The US Court of Appeals for the Tenth Circuit (the court) issued its much anticipated ruling in Direct Marketing Association,¹ holding that a Colorado statute, which requires remote sellers lacking physical presence within the state to file an annual statement with the Colorado Department of Revenue (Department) showing the total amount paid for Colorado purchases during the preceding calendar year for each Colorado purchaser, does not violate the dormant Commerce Clause.

The statute, which also requires non-collecting remote retailers to notify Colorado purchasers that use tax is due on purchases made from the retailer, and that the purchaser must file a use tax return, was enacted in 2010 and was set to take effect on January 31, 2011. Before that date, however, the US District Court for the District of Colorado issued an injunction barring enforcement of the statute, and subsequently ruled that the law violated the "dormant" Commerce Clause both by discriminating against, and placing an undue burden on, interstate commerce.² In 2013, the Tenth Circuit concluded that the suit was barred from being heard in the federal courts by the Tax Injunction Act (the TIA),³ which provides that the "[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." That decision was reversed by the US Supreme Court, which concluded that the TIA did not bar the case from federal court because the statute at issue did not implicate the "assessment, levy or collection" of a state tax.⁴

On remand, the court first determined that the analysis of whether a tax on interstate commerce is permissible under the dormant Commerce Clause, as provided by the US Supreme Court in Complete Auto Transit,⁵ does not apply because this case involves a reporting requirement, not a tax. The court further held that the scope of the physical presence nexus standard set forth in Quill⁶ "applies narrowly to sales and use tax collection," noting that the Supreme Court "has not extended the physical presence rule beyond th[at] realm." Accordingly, the court found that the district court erred in striking down the statute on that ground.

The court next addressed the District Court's finding that Colorado's remote seller notification statute discriminates against, and unduly burdens, interstate commerce. Here, the court found that the statute does not discriminate against interstate commerce, either facially or in-effect. With respect to facial discrimination, the court noted that the statute does not distinguish between in-state and out-of-state economic interests but, rather, imposes differential treatment based on "whether the retailer collects Colorado sales or use taxes" without geographic distinction. In regard to the discriminatory effect analysis, the court explained that the statute conferred no competitive advantage on in-state retailers that were not similarly situated with remote sellers, and that already were required to collect Colorado sales and use taxes.

The court then considered the Department's position that the statute was not discriminatory in-effect because remote retailers could either comply with the notice and reporting requirements or collect and remit taxes like in-state retailers. The Direct Marketing Association (DMA) argued that the Department's argument fails because Quill protects out-of-state retailers from having to collect and remit taxes, effectively making the statute's only function "to impose new notice and reporting responsibilities on out-of-state retailers that in-state retailers need not perform." In rejecting DMA's argument, the court noted that Quill does not establish that out-of-state retailers are free from all regulatory requirements, but applies only to the collection of sales and use taxes, which function is not implicated by the Colorado remote seller notification statute. As such, the court explained, the "notice and reporting obligations are discriminatory only if they constitute 'differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.'" Such treatment, the court concluded, was not proved because "DMA does not point to any evidence establishing that the notice and reporting requirements for non-collecting out-of-state retailers are more burdensome than the regulatory requirements in-state retailers already face."

Regarding whether the statute created an undue burden on interstate commerce, the court examined whether "the burdens imposed by the [notice requirement] are inextricably related in kind and purpose to the burdens condemned in Quill," as the District Court had concluded. First, the court referred to the US Supreme Court's decision on the application of the TIA to determine that Quill was not controlling. Specifically, the court noted that, by arguing that the TIA did not bar the suit in federal court because the statute at issue did not relate to the assessment, levy or collection of use tax on behalf of Colorado, the DMA could not subsequently argue that Quill applies. As such, having determined Quill did not apply to the case, and failing to "identify any good reason to sua sponte extend the bright-line rule of Quill to the notice and reporting requirements of the Colorado Law," the court concluded that the notice requirement did not discriminate against or unduly burden interstate commerce.

Implications

The court's decision is not surprising, given the US Supreme Court's 2015 ruling that the Colorado remote seller notification statute did not implicate the "assessment, levy or collection" of a state tax. Based on that decision, the court would have been required to expand the Quill physical presence requirement beyond the scope of sales and use tax collection; given Justice Anthony Kennedy's concurring opinion in the earlier Direct Marketing Association case, in which he called for a reexamination and potential reversal of Quill, such a result was unlikely. It also appears unlikely that the US Supreme Court will hear an appeal of this decision, or use such an appeal as a vehicle for overturning Quill. In our view, a more likely occasion for such a review would be the potential challenge to Alabama's "economic presence" nexus standard, which became effective January 1, 2016, and which directly contradicts the Quill nexus standard. As of this decision, no such challenge has been filed, and at least two other states — Rhode Island and South Dakota — have introduced similar bills.⁷

For now, the court's decision likely will serve as a signal for the states to adopt similar provisions requiring online and other remote sellers that maintain a narrow "nexus footprint" to comply with significant state sales and use tax reporting requirements. As recently as 2010, the Multistate Tax Commission (MTC) was working on draft legislation modelled after the Colorado notice statute. That project could now find new life in the wake of this decision and state revenue authorities and legislatures could adopt it as their own, even without any additional action by the MTC. Should this occur on a wide scale, remote sellers will need to consider whether to simply register, report, collect and remit sales tax, rather than burdening themselves with what could be onerous, costly and complex sales and use tax reporting requirements that would be imposed by these remote seller notification laws.

Finally, it is worth noting that, should a number of states begin to adopt similar notice requirements, Congress may be forced to act through one of the remote seller nexus bills currently pending in both houses.⁸ As noted by the court in its conclusion, paraphrasing the Quill Court, "Congress holds the 'ultimate power' and is 'better qualified to resolve' the issue of 'whether, when, and to what extent the States may burden interstate [retailers] with a duty to collect [sales and] use taxes.'" Given that the likely outcome of the states each enacting a complex variety of sales and use tax reporting requirements in response to this ruling, having Congress enact a national, uniform nexus standard for sales and use tax collection may prove to be a more viable alternative for remote sellers throughout the US.

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ENDNOTES

¹ Direct Marketing Ass'n. v. Brohl, No. 12-1175 (10th Cir. Feb. 22, 2016).

² Direct Mktg. Ass'n. v. Huber, No. 10-cv-01546-REB-CBS (D. Colo. March 30, 2012).

³ 28 USC. Section 1341.

⁴ Direct Mktg. Ass'n. v. Brohl, 574 US __ (2015). For more on the US Supreme Court's ruling, see Tax Alert 2015-455.

⁵ Complete Auto Transit, Inc. v. Brady, 430 US 274 (1977). Under the Complete Auto Transit analysis, a tax on interstate commercial activity is constitutional if it:1) applies to an activity with a substantial nexus with the taxing State; 2) is fairly apportioned; 3) does not discriminate against interstate commerce; and 4) is fairly related to the services provided by the State.

⁶ Quill Corp. v. North Dakota, 504 US 298 (1992).

⁷ See 2016 R.I. H7375 and 2016 S.D. SB106.

⁸ See S. 698, "The Marketplace Fairness Act," and H.R. 2775, "The Remote Transactions Parity Act," which would authorize Streamlined Sales Tax Full-Member states, and states that adopt specified simplification provisions to require certain remote seller to collect and remit tax on sales to local customers regardless of whether the seller has in-state physical presence.