Supreme Court To Hear Tax Injunction Act Case

On August 20, 2013, in Direct Marketing Association v. Brohl, the U.S. Court of Appeals for the Tenth Circuit held that the federal Tax Injunction Act (TIA) prohibited the U.S. District Court for the District of Colorado from ruling on the Direct Marketing Association's (DMA) challenge to Colorado's use tax notice and reporting requirements.735 F.3d 904 (10th Cir. 2013). The Supreme Court of the United States has granted certiorari and will hear the case during its October 2014 term.

State Court Bias and the Tax Injunction Act

Among state and local tax practitioners there exists the perception that state court judges, despite their sincere efforts, have difficulty remaining unbiased when hearing state tax cases. The concern is that the judges may be unconsciously biased against the claims of taxpayers because the judges themselves are inextricably entwined with state government. Every decision in favor of a taxpayer results in a reduction of revenue for the state—the ultimate payor of the judge's salary—and perhaps a slap in the face of the judge's colleagues in state government. As a result, they may improperly take the loss of state government revenue and power into consideration when determining case outcomes.

Taxpayers can point to numerous examples of state courts considering the loss of state government revenue when issuing a ruling. For example, in Exelon Corp. v. Illinois Department of Revenue, the taxpayer successfully convinced the Illinois Supreme Court that electricity was tangible personal property, and thus the taxpayer was entitled to the investment credits for taxpayers engaged in retailing tangible personal property. 917 N.E.2d 899 (Ill. 2009). However, following a motion for rehearing, the court limited its holding to prospective application only. In Miller v. Johnson Controls, Inc., the Kentucky Supreme Court upheld legislation retroactively prohibiting refunds resulting from the change from separate unitary filing to unitary combined filing. 296 S.W.3d 392 (Ky. 2009). The court held that the retroactive application did not violate the taxpayer's due process and equal protection rights because the legislation was rationally related to the legitimate governmental purpose of preventing the loss of revenue. See Arthur R. Rosen & Julie M. Skelton, "Desperately Seeking State Tax Fairness: The Need for Federal Adjudication," 61 State Tax Notes 357 (Aug. 8, 2011). Based on these decisions, taxpayers' worries about state court bias may be for good reason.

Taxpayers have long desired a way to engage in federal court adjudication to receive impartial treatment. Despite concerns about state court bias, the TIA and its common law basis, comity, prohibit taxpayers from petitioning federal courts for the...