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By Tripp Baltz
Sept. 1 — The Direct Marketing Association faces hurdles in reaching the U.S. Supreme Court on its challenge to Colorado's reporting regime for remote sales, practitioners told Bloomberg BNA.
However, unique questions of law may encourage the high court to accept review ( Direct Marketing Ass'n v. Brohl, U.S., No. 15A1259, petition for certiorari review 8/29/16 ).
The DMA's petition for certiorari, filed Aug. 29, seeks a reversal of the February ruling by the U.S. Court of Appeals for the Tenth Circuit, which found constitutional Colorado's 2010 law imposing notice and reporting requirements on remote retailers that don't collect and remit sales and use taxes to the state.
DMA argues Colorado's law violates the anti-discrimination doctrine of the dormant commerce clause by only requiring remote vendors to report consumer purchases to the state Department of Revenue and provide notice to purchasers of their obligation to pay Colorado's sales or use tax.
Whether that issue, and other questions raised by the case, will be compelling enough for the Supreme Court to consider, is now a topic of debate among tax practitioners.
Sources said Aug. 31 that the DMA faces long odds in persuading the Supreme Court to review the Tenth Circuit's decision. However, a state law that stands out may warrant the high court's scrutiny.
“It is very hard to get a petition for cert. granted—only 4 percent of cases are taken up,” June Summers Haas of Honigman Miller Schwartz and Cohn LLP in Lansing, Mich. told Bloomberg BNA. “On the other hand, this case is very novel. A state coming in to ask for tax information of out-of-state companies is unusual, and new for Colorado. But even for a novel question like this, it will be an uphill battle. The Supreme Court likes for the issue to be ripe or present a conflict between states.”
In its petition, DMA urges the Supreme Court to rule consistently with its long history of recognizing that a state law discriminates against interstate commerce when it imposes burdens on out-of-state businesses that in-state businesses aren't required to bear (see related story, this issue).
Opponents of the nearly 25-year-old standard in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which said only those sellers with an in-state physical presence are obligated to remit sales and use taxes, say the DMA's argument fails to reflect the larger context of state sales and use tax systems, in which many out-of-state retailers don't collect and remit taxes. This gives them, in the eyes of the states, an unfair advantage over in-state sellers that are required to pay the tax.
Haas said the DMA put forward a “great argument” in its 160-page petition, and the Supreme Court “is going to look at this hard.”
And although the Supreme Court rarely takes up state tax cases, “it wouldn't surprise me at all” if the court granted cert. to the DMA, said Joe Huddleston, executive director of Indirect Tax in the National Tax office for Ernst & Young LLP in Washington. “There are a couple of open-ended questions in this case, particularly the issue of burden analysis.”
To let stand the Tenth Circuit ruling would be to turn away from a “clear standard of review” that state laws that discriminate facially are subject to the “strictest scrutiny,” George Isaacson of Brann & Isaacson in Lewiston, Maine, attorney for the DMA, told Bloomberg BNA Aug. 29.
“The issue here is that the Tenth Circuit got it wrong,” he said. “Its ruling abandons established Supreme Court doctrine with regard to interstate commerce. This goes way beyond catalog companies and internet purchases. The Tenth Circuit has given a green light to states to be able to pass discriminatory laws, as long as those laws are phrased in a way that doesn't identify geographic distinctions. It's totally contrary to well-established precedent.”
Isaacson said he believes the case “stands a good chance” of meriting Supreme Court review. “The court has already heard this case once on the jurisdictional issue; the petition for cert. is to hear a different aspect of the case,” he said. However, “anybody trying to predict with any certainty what the U.S. Supreme Court will do is better off betting on the ponies than betting on the courts.”
Many practitioners say the potential ramifications for Quill won't be enough for the court to justify hearing the case.
“This is not the case that is going to resolve whether Quill is good law or not,” Haas said.
In an earlier jurisdictional phase of DMA v. Brohl that reached the Supreme Court, Justice Anthony M. Kennedy issued a concurrence that raised the question of whether the high court should revisit Quill. Kennedy's concurrence, which no other justice joined, said the high court should reexamine Quill, given changes in technology and consumer sophistication.
However, Kennedy also said the earlier version of DMA v. Brohl doesn’t raise the Quill issue in a manner appropriate for the court to address it. “The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess,” Kennedy said. Bellas Hess is a 1967 Illinois case that determined that use taxes are to be paid by the customer, not the out-of-state seller ( Nat'l Bellas Hess, Inc. v. Dep't of Revenue of Ill., 386 U. S. 753).
“He didn't think DMA v. Brohl was a good case for dealing with Quill,” Richard Pomp, professor at the University of Connecticut School of Law, told Bloomberg BNA Aug. 30. “They ought to wait until they get a nice clean Quill case. Inevitably, they are going to get a petition on Quill, and the court would be much better off dealing with Quill then. A ruling then would render moot the Colorado approach.”
Other states have passed laws or administrative rules in recent months that constitute direct, frontal attacks on Quill. A court case now pending in South Dakota may be leading the pack, and a rule in Alabama also bills itself as a direct attempt to capture more e-retailer tax dollars and to overturn Quill. Some viewed the Kennedy concurrence as an invitation for Congress to intervene, and a series of pending bills indicates a nonpartisan divide on the issue (2016 Weekly State Tax Report 22, 7/29/16).
“Maybe Justice Kennedy can persuade at least some of the seven remaining Justices who declined to join him in opening the Quill question in DMA I to see the world his way; on the other hand, perhaps the Court will live by what it said in Quill, that this is a matter for which Congress is much better suited to address,” Art Rosen, partner at McDermott Will & Emery, told Bloomberg BNA Aug. 30.
If the court does take the case and ultimately removes the Quill physical presence test, “then we can expect widely varying reactions by the states, which would be a very messy situation,” he said. “And so, the ultimate answer is—of course—rational, comprehensive federal legislation.”
Huddleston said if the Supreme Court were to rule in favor of Colorado, or deny the DMA's petition for review and let the Tenth Circuit ruling stand, it would be “unquestionable” that other states would mimic Colorado's notice and reporting approach to get out-of-state vendors to remit sales taxes.
One of the three main questions presented by the DMA is whether the 10th Circuit erred in adopting a “comparative burdens” test for discrimination.
Is the burden of regulatory requirements placed solely on out-of-state vendors offset by different obligations imposed on in-state retailers, the DMA asked.
The DMA petition argues that the Tenth Circuit—lacking support for a comparative burdens test for discrimination in dormant commerce clause cases—wrongly drew upon cases interpreting and applying other laws and doctrines.
Huddleston said the Supreme Court in Ala. Dep't of Revenue v. CSX Transp., Inc., 135 S.Ct. 1136 (2015) set forth a comparative burden analysis that “looked at the entire tax burden to determine whether the tax structure was discriminatory.”
“Here, the taxpayer is saying this is a commerce clause case, and the other side is saying it's not,” Huddleston said. “The issue of whether you can look at the whole tax system to determine tax would certainly be ripe for discussion.”
Helen Hecht, general counsel of the Multistate Tax Commission, told Bloomberg BNA Aug. 30 that making a commerce clause argument alone may undermine the DMA's case.
“They are taking the traditional discriminatory path,” she said. “The weakness in that argument is they want the court to ignore everything else, to take this set of regs by themselves and say, ‘You can't single out out-of-state vendors.' But that ignores the bigger context. All these other people have to pay the tax. They think it's right just to ignore that context. That's going to be a tough road for the DMA.”
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Text of the DMA's petition is at http://src.bna.com/h8k.
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