Legal Matters: Direct Marketers Take Colorado to the Supreme Court

Many online merchants have been watching closely the saga of the Direct Marketing Association's (DMA) constitutional challenge to a 2010 Colorado law targeting remote sellers. This legislation would require out-of-state catalog and internet retailers that do not collect Colorado state and local sales tax to turn over customer transaction information to the Colorado Department of Revenue.

The statute also requires those merchants to provide notices to their customers — both at the time of the transaction and by an annual First Class mailing — of their obligation to self-report taxes. The DMA filed its lawsuit in the United States District Court in Denver and obtained both a preliminary injunction and a permanent injunction barring the state from enforcing the law. The federal district court found that the statute violated the Commerce Clause of the United States Constitution because it discriminated against out-of-state retailers and was a burden on interstate commerce.

The injunction was dissolved, however, in late 2013 after the United States Court of Appeals for the Tenth Circuit ruled that a federal law known as the Tax Injunction Act (TIA) deprived the federal district court of jurisdiction to hear the case. The appellate court ruled that only the state courts in Colorado had jurisdiction over a challenge to the way the state's taxes are administered — even if the objection is based on federal constitutional grounds and doesn't involve the appeal of a tax assessment.

The DMA lawsuit objects to the notice and reporting obligations imposed on out-of-state retailers. Because the DMA believed that the appellate court ruling was incorrect, as well as being in conflict with the jurisdictional standard adopted by United States Courts of Appeal in other parts of the country, it filed a petition for a writ of certiorari asking the United States Supreme Court to review the decision. On July 1, 2014, the U.S. Supreme Court granted the DMA's petition, and the case will be scheduled for oral argument beginning in December of this year. The Supreme Court accepts review in only about 70 out of 7,000 petitions filed each year (a mere 1 percent).

Following the 10th Circuit decision dismissing the case, the DMA proceeded to file a new lawsuit in state court on the same constitutional grounds as previously alleged in federal court. On Feb. 18, 2014, the Colorado State District Court for the City and County of Denver granted the DMA's motion for a preliminary injunction and barred enforcement of the Colorado notice and reporting law. Now that the U.S. Supreme Court has agreed to review the jurisdictional issue, the state court judge has stayed further proceedings, and the preliminary injunction will remain in place until the Supreme Court issues its ruling.

The precise question presented by the DMA's appeal is as follows:

"Whether the Tax Injunction Act bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the informational notice and reporting requirements of a state law that neither imposes a tax, nor requires the collection of a tax, but serves only as a secondary aspect of state tax administration?"

This case has attracted interest from a large number of industry groups that are concerned about a restriction on access to federal court when nonresident companies' constitutional rights have been violated by state tax laws. Several trade associations plan to file amicus curiae, or "friend of the court," briefs in support of the DMA's position.

Impact to Online Retailers
When an out-of-state company is forced to bring its federal constitutional claims (e.g., Commerce Clause, Due Process, Equal Protection, etc.) before a state court judge rather than to a federal court, a common fear is that the state tribunal may be biased against the out-of-state company and that the scales of justice will be tilted in favor of the state. In the current case, Colorado has enacted a law targeted exclusively at companies that are not located in the state, are not Colorado taxpayers, have not been issued an assessment for any tax, and do not owe the state any money.

In the face of such a statute, it's not surprising that a non-Colorado retailer would be concerned about the neutrality and fairness of the forum in which its federal constitutional rights are to be determined. Indeed, no matter how competent and objective a state judge may be (the DMA did, in fact, obtain a preliminary injunction from a state court judge), it's a reasonable apprehension that a nonresident business will be disadvantaged and on the wrong side of some "home cooking" because of its foreign status in a state court. How those individuals and corporations whose fate and affairs will be decided in a court of law view our system of justice is critical to the integrity of America's legal system.

The DMA's position is that the TIA, which was enacted by Congress in 1937, was for the limited objective of requiring state taxpayers to follow established state procedures to protest tax assessments or file claims for refund if they claim they don't owe the taxes assessed against them. Forced recourse to state courts to assert federal constitutional objections by nontaxpayers serves no legitimate policy objective and isn't consistent with the original intent of the TIA. Indeed, such a strained interpretation of the TIA would deprive those online merchants most affected by the Colorado law access to the judicial forum in which they have the most confidence that their claims will be judged free from any bias that might result from an elected state judiciary or a predisposition towards local commercial interests.

The Supreme Court will likely issue a decision sometime in the spring of 2015. If the Supreme Court agrees with the DMA's argument and reverses the decision of the 10th Circuit Court of Appeals, then the case will be returned to the 10th Circuit for it to rule on the merits of the DMA's constitutional challenge to the Colorado notice and reporting law. If the Supreme Court affirms the 10th Circuit ruling, then the state court lawsuit will resume and that court will decide whether to issue a permanent injunction against the Colorado law.

George S. Isaacson is a senior partner at Brann & Isaacson, a direct marketing law firm. George can be reached at gisaacson@brannlaw.com.