The United States Supreme Court released a unanimous decision today holding that the Tax Injunction Act (TIA), 28 U.S.C. § 1391, does not bar suit in federal court to enjoin the enforcement of Colorado notice and reporting requirements imposed on noncollecting out-of-state retailers. See Direct Marketing Ass’n v. Brohl, No. 13-1032, 575 U.S. ___ (March 3, 2015), available here. These requirements, enacted in 2010, require retailers to (1) notify Colorado purchasers that tax is due on their purchases; (2) send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state; and (3) report information on Colorado purchasers to the state’s tax authorities. See Colo. Rev. Stat. § 39-21-112(3.5). The TIA provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.”
The Court’s Opinion
The Court held that although the notice and reporting requirements are part of Colorado’s overall assessment and collection process, none of the requirements constitute an “assessment,” “levy,” or “collection” within the meaning of the TIA. Specifically, the Court looked to the Internal Revenue Code (IRC) to determine that the terms are “discrete phrases of the taxation process that do not include informational notice or private reports of information relevant to tax liability.” See Slip Op. at 5-8 (noting that no “assessment” or “collection” within the meaning of the IRC occurs until there is a recording of the amount the taxpayer owes the Government, which the notice and reporting requirements precede). Justice Thomas, who authored the opinion, concluded that “[t]he TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.” Id. at 9.
The Court rejected the Tenth Circuit’s reliance on (and expansive interpretation of) the term “restrain” in the TIA. Justice Thomas explained that such a broad reading of the statute would “defeat the precision” of the specifically enumerated terms and allow courts to expand the TIA beyond its statutory meaning to “virtually any court action related to any phase of taxation.” Id. at 11. Instead, he assigned the same meaning to “restrain” that it has in equity for TIA purposes, which is consistent with its roots and the Anti-Injunction Act (the TIA’s federal counterpart). Therefore, the Court concluded that “a suit cannot be understood to ‘restrain’ the ‘assessment, levy or collection’ of a state tax if it merely inhibits those activities.” Id. at 12.
The Court’s decision took “no position on whether a suit such as this one might nevertheless be barred under the ‘comity doctrine,’” under which federal courts – as a matter of discretion, not jurisdiction – refrain from “interfering with the fiscal operations of the state governments in all cases where the Federal rights of persons could otherwise be preserved unimpaired.” Id. at 13. The Court left it to the Tenth Circuit on remand to determine whether the comity argument remained available to Colorado. Id.
Justice Kennedy’s Concurrence
Justice Kennedy joined the Court’s opinion, but wrote separately to take the opportunity to point out his views on the physical presence standard for sales and use tax purposes established by the Court in Quill Corp. v. North Dakota more than 20 years ago. 504 U.S. 298 (1992). Citing to the far-reaching systematic and structural changes in the economy caused by Internet commerce, Justice Kennedy expressed his view that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill . . . [because it] now harms States to a degree far greater than could have been anticipated earlier.” Brohl (Kennedy, J., concurring at 3). He went on to state that Quill “should be left in place only if a powerful showing can be made that its rationale is still correct.” Id. at 3-4. While Justice Kennedy noted that Brohl was not the proper case to resolve this issue, he requested litigants to bring “an appropriate case for this Court to reexamine Quill.” Id. at 4.
Practice Note: While the Court’s opinion can certainly be viewed as a taxpayer victory, it is overshadowed by Justice Kennedy’s concurrence calling for the reconsideration of Quill. In terms of the main issue resolved by Justice Thomas, the door to the federal courts is now open—at least insofar as the TIA is concerned—to state tax cases that do not directly involve the assessment, levy or collection of tax. Because a federal court is generally a more favorable forum for taxpayers to litigate, we expect additional attempts to resolve more tangential state tax issues in the federal court system.
