03.06.2015 U.S. Supreme Court’s Decision in Direct Marketing – Out of State Retailers may be in for a Shock!


The U.S. Supreme Court has ruled in one of the three state and local tax cases argued in this term - Direct Marketing Association v. Brohl, 575 U.S. __(2015)

At first glance, the Court’s ruling adds clarity to the Tax Injunction Act (“TIA”) and state taxpayers’ attempts to use the federal courts to prohibit a state’s ability to tax.  The TIA bars action against a state in federal courts if the action would “enjoin, suspend or restrain the [state’s] assessment, levy or collection” of a state level tax. The unanimous Court held the action brought by the Direct Marketing Association (“DMA”) did not fall into the prohibited actions and therefore could progress.  The DMA sought to have Colorado’s requirement that out of state sellers that did not collect the Colorado use tax inform their customers that Colorado use tax was owed on their purchases and also provide Colorado a list of the Colorado buyers and their identifying information. 

The Supreme Court held that Colorado’s requirement to inform customers and provide Colorado the list was not part of the activities that are covered by the TIA (assessment, levy and collection) and therefore DMA was not prohibited from using a federal court to enjoin the state from requiring the  out of state seller  to perform the notice and reporting requirements. It should be noted that the Court “takes no position on whether a suit such as this might be barred under the “comity doctrine” which “counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction.” citing Levin v. Commerce Energy, Inc. 560 U.S. 413, 421. 

What is of the most interest in this case is Justice Kennedy’s concurring opinion in which he brings up “what well may be a serious, continuing injustice faced by Colorado and many other states.”  The “injustice” being the Court’s previous ruling in Quill Corp. v. North Dakota, a 1992 case involving out of state catalog sales and the states’ ability to impose sales or use taxes on those sales.  This signature sales and use tax case, following the Court’s previous ruling in National Bellas Hess, Inc. v. Department of Revenue of Ill., set the “physical present test” that has prohibited states from imposing sales/use taxes on out of state sales to instate citizens.  Justice Kennedy provides a brief but on point discussion on the rise of internet sales and the resulting loss of tax revenues by most of the states.  It should also be noted that Justice Kennedy voted with the majority in Quill and is considered a “swing” vote.  Should another “Quill” type case come up before the Supreme Court, the Justice’s words appear to indicate that he would think twice before following stare decisis and applying the holding in Quill to an out of state sale.