CSG Joins Amicus Brief in Internet Sales Tax Case

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 amicus brief, joined by The Council of State Governments, 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, the Colorado legislature in 2010 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 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 challenged the constitutionality of Colorado’s law in federal court. The association argued the Tax Injunction Act does not apply in this case because the association 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 10th Circuit disagreed and dismissed the association’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. Direct Marketing Association is seeking to invalidate third-party reporting requirements, which are an effective method of collecting such taxes. The SLLC’s brief argues the association’s lawsuit falls within the Tax Injunction Act’s jurisdiction because the association seeks to prevent the assessment and collection of a state tax and precedent indicates that it does not matter that the association 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 the National Conference of State Legislatures, at least three other states—Oklahoma, South Dakota and Vermont— recently have enacted reporting requirements on remote sellers.

All of the Big Seven members and the Government Finance Officers Association joined this brief.