United States: Taxpayers And Retailers Be Warned!

Last Updated: June 1 2016
Article by Mark P. Rotatori, E. Kendrick Smith and Meghan S. Bean
Most Read Contributor in United States, September 2019

The Tenth Circuit's Recent Decision in Brohl Presents the Supreme Court with an Opportunity to Reconsider Quill and the Physical Presence Requirement for the Collection of Sales and Use Tax

On February 22, 2016, the United States Court of Appeals for the Tenth Circuit ruled in favor of the Colorado Department of Revenue ("Department") in a case that could have striking implications for both retailers and taxpayers. In Direct Marketing Association v. Brohl, No. 12-1175 (10th Cir.), the Tenth Circuit upheld Colorado's use tax reporting law. Specifically, the court held that the information reporting law does not violate the dormant Commerce Clause because it does "not discriminate against nor does it unduly burden interstate commerce." In so holding, the court narrowly construed the U.S. Supreme Court's decision in Quill Corp. v. North Dakota as applying only to "sales and use tax collection" and not to tax reporting requirements. The Tenth Circuit denied Direct Marketing Association's ("DMA") petition for rehearing en banc on April 1, 2016.

Background and Procedural Posture

The Colorado legislature passed a law in 2010 imposing three information obligations on out-of-state retailers that do not collect the state's sales tax. They are to send: (i) a "transactional notice" to in-state Colorado purchasers informing them that they may be subject to Colorado's use tax; (ii) an "annual purchase summary," which includes the dates, categories, and purchase amounts, to Colorado purchasers who buy goods from the retailer totaling more than $500, reminding those purchasers of their obligation to pay use tax on those purchases; and (iii) an annual "customer information report" listing customers' names, addresses, and total amounts spent to the Colorado Department of Revenue.

Later that year, DMA filed a facial challenge to the Colorado law in federal district court. Among other claims, DMA argued that the law violates the dormant Commerce Clause of the United States Constitution because it discriminates against and unduly burdens interstate commerce. On March 30, 2012, the district court granted summary judgment to DMA on both grounds and permanently enjoined the Department from enforcing the law. See Direct Mktg. Ass'n v. Huber, No. 10-cv-01546-REB-CBS, 2012 WL 1079175, at *10-11 (D. Colo. Mar. 30, 2012).

On appeal, the Tenth Circuit on August 20, 2013, vacated the injunction, holding that the district court lacked jurisdiction to entertain DMA's challenge under the Tax Injunction Act ("TIA"). See Direct Mktg. Ass'n v. Brohl ("Brohl I"), 735 F.3d 904, 906 (10th Cir. 2013). The Tenth Circuit remanded the case to the district court, directing it to dismiss DMA's claims and dissolve the injunction. The Tenth Circuit denied en banc review of that ruling. On December 10, 2013, the district court dismissed DMA's claims and dissolved the injunction. Shortly after, the court dismissed the remainder of DMA's claims without prejudice.

DMA filed a Petition for Certiorari with the U.S. Supreme Court, which was granted on July 1, 2014. On March 3, 2015, the Supreme Court reversed the Tenth Circuit and held that the TIA did not preclude federal courts from entertaining DMA's challenge to the tax information reporting requirements. See Direct Marketing Ass'n v. Brohl ("Brohl II"), 135 S. Ct. 1124 (2015). In concurrence, Justice Kennedy significantly acknowledged "startling revenue shortfall[s]" in many states and urged the "legal system" to "find an appropriate case for the Court to reexamine Quill." The U.S. Supreme Court remanded the case to the Tenth Circuit for further consideration. One should remember, however, that Quill was itself structured not to require judicial overruling to address the Commerce Clause concerns, instead explicitly leaving those issues to Congress. Justice Kennedy's invitation to find an appropriate case reflects his apparent view as one Justice that 25 years is more than enough patience and that Congress's inaction will no longer suffice to leave the Quill rule in place.

Brohl III

With one jurisdictional issue settled by the Supreme Court, the Tenth Circuit stated that its "focus ... is whether a state law improperly interferes with interstate commerce." The court concluded that Quill's limitations apply only "narrowly to sales and use tax collection." Because the Colorado law at issue dealt only with regulatory reporting requirements and not tax collection, the court held that Quill did not control. The Tenth Circuit went on to explain how the district court's improper application of Quill resulted in its erroneous holding that the Colorado law is discriminatory. Similarly, the Tenth Circuit rejected DMA's undue burden argument, holding that Quill's nonapplicability to the Colorado reporting requirements "ends the undue burden inquiry." Thus, the court ruled in favor of the Department and reversed the district court's determination that the Colorado use tax reporting requirements violate the dormant Commerce Clause.


Given the Tenth Circuit's denial of en banc review, DMA must decide whether it will again seek U.S. Supreme Court review of the appellate court's decision. Should DMA file a Petition for Certiorari, this iteration of the litigation may provide the Supreme Court with the opportunity to reconsider Quill. Should the Tenth Circuit's decision ultimately stand, however, it may encourage cash-strapped states to impose strict regulatory obligations that—although requiring expanded reporting of transactional information but not directly collecting taxes—indirectly seek to increase the tax amounts collected.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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