Federal Court Of Appeals Orders Dismissal Of Case Granting Injunction Against Colorado’s Sales And Use Tax Notice And Reporting Requirements

On August 20, the Tenth Circuit of the U.S. Court of Appeals ordered a U.S. District Court to dismiss a case in which a permanent injunction had been granted against the Colorado Department of Revenue that prevented the Department from enforcing Colorado's sales and use tax notice and reporting requirements for out-of-state (remote) retailers.1 After determining that the federal Tax Injunction Act (TIA)2 deprived the U.S. District Court of jurisdiction to enjoin Colorado's tax collection effort, the U.S. Court of Appeals remanded the case to the District Court to dissolve the permanent injunction and to dismiss the Commerce Clause claims raised by the remote retailers. Previously, the U.S. District Court had determined that Colorado's notice and reporting requirements violated the Commerce Clause of the U.S. Constitution. In remanding the case, the U.S. Court of Appeals did not consider the merit of the constitutional arguments.

Background

The Direct Marketing Association (DMA), which consists of businesses and organizations that market products directly to consumers via catalogs, print advertisements, broadcast media and the Internet, filed a lawsuit against the Department in U.S. District Court. In its lawsuit, the DMA challenged the constitutionality of Colorado's sales and use tax notice and reporting requirements for remote retailers by asserting violations of the Commerce Clause.3

The District Court granted the DMA's motion for a preliminary injunction against the Department that prevented enforcement of the notice and reporting requirements on remote retailers pending a final determination in the case.4 Both the DMA and the Department subsequently filed cross motions for summary judgment.

On March 30, 2012, the District Court granted a motion for summary judgment in favor of DMA and issued a permanent injunction against the Department that enjoined the enforcement of the notice and reporting requirements.5 The District Court concluded that Colorado's notice and reporting requirements discriminated against and placed undue burdens on interstate commerce, in violation of the Commerce Clause. The Department appealed the District Court's decision.

Notice and Reporting Requirements

On February 24, 2010, Colorado enacted legislation (the Act) that imposes notification and reporting requirements on remote retailers making Colorado sales.6 Under the Act and the associated regulations promulgated by the Department, remote retailers that did not collect Colorado sales and use taxes are required to notify customers that they are obligated to self-report and remit use tax on their purchases.7 Remote retailers that did not collect tax are also required to provide Colorado customers with an annual report by January 31 of each year, via first-class mail, detailing a customer's purchases in the previous year and notifying the customer that the retailer was required to report the customer's name and amount of purchases to the Department.8 Finally, remote retailers that did not collect tax are also required to report to the Department, the name, billing...