WASHINGTON (CN) – Federal law does not block online retailers from fighting Colorado’s attempt to make up tax revenue lost to the rise of e-commerce, the Supreme Court ruled Tuesday.
While consumers who buy tangible goods in Colorado must pay a 2.9 percent tax at the point of sale, they are supposed to independently fill out a return and remit a 2.9 percent use tax on any goods they buy from a retailer that lack a physical presence in the state, an e-retailer for example. In the court record, these businesses are described as noncollecting retailers.
Since voluntary compliance with use-tax obligations is relatively low, and e-commerce tripled in 2010, Colorado estimated that year that its revenue loss attributable to noncompliance would grow by more than $20 million each year.
To make up the difference the Colorado Legislature enacted statutory requirements in 2010 for the noncollecting retailers, based on the businesses’ gross sales.
These obligations include providing transactional notices and annual purchase summaries to Colorado customers, and to annually report Colorado purchaser information to the state Department of Revenue.
Noncollecting retailers that do not comply with any one of Colorado’s notice-and-reporting obligations are subject to penalties.
The Direct Marketing Association, a group of business and organizations that market products via catalogs, advertisements, broadcast media and the Internet, sought to enjoin the implementation of the new regulations under the commerce clause of the U.S. Constitution.
A federal judge in Denver granted the group summary judgment in 2012, finding the state’s notice-and-reporting requirements facially discriminate against interstate commerce.
Barbara Brohl, the executive director of the state revenue department, persuaded the 10th Circuit on appeal, however, that the federal Tax Injunction Act deprived the U.S. District Court of jurisdiction to enjoin the tax-collection effort.
The Supreme Court unanimously reversed Monday, boiling down the question at hand to whether enforcement of the notice-and-reporting requirements “is an act of ‘assessment, levy or collection,'” as proscribed by the Tax Injunction Act.
“We need not comprehensively define these terms to conclude that they do not encompass enforcement of the notice and reporting requirements at issue,” according to the lead opinion by Justice Clarence Thomas.
It is up to the 10th Circuit on remand to determine whether the state could otherwise block the lawsuit under the comity doctrine, which “counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction,” according to the 13-page opinion.
Justice Anthony Kennedy wrote a concurring opinion to focus on the “injustice” facing states like Colorado because of high court precedent that blocks states from forcing a business “to collect use taxes – which are the equivalent of sales taxes for out-of-state purchases – if the business does not have a physical presence in the state.”
The court decided National Bellas Hess Inc. v. Department of Revenue of Ill. in 1967, and Quill Corp. v. North Dakota in 1992.
“Because of Quill and Bellas Hess, states have been unable to collect many of the taxes due on these purchases,” Kennedy wrote. “California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors. The result has been a startling revenue shortfall in many states, with concomitant unfairness to local retailers and their customers who do pay taxes at the register. The facts of this case exemplify that trend: Colorado’s losses in 2012 are estimated to be around $170 million. States’ education systems, healthcare services, and infrastructure are weakened as a result.”
Kennedy said the time to reconsider Quill is near, but that Colorado’s case was not the appropriate vehicle.
“A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier,” he wrote.
“The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess,” the opinion concludes.
Justice Ruth Bader Ginsburg wrote a concurring opinion as well, joined by Justices Stephen Breyer and Sonia Sotomayor.
That opinion emphasizes the consistency of Monday’s holding with the 2004 opinion Hibbs v. Winn.
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