Supreme Court Holds Challenge to Colorado Reporting Requirements Can Go Forward

By James A. Beavers, J.D., LL.M., CPA, CGMA

State & Local Taxes

Reversing the Tenth Circuit, the Supreme Court held that the Tax Injunction Act did not bar a suit that sought to enjoin the state of Colorado from enforcing a law requiring out-of-state sellers to notify Colorado customers of their use tax liability for purchases and report tax-related information about the purchases to the customers and the Colorado Department of Revenue.


Colorado has a complementary sales-and-use tax regime imposing a 2.9% tax on sales of tangible personal property within the state and an equivalent use tax for any property stored, used, or consumed in Colorado on which a sales tax was not paid to the retail seller (retailer) of the property. Retailers with a physical presence in Colorado must collect the sales or use tax from purchasers at the point of sale and remit the proceeds to the Colorado Department of Revenue (DOR). However, under the Supreme Court's negative Commerce Clause precedents, as expressed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and other cases, Colorado may not require retailers who lack a physical presence in the state to collect these taxes on behalf of the department. Therefore, since the state cannot force these retailers to collect the sales tax due on sales to Colorado residents, Colorado law requires its residents who purchase tangible personal property subject to sales tax for which the seller did not collect sales tax to fill out a use tax return and remit use tax on the purchase to the DOR directly.

Because the DOR has no practical way to enforce this requirement to report and pay use tax, few taxpayers voluntarily file a return and pay the use tax they owe. This fact, combined with the rapidly increasing number of purchases by Colorado residents from internet retailers, who typically are not required to collect Colorado sales tax, has led to Colorado's losing an ever-growing amount of sales and use tax revenue. Like all the other states in this position, Colorado was and continues to be very unhappy about this state of affairs.

Colorado, however, decided to quit complaining about the revenue loss and do something about it. The state enacted legislation in 2010 imposing notice and reporting obligations on out-of-state retailers that did not collect Colorado sales tax (noncollecting retailers) whose gross sales in Colorado exceed $100,000. The legislation (Colo. Rev. Stat. §39-21-112(3.5)) required noncollecting retailers to:

  • Notify Colorado purchasers during each transaction that sales or use tax is due on certain purchases and that the state of Colorado requires the purchaser to file a sales or use tax return, subject to a per transaction penalty for failure to comply.
  • Send a report by Jan. 31 of each year to all Colorado purchasers who bought more than $500 worth of goods from the retailer in the previous year listing the dates, categories, and amounts of those purchases, and containing a notice stating that Colorado requires the purchaser to file a return and pay the use tax. The retailer is subject to a per report penalty for failure to comply.
  • Send, by March 1 of each year, a statement to the DOR listing the names of their Colorado customers, their known addresses, and the total amount each Colorado customer paid for Colorado purchases in the prior calendar year, subject to a per customer penalty for a failure to list a customer required to be listed in the report.

As would be expected, out-of-state retailers who sell property to Colorado customers objected to these requirements. The law affected many noncollecting retailers that are members of the Direct Marketing Association, a trade association of businesses and organizations that market products directly to consumers via catalogs, print advertisements, broadcast media, and the internet. On behalf of its members, the DMA brought suit in federal district court seeking to prevent the DOR from enforcing the reporting requirements.

In its suit, the DMA alleged that the notice and reporting requirements of the law violated the U.S. and Colorado constitutions. Among its allegations, the DMA argued that the law (1) discriminated against interstate commerce and (2) imposed undue burdens on interstate commerce in violation of the Supreme Court's negative Commerce Clause precedents in Quill and other cases. At the request of both parties, the district court stayed all challenges to the law except these two, in order to facilitate expedited consideration. It then granted partial summary judgment to DMA and permanently enjoined enforcement of the notice and reporting requirements.

Colorado appealed the case to the Tenth Circuit, which reversed the district court's decision. Without reaching the merits, the Tenth Circuit held that the district court lacked jurisdiction over the suit because of the Tax Injunction Act (TIA), 28 U.S.C. Section 1341. Acknowledging that the suit "differs from the prototypical TIA case," the court nevertheless found it barred by the TIA because, if successful, it "would limit, restrict, or hold back the state's chosen method of enforcing its tax laws and generating revenue."

The DMA appealed the Tenth Circuit's decision to the Supreme Court, which agreed to hear the case.

The Tax Injunction Act

The TIA, which was enacted in 1937, provides that "[t]he 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."

The Supreme Court's Decision

The Supreme Court held that the TIA did not bar the DMA's challenge to the Colorado reporting statute and remanded the case to the Tenth Circuit. The Court found the relief the DMA sought would not "enjoin, suspend or restrain the assessment, levy or collection of any tax under State law" because the reporting and notice requirements of the Colorado law were not encompassed by the terms "assessment," "levy," and "collection" in the TIA and the term "restrain" in the context of the TIA did not mean any action that would merely inhibit the assessment, levy, or collection of any tax.

The Court found that the terms "assessment," "levy," and "collection" in the TIA do not encompass Colorado's enforcement of its notice and reporting requirements because, read in light of the Code, they refer to discrete phases of the taxation process that do not include informational notices or private reports of information relevant to tax liability. The court observed that information gathering has long been treated as a phase of tax administration that occurs before assessment, levy, or collection. Despite Colorado's portrayal of the notice and reporting requirements as part of its assessment and collection process, the Court found that Colorado's assessment and collection procedures are triggered after it has received the returns and made the deficiency determinations that the notice and reporting requirements are meant to facilitate. While the reporting requirements might improve Colorado's ability to assess and ultimately collect its sales and use taxes, the TIA did not cover all such activities. The Court stated that such a rule would be inconsistent with the statute's text and its rule favoring clear boundaries in the interpretation of jurisdictional statutes.

The Court also addressed the Tenth Circuit's reliance on the idea that the TIA barred the suit because it restrained the assessment, levy, or collection of Colorado's sales and use tax. Specifically, the Tenth Circuit defined the term "restrain" broadly to mean "inhibit" and thus concluded that the TIA bars any suit that would inhibit the assessment, levy, or collection of state taxes.

The Court found that while the word "restrain" could be defined as broadly as the Tenth Circuit defined it, the Court determined that the context in which the TIA uses the word "restrain" indicated that the narrower meaning of the term used in equity, which only applies to orders that stop acts of assessment, levy, or collection, should be used. The Court noted that the verbs accompanying "restrain" in the statute, "enjoin" and "suspend," are terms of art in equity jurisprudence that refer to different equitable remedies that restrict or stop official action. This strongly suggested to the Court that "restrain" also did so. Additionally, in the TIA, "restrain" acts on "assessment," "levy," and "collection," a carefully selected list of technical terms. The Court found that using a broad meaning of restrain would defeat the precision of that list and render the terms "assessment" and "levy," as well as the terms "enjoin" and "suspend," meaningless.

In addition, the Court asserted that giving "restrain" its meaning in equity was consistent with its recognition in Tully v. Griffin, Inc., 429 U.S. 68 (1976), that the TIA "has its roots in equity practice." Finally, the Court concluded that giving "restrain" a narrower meaning rather than a broad one would be in line with the rule that "[j]urisdictional rules should be clear."


The Court's majority opinion, which answers the legal question actually at hand, is unexceptional. Not so the concurring opinion of Justice Anthony Kennedy, in which, after summarily stating he is in complete agreement with the majority opinion, he calls for the Court to revisit its decision in Quill in light of what he states "may well be a serious and continuing injustice faced by Colorado and many other States." Kennedy makes it clear that he supports greatly relaxing or eliminating the Quill physical presence nexus standard for sales and use taxes because the standard in Quill is now "inflicting extreme harm and unfairness on the States." However, Kennedy seems to ignore the fact that his remedy for this "injustice, harm, and unfairness" to the states would cause much higher overall sales tax liabilities to the residents of those states.

Direct Marketing Ass'n v. Brohl, No. 13-1032 (U.S. 3/3/15)

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