Justices Gingerly Join Debate Over Internet Sales Taxes

The U.S. Supreme Court on Dec. 8 scratched the surface of the looming battle over state taxation of Internet retailers and seemed troubled by what it saw.

The justices heard arguments in Direct Marketing Association v. Brohl, No. 13-1032, a jurisdictional dispute over a Colorado law that seeks to capture new revenue by requiring out-of-state companies to report information to the state about their sales to Colorado residents. Find the transcript at http://1.usa.gov/1z3xcaJ.

So far, Colorado is the only state with such a law, but when Colorado Solicitor general Daniel Domenico acknowledged that other states might follow suit if he wins, Justice Samuel Alito Jr. put himself in the position of a small Internet retailer if all 50 states pass similar laws.

“Now I will have to submit potentially 50 different forms to all of these states reporting that somebody in South Carolina purchased something from me that costs $23.99,” Alito said incredulously. “That's where all this could lead, couldn't it?” Domenico agreed.

The case before the court is not about the merits of Colorado's tax collection law, but focuses on where challenges to such initiatives can be litigated. The Direct Marketing Association (DMA) wants federal courts as the forum to adjudicate its claims, which include the Commerce Clause and the First Amendment. It also acknowledged concerns that a state court, unlike a federal court, might be biased in favor of a law that will bring in revenue from non-residents. See, “Internet Retailers Press Their Claims in High Court,” The National Law Journal.

“An out-of-state company may have concerns about the neutrality and fairness of the forum in which its federal constitutional rights are to be determined,” the DMA stated in its brief.

Justice Antonin Scalia appeared to agree during the arguments. “There is a real incentive on the part of the state government which includes the state courts” to support the tax, he said.

Late in the litigation, Colorado invoked the federal Tax Injunction Act as a reason for keeping such tax disputes in state court. The 1937 statute prohibits federal courts from enjoining or restraining the assessment or collection of state taxes. It was intended to prevent state taxpayers from running to federal court to avoid their obligations.

On that basis, the U.S. Court of Appeals for the Tenth Circuit ruled against the Direct Marketing Association and said federal courts had no jurisdiction to halt Colorado's tax.

George Isaacson of Brann & Isaacson in Lewiston, Maine, argued on behalf of the marketing group that the act did not apply to his suit because the retailers, not the taxpayers who owe the tax, are challenging the law.

That seemed like hair-splitting to some justices, especially since the injunction law has been interpreted to allow federal suits challenging other kinds of tax reporting requirements.

“Where do you get ' the idea that the plaintiff has to be the taxpayer?” Justice Elena Kagan asked.

The litigation comes amid growing concern from states and localities about the loss of revenue from Internet sales. A coalition of state and local government groups filed a brief with the court warning of a “deepening crisis for states and local governments whose solvency depend in large part on sales and use tax revenues.”

Because of the Supreme Court's 1992 ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), out-of-state merchants have not had to pay sales and use taxes, costing state and local governments an estimated $23 billion in tax revenues from out-of-state retailers every year, the brief stated.

Tony Mauro covers the U.S. Supreme Court for ALM Media. He can be reached at [email protected] and on Twitter @Tonymauro.

The U.S. Supreme Court on Dec. 8 scratched the surface of the looming battle over state taxation of Internet retailers and seemed troubled by what it saw.

The justices heard arguments in Direct Marketing Association v. Brohl, No. 13-1032, a jurisdictional dispute over a Colorado law that seeks to capture new revenue by requiring out-of-state companies to report information to the state about their sales to Colorado residents. Find the transcript at http://1.usa.gov/1z3xcaJ.

So far, Colorado is the only state with such a law, but when Colorado Solicitor general Daniel Domenico acknowledged that other states might follow suit if he wins, Justice Samuel Alito Jr. put himself in the position of a small Internet retailer if all 50 states pass similar laws.

“Now I will have to submit potentially 50 different forms to all of these states reporting that somebody in South Carolina purchased something from me that costs $23.99,” Alito said incredulously. “That's where all this could lead, couldn't it?” Domenico agreed.

The case before the court is not about the merits of Colorado's tax collection law, but focuses on where challenges to such initiatives can be litigated. The Direct Marketing Association (DMA) wants federal courts as the forum to adjudicate its claims, which include the Commerce Clause and the First Amendment. It also acknowledged concerns that a state court, unlike a federal court, might be biased in favor of a law that will bring in revenue from non-residents. See, “Internet Retailers Press Their Claims in High Court,” The National Law Journal.

“An out-of-state company may have concerns about the neutrality and fairness of the forum in which its federal constitutional rights are to be determined,” the DMA stated in its brief.

Justice Antonin Scalia appeared to agree during the arguments. “There is a real incentive on the part of the state government which includes the state courts” to support the tax, he said.

Late in the litigation, Colorado invoked the federal Tax Injunction Act as a reason for keeping such tax disputes in state court. The 1937 statute prohibits federal courts from enjoining or restraining the assessment or collection of state taxes. It was intended to prevent state taxpayers from running to federal court to avoid their obligations.

On that basis, the U.S. Court of Appeals for the Tenth Circuit ruled against the Direct Marketing Association and said federal courts had no jurisdiction to halt Colorado's tax.

George Isaacson of Brann & Isaacson in Lewiston, Maine, argued on behalf of the marketing group that the act did not apply to his suit because the retailers, not the taxpayers who owe the tax, are challenging the law.

That seemed like hair-splitting to some justices, especially since the injunction law has been interpreted to allow federal suits challenging other kinds of tax reporting requirements.

“Where do you get ' the idea that the plaintiff has to be the taxpayer?” Justice Elena Kagan asked.

The litigation comes amid growing concern from states and localities about the loss of revenue from Internet sales. A coalition of state and local government groups filed a brief with the court warning of a “deepening crisis for states and local governments whose solvency depend in large part on sales and use tax revenues.”

Because of the Supreme Court's 1992 ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), out-of-state merchants have not had to pay sales and use taxes, costing state and local governments an estimated $23 billion in tax revenues from out-of-state retailers every year, the brief stated.

Tony Mauro covers the U.S. Supreme Court for ALM Media. He can be reached at [email protected] and on Twitter @Tonymauro.