agree with the retailers’ contention that the Tax Injunction Act bars an injunction only if it comes in a suit brought by a taxpayer. Because the retailers are not the ones obligated to pay the tax, that argument would mean that this suit was not covered by the statute at all.
Not surprisingly, given the discussion at the argument, the Court’s opinion did not take that route. Rather, it took a straightforward route to hang the result directly on the statute. The statute limits only those injunctions that reach “the assessment, levy or collection” of a tax. This statute imposes notice and reporting requirements, but those are nothing like assessment, levy, or collection. Emphasizing the technical meaning those terms have in federal tax law – one that would not include notice and reporting requirements – the opinion is written with a tone suggesting that the result is self-evident. As you might suppose, this is not so hard when there is no dissent.
What makes the case exciting, though, is Justice Anthony Kennedy’s concurrence. In addition to his “unqualified join and assent” to the “complete and correct” opinion of the Court, he wrote separately to emphasize his view that the Court should overturn Quill v. North Dakota and allow the states to impose sales taxes directly on the business of online retailers. The opinion is much more harmful now to the states than when it was decided; Justice Kennedy reports mail-order commerce of $180 million at the time of Quill (1992 – a few years before internet commerce), compared to more than three trillion dollars in 2008. Given the increased harm and the transformational effect on our society and economy of electronic communication, he calls for the Court to reconsider Quill as soon as possible. Now that is an opinion that will get noticed in the offices of some general counsels around the country on Wednesday morning!
PLAIN LANGUAGE: Colorado requires internet retailers like Amazon.com to send it reports about their customers in Colorado. Colorado wants to use those reports to force those customers to pay taxes when they buy online. The district court enjoined the statute, thinking it probably is unconstitutional. Without deciding whether the statute is valid, the Court said that the injunction can stand while the parties litigate about the statute itself.