Direct Marketing Association v. Brohl

LII note: The U.S. Supreme Court has now decided Direct Marketing Association v. Brohl.


Does the Tax Injunction Act prohibit federal courts from hearing cases where a tax-exempt, out-of-state entity brings suit to challenge an in-state law that does not impose a tax on the exempt entity but does impose notice and reporting requirements?

Oral argument: 
December 8, 2014

The Supreme Court’s decision in this case will determine whether the Tax Injunction Act (“TIA”) prevents federal court review of the notice and reporting requirements imposed on tax-exempt entities through the Colorado Collection Act. The Direct Marketing Association argues that neither the TIA’s language nor Congress’s intent when writing the TIA support the proposition that the TIA bars federal court jurisdiction when a tax-exempt entity challenges a statute that imposes notice and reporting obligations on the entity but does not create an actual tax liability. Brohl counters that the TIA protects the notice and reporting obligations from federal review because those functions are essential to facilitate the collection of the use tax. The resolution of this case will implicate the role that federal courts have over state taxation matters.

Questions as Framed for the Court by the Parties 

Whether the TIA bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the informational notice and reporting requirements of a state law that neither imposes a tax, nor requires the collection of a tax, but serves only as a secondary aspect of state tax administration?


Colorado requires that all retailers pay a 2.9 percent tax on the sale of all tangible goods within the state. The Commerce Clause and the Supreme Court’s decision in Quill Corp. v. North Dakota, however, seemingly prohibit states from ordering retailers to collect taxes when those retailers do not have a physical presence within the tax-collecting state. Typically, this tax-exempt group consists of online and mail-order retailers. To circumvent Quill’s holding, Colorado enacted Colorado Revenue Statute § 39–26–202(1)(b) (“Collection Act”). Under the Collection Act, if purchasers obtain goods from retailers that are exempt from the Colorado sales tax, the purchasers—instead of the retailers—must pay the 2.9 percent tax (“use tax”) with their income tax returns. Most Colorado residents, however, do not pay the use tax even though the failure to do so is a criminal offense. One report in 2010 “estimated that Colorado state and local governments would lose $172.7 million in 2012 because of residents’ failure to pay use tax on e-commerce purchases from out-of-state, non-collecting retailers.”

To combat this loss in tax revenue, the Colorado legislature implemented three statutory notice and reporting requirements on tax-exempt retailers with gross sales in Colorado in excess of $100,000. First, tax-exempt retailers must, in every transaction, notify Colorado purchasers that the State of Colorado requires the purchasers to file a sales or use tax return. Second, tax-exempt retailers must send annual digests to all Colorado purchasers that have bought more than $500 worth of goods from that retailer in the preceding year. Third, tax-exempt retailers must annually report the names, billing addresses, shipping addresses, and total purchase amounts of Colorado purchasers to the Colorado Department of Revenue (“CDR”). If the tax-exempt retailers do not comply with any of the three notice and reporting obligations, Colorado imposes penalties on those retailers. Alternatively, the tax-exempt retailers can escape the notice and reporting requirements if they choose to directly collect and remit the use tax.

Alleging that the notice and reporting requirements “discriminate against interstate commerce . . . and impose undue burdens on [it],” the Direct Marketing Association (“DMA”) filed suit against the CDR’s Executive Director, Roxy Huber, who was later replaced by Barbara Brohl, in June 2010 in a federal district court. On March 30, 2012, the district court held that the Collection Act’s notice and reporting requirements “facially discriminated against” and unduly burdened interstate commerce.

The U.S. Court of Appeals for the Tenth Circuit (“Tenth Circuit”) reversed the district court’s holding. The Tenth Circuit did not reach the merits of DMA’s case and instead determined that the Tax Injunction Act (“TIA”) divested the federal courts of subject–matter jurisdiction. The TIA divests a federal court of the power to “enjoin, suspend or restrain the assessment, levy or collection of any tax under state law” if a party can obtain “a plain, speedy and efficient remedy” in state court. The court reasoned that the Colorado state courts provided “a plain, speedy and efficient remedy” and that DMA’s suit, although not directly challenging a tax, did seek to restrain tax collection. On July 1, 2014, the Supreme Court granted DMA’s petition for writ of certiorari to determine whether the TIA applies to DMA’s suit.


This case provides the Supreme Court with the opportunity to decide whether the TIA’s language bars federal court review of a statute that imposes notice and reporting obligations on a tax-exempt party but that does not create a tax liability on that party.

DMA argues that the Tenth Circuit erred in barring federal jurisdiction over DMA’s suit challenging the Collection Act’s reporting and notice requirements. DMA asserts that the Tenth Circuit misinterpreted the language of the TIA and mischaracterized the language of the Collection Act. Furthermore, DMA contends that the comity doctrine does not apply in this case.

In opposition, Barbara Brohl, the executive director of Colorado Department of Revenue (“CDR”), counters that the Tenth Circuit correctly held that the TIA bars federal jurisdiction over DMA’s suit challenging the Collection Act. Brohl argues that the Collection Act’s reporting and notice requirements is the means by which Colorado collects state sales and use taxes on purchases made by Colorado residents from out-of-state retailers. Thus, the TIA would bar DMA’s suit since the DMA seeks to enjoin the assessment and collection of tax under state law—something which the plain text of the TIA prohibits. Also, Brohl states that the doctrine of comity provides another reason for barring DMA’s suit.


DMA argues that the Tenth Circuit erred in characterizing the Collection Act’s notice and reporting requirements as methods for collecting taxes. DMA contends that the Collection Act’s notice and reporting requirements do not “constitute the assessment, levy or collection of a state tax within the meaning of the TIA.” According to DMA, these terms are “terms of art in the area of taxation” and as such, have specific definitions. By referencing the Internal Revenue Code, DMA defines “assessment” as the recording of a taxpayer’s tax liability, “levy” as the seizure of property by any means, and “collection” as the recovery of amounts due. DMA thus argues that the actions these terms refer to are not what the Collection Act’s requirements set out to do. Consequently, DMA submits that the Collection Act’s requirements do not come within the language of the TIA because the actions mandated by the Collection Act are not the “assessment, levy or collection” of a state tax. DMA asserts that this mischaracterization of the Collection Act’s requirements as methods for the collection of taxes stemmed from the Tenth Circuit’s misinterpretation of the word “restrain.” DMA states that in the TIA’s context, “restrain,” “enjoin,” and “suspend” are understood only with reference to equity jurisdiction (where a court would grant anticipatory relief). Together, DMA maintains, the terms are used in the TIA in order to withdraw a federal court’s power to grant anticipatory relief that would prevent state officials from assessing and collecting taxes. Thus, DMA urges that the Tenth Circuit erred by relying on the word “restrain” since “restrain” refers to relief that would bar the assessment and collection of taxes by the state—something that the Collection Act’s notice and reporting requirements do not do.

Brohl counters that DMA is indeed attempting to enjoin or restrain the assessment or collection of a tax under state law. Brohl characterizes the Collection Act’s notice and reporting requirements as the “core method” for collecting state sales and use taxes from local consumers who purchase from out-of-state retailers. Brohl describes this method as the only way to ensure that individuals pay sales and use taxes on out-of-state purchases that, absent the Collection Act’s requirements, would escape assessment and collection. According to Brohl, by giving Colorado purchasers notice that they may be subject to the state taxes, the requirements promote the payment of taxes. Furthermore, Brohl submits that retailer reports submitted to the CDR that include Colorado purchasers’ information and their total amount spent on purchases from out-of-state retailers allows Colorado taxing authorities to “perform their standard audit and enforcement functions.” Brohl therefore argues that the Collection Act’s requirements involve the assessment and collection of taxes. Brohl notes that the TIA bars all federal suits that seek to “enjoin, suspend or restrain the assessment, levy or collection” of state taxes, and because DMA sought an injunction against the Collection Act, this relief is what the word “restrain” describes. Moreover, Brohl asserts that since the Collection Act’s requirements are methods for assessing and collecting taxes, DMA is seeking to “restrain” Colorado’s “assessment” and “collection” of its use and sales tax. As a result, Brohl argues, the plain text of the TIA bars DMA’s suit and the Tenth Circuit was correct in reaching that conclusion.


For courts, the doctrine of comity is the legal principle that courts of different jurisdictions will mutually recognize each other’s judicial acts. This doctrine, however, can also come in the form of a federal court refraining from involving itself in certain state matters, like state taxation.

DMA argues that the doctrine of comity does not apply in this situation for various reasons. First, DMA states that Brohl did not raise comity in either the district court of D.C. Court of Appeals; consequently, Brohl cannot raise a comity argument now. Furthermore, because Brohl took part in the federal court proceedings, DMA states that Brohl either did not believe that comity applied or she chose to proceed in federal court to avoid delays that would result from moving the suit to a state court. DMA asserts that Brohl’s actions preclude the application of comity because they indicate either an acceptance of federal jurisdiction or a belief that comity was not a bar to federal jurisdiction. Second, DMA contends that none of the concerns relevant to comity in state tax cases are present in this case, primarily because this case challenges the Collection Act’s requirements, which DMA argues are non-tax matters. Finally, DMA submits that the factors that determine the applicability of comity are not present in this case: (1) DMA’s suit does not involve a fundamental right or classification requiring heightened judicial scrutiny; (2) DMA does not seek the federal courts to improve DMA’s position relative to other competitors in the market; and (3) the Colorado state courts are not better positioned to fix an unconstitutional discrimination arising from Colorado’s legislation.

On the other hand, Brohl argues that the doctrine of comity is a second reason for barring DMA’s suit. Brohl states that not raising the issue in the district court or D.C. Court of Appeals does not constitute error, and in fact, the Supreme Court has addressed comity in other cases despite comity not being raised in lower court proceedings. Brohl also asserts that comity principles are “embraced within the TIA’s legislative history and text,” as the TIA encourages federal courts to not interfere in state tax matters. Lastly, Brohl argues that the three factors that determine that applicability of comity are present in this case. First, DMA’s claim of a Commerce Clause violation does not rise to the level of being deprived of a fundamental right. Second, Colorado’s state courts are in a better position to sever any portion of the Collection Act found to be unconstitutional since they are more knowledgeable about what the Colorado legislature would have done had the legislature been aware of the unconstitutionality of certain parts. Third, DMA would have access to federal courts while its competitors would not, thereby giving DMA an advantage in the market.


The Supreme Court will determine whether the Tax Injunction Act (“TIA”) bars federal courts from hearing suits brought by tax-exempt entities to enjoin a law that imposes notice and reporting obligations on those entities. DMA contends that the TIA does not reach tax-exempt retailers because “neither the language nor the purpose of the statute” supports the conclusion that Congress intended to divest jurisdiction from federal courts when a statute has a secondary relationship to taxation but does not impose an actual tax. Brohl counters that the TIA applies here because Colorado’s notice and reporting requirements are not secondary to the tax scheme but are “the tools it needs to assess and collect its sales and use taxes.” The Supreme Court’s decision in this case will likely affect the federalism balance by establishing to what extent federal courts can interfere in state taxation matters.


In support of DMA, the United States Chamber of Commerce (“USCOC”) claims that under Brohl’s interpretation the TIA would effectively block federal jurisdiction over any claim that may have a negative impact on state revenue and lead to wasteful litigation over the indirect tax effects of regulations. For example, the USCOC suggests that the TIA could reach First Amendment suits that challenge state laws precluding companies from listing on a receipt the amount of taxes included in the price of the good as well as suits where employees challenge an employer’s tax-withholding practice. USCOC explains that this is because both instances could have an indirect impact on tax revenues. Moreover, the Institute for Professionals in Taxation (“IPT”) argues that a broad interpretation of the TIA will grant a state the ability to extinguish federal jurisdiction by drafting laws that nominally increase tax collection but have a primarily non-tax collecting purpose.

On the other hand, several law professors supporting Brohl maintain that DMA’s claims envision scenarios that are “readily distinguishable” from the immediate case because, here, the Colorado notice and reporting scheme is directly tied to taxation: “[T]he Statute requires the provision of readily available and narrow tax information, by a party to a taxable transaction, to tax authorities, for the purpose of enforcing that very same tax.” The Multistate Tax Commission (“MTC”) asserts that the mere fact that a regulation is tied to a tax does not, by itself, require the TIA’s application. Instead, the judiciary, according to the MTC, will decide whether the TIA bars a federal court from jurisdiction by looking at whether a regulation is essential for the taxpayer to comply with a state’s tax scheme and whether the tax-exempt entity is the type of entity generally subject to a collection duty.


The Council on State Taxation (“COST”) asserts, in DMA’s support, that if the Court accepts Brohl’s interpretation of the TIA, then companies could face local discrimination that the divested federal courts could not remedy. NFIB Small Business Legal Center and other amici echo COST’s sentiments and contend that without federal courts, entities like DMA would face local discrimination—the very effect that federal courts are intended to prevent. Moreover, the IPT maintains that a broad interpretation of the TIA would prohibit federal courts from vindicating fundamental federal rights and “would lead to a less robust body of federal courts interpreting federal law.”

The MTC, however, asserts that the federalist system and respect for state sovereign immunity “counsel[] against any expansion of federal court jurisdiction to hear a suit challenging the application of a state tax collection requirement.” In fact, according to Illinois and twenty-three other states, the very purpose of the TIA is to minimize friction between federal and state government and to mitigate interference with the states’ longstanding preeminence in state taxation. Moreover, the National Governors Association contends that states that impose a use tax lost $23.2 billion dollars in tax revenue in 2012, which is an important local concern that state courts should have exclusive jurisdiction over.


In this case, the Supreme Court will decide whether the Tax Injunction Act bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the notice and reporting requirements of Colorado’s Collection Act. In order to reach this conclusion, the Court will have to determine whether the Collection Act’s notice and reporting requirements constitute the “assessment” or “collection” of state taxes and whether seeking to enjoin these requirements violates the TIA. The Court will also decide whether the doctrine of comity bars jurisdiction in this case. Here, the Court’s decision has the potential to impact the role of the federal courts in matters relating to state taxation, effectively altering the federalism balance.

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