March 03, 2015

Supreme Court Decides Direct Mktg. Ass'n. v. Brohl

On March 3, 2015, the Supreme Court decided Direct Mktg. Ass’n. v. Brohl, No. 13-1032, holding that the 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. §1341, does not bar a suit to enjoin enforcement of a Colorado law requiring retailers that do not collect Colo­rado sales or use tax to notify Colorado customers of their use tax liability and to report tax-related information to customers and the Colorado Department of Revenue.

The State of Colorado enacted legislation in 2010 requiring retailers whose gross sales in Colorado exceed $100,000 and who do not collect Colo­rado sales or use tax to notify Colorado customers of the customers’ use tax liability and to report tax-related information to customers and the Colorado Department of Revenue. Direct Marketing Association (DMA) is a trade asso­ciation of businesses and organizations that market prod­ucts directly to consumers, including consumers in Colorado. Many of DMA’s members have no physical presence in Colorado and choose not to collect Colorado sales and use taxes on Colorado purchases, and consequently are subject to Colorado’s notice and reporting requirements. In 2010, DMA brought suit in federal court in Colo­rado against the Colorado Department of Revenue, claiming that the state’s notice and reporting requirements violate provisions of the United States and Colorado Constitu­tions. The District Court granted partial summary judgment to DMA and permanently enjoined enforcement of the notice and reporting requirements. The 10th Circuit reversed and, without reaching the merits, held that the District Court lacked juris­diction over the suit because of the TIA.

The Supreme Court unanimously reversed, holding that the TIA did not bar the District Court from hearing the challenge to Colorado’s notice and reporting regime. The Court determined that, read in light of the Federal Tax Code, the terms “assessment,” “levy,” and “collection” in the TIA refer to discrete phases of the taxation process. The provision of information notices and reports is part of a phase of the taxation process that occurs before assessment. Even understood more broadly, the terms relate to actions taken after information has been reported to the taxing authority. According to the Court, “[e]nforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumers, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes.” Therefore, although the TIA is keyed to the acts of assessment, levy, and collections, “enforcement of the notice and reporting requirements is none of these.”

The Court further held that the Court of Appeals read the phrase “suspend or restrain” too broadly to mean “any suit that would ‘limit, restrict, or hold back’ the assessment, levy, or collection of state taxes.” Acknowledging that the term “restrain,” standing alone, can have several meanings, the Court adopted a narrower definition “consistent with the rule that ‘jurisdictional rules should be clear.’” Reading “restrain” in context with the surrounding terms, the Court held that the 10th Circuit’s broad definition would “defeat the precision of that list, as virtually any court action related to any phase of taxation might be said to ‘hold back’ ‘collection.’” The Court determined that under the narrower definition, “a suit cannot be understood to ‘restrain’ the ‘assessment, levy or collection’ of a state tax if it merely inhibits those activities.”

Justice Thomas delivered the opinion for a unanimous Court. Justice Kennedy filed a concurring opinion. Justice Ginsburg filed a concurring opinion in which Justice Breyer joined and in which Justice Sotomayor joined in part.

Download Opinion of the Court

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