In Direct Marketing Association v. Brohl the Supreme Court will decide whether a federal court is barred from deciding a constitutional challenge to a Colorado law that requires remote sellers who don’t collect state sales tax to comply with notice and reporting requirements. The State and Local Legal Center’s (SLLC) amicus brief, joined by ICMA, argues that federal courts are so barred.  

Per the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, states cannot require retailers with no in-state physical presence to collect state sales tax. To improve tax collection, in 2010 the Colorado legislature began requiring remote sellers to inform Colorado purchasers annually of their purchases and send the same information to the Colorado Department of Revenue.

The Tax Injunction Act (TIA) states that federal courts may not “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law” where a remedy is available in state court. Regardless, Direct Marketing Association (DMA) challenged the constitutionality of Colorado’s law in federal court. DMA argued that the TIA does not apply in this case because DMA isn’t a taxpayer and Colorado “neither imposes a tax, nor requires the collection of a tax, but serves only as a secondary aspect of state tax administration.” The Tenth Circuit disagreed and dismissed DMA’s lawsuit.

The SLLC’s amicus brief, filed in support of Colorado, points out that state and local governments are losing an estimated $23 billion in annual tax revenue to remote sales. DMA is seeking to invalidate third-party reporting requirements, which are an effective method of collecting such taxes. The SLLC’s brief argues that DMA’s lawsuit falls within the TIA’s bar because DMA seeks to prevent the “assessment” and “collection” of a state tax and precedent indicates that it does not matter that DMA isn’t a taxpayer.

Until Congress passes the Marketplace Fairness Act, which would authorize states to require remote vendors to collect sales tax, states will continue to experiment with methods to collect sales tax owed but not paid. According to NCSL, at least three other states (Oklahoma, South Dakota, and Vermont) have recently enacted reporting requirements on remote sellers.