Reed Smith Client Alerts

Today, the U.S. Supreme Court declined to review the Tenth Circuit’s holding in Direct Marketing Association v. Brohl, which upheld Colorado’s use tax reporting regime on out-of-state taxpayers. In so doing, the Court also denied a cross-petition for certiorari filed by Colorado, which urged the Court to grant cert and directly address whether Quill’s physical presence standard should be overruled.

Today’s Decision At-a-Glance

  • The U.S. Supreme Court declined to review the Tenth Circuit’s decision upholding Colorado’s reporting regime against a Commerce Clause challenge.
  • Colorado is now free to enforce its reporting regime. Failure to comply will cost taxpayers $10 per violation.
  • Remote sellers must consider the impact of today’s denial in Colorado, as well as in other states that have passed similar statutes, including Vermont, Louisiana, and Oklahoma.
  • Reviewing your compliance in Vermont is of particular concern, as its regime becomes effective on the first day of the first quarter after Colorado begins enforcing its regime (or July 1, 2017 at the latest), and it imposes a penalty—up to $15—for noncompliance.
  • Louisiana’s regime becomes effective July 1, 2017, but does not carry a monetary fine for failing to comply. Similarly, Oklahoma’s regime carries no fine for non-compliance, thus effectively making compliance voluntary.

Colorado’s Use Tax Reporting Regime

Colorado’s use tax reporting regime requires sellers that did not collect Colorado sales tax on taxable purchases by Colorado customers to provide the Colorado Department of Revenue (the “Department”) specific information regarding these sales.1 The statute and regulations impose the following duties on non-collecting retailers with gross sales to Colorado customers in excess of $100,000:

  1. Provide transactional notices to Colorado customers;
  2. Send annual purchase summaries to certain Colorado customers; and
  3. Annually report Colorado purchaser information to the Department.2

Prior Court Decisions

The Direct Marketing Association (“DMA”) sought a permanent injunction in federal district court against the regime, arguing that it violated the Commerce Clause because it imposed a tax-related obligation on DMA’s members who lacked a physical presence in Colorado. DMA relied on the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota, which held that sales and use tax collection obligations could only be imposed on entities physically present in the state.3 Because DMA’ members that would be required to comply with the regime did not have a physical presence in Colorado, DMA argued that Colorado could not impose the reporting requirement on its members. The district court agreed and granted DMA’s permanent injunction against the regime.4

The Tenth Circuit had previously declined to hear the appeal on jurisdictional grounds, but that decision was overruled by the U.S. Supreme Court and the appeal was remanded to the Tenth Circuit for a decision on the merits (Brohl I).5 In February 2016, the Tenth Circuit held that Colorado’s use tax reporting regime did not violate the Commerce Clause, and thus overturned the district court’s 2012 decision striking down the law.6 In upholding the law, the Tenth Circuit court narrowly interpreted Quill’s physical presence requirement—finding that it applies solely to sales and use tax collection and remittance obligations.7 And concluding that “Quill applies narrowly to and has not been extended beyond tax collection.”8 The Court then analyzed Colorado’s law and found that it did not discriminate against out-of-state taxpayers and did not impose an undue burden on interstate commerce. Therefore, it did not violate the Commerce Clause. (See Reed Smith’s prior coverage of this decision.)

Petitions for Cert Filed, But Denied

DMA filed a petition for a writ of certiorari (“cert petition”) with the U.S. Supreme Court on August 29, 2016.9 DMA urged the Court to review the Tenth Circuit’s decision, citing that court’s misapplication of Supreme Court precedent—as well as the national impact of the case. It was joined by the Council on State Taxation (“COST”) and the National Federation of Independent Businesses as amici curiae. On October 24, Colorado filed its brief in opposition of the cert petition, and it was joined by the National Governors Association as amicus curiae.

In an interesting and uncommon move, Colorado filed a Cross-Petition for Certiorari on October 4, 2016.10 This petition requested that, if the Court were to grant DMA’s cert petition, it should address an additional question upon review: whether Quill is still good law. Colorado’s cert petition was undoubtedly an effort to remind the Court of Justice Kennedy’s concurrence in Brohl I, which urged the “legal system” to “find an appropriate case for this Court to reexamine Quill and Bellas Hess.”11 Colorado received the support of “interested law professors”—including Richard Pomp—as well as 10 states as amici curiae. DMA opposed this cert petition, arguing that the Court lacks jurisdiction to address a question not briefed or argued at the lower court.

Today, the Court denied both petitions—effectively giving Colorado permission to enforce its use tax reporting regime.

Time to Comply?

After a legal battle spanning over four years, Colorado has finally prevailed, and its use tax reporting regime has been upheld under the Commerce Clause. Barring a challenge of the regime on other grounds, Colorado is free to begin enforcing its reporting regime. For out-of-state taxpayers, this means that a new compliance burden exists in Colorado, including notifying customers of their duty to remit use tax to the Department, as well as providing the Department customer information. Failure to fulfill these obligations carries with it a $10 per violation fine.12

Since Colorado’s enactment of its reporting regime in 2010, other states have enacted similar laws to combat use tax avoidance by their residents. Vermont has enacted a similar reporting regime, H.873, but with a strategically chosen effective date. The default effective date is July 1, 2017. But if Colorado begins enforcing its reporting regime, Vermont’s regime becomes effective on the first day of the first quarter after Colorado’s enforcement date. Like Colorado’s law, the Vermont law punishes taxpayers for non-compliance by imposing a fine, up to $15, for non-compliance. Because the U.S. Supreme Court declined to review the Tenth Circuit’s decision, Colorado is likely to begin enforcement, thus triggering Vermont’s reporting regime. (Louisiana and Oklahoma have also imposed reporting requirements substantially similar to Colorado’s, but those requirements do not carry a monetary fine for failing to comply.)

For out-of-state taxpayers with substantial sales to Colorado and Vermont, the penalties for failing to comply with the reporting regimes can add up quickly. For information regarding your business and whether and how to comply with these and similar laws, contact the authors of this alert or any member of Reed Smith’s State Tax Team.

  1. Colo. Rev. Stat. §§ 39-21-112(3.5)(c), (d).
  2. Id.; 1 Colo. Code Regs. § 201-1:39-21-112.3.5.
  3. 504 U.S. 298 (1992).
  4. Direct Marketing Ass’n v. Huber, No. 10–CV–01546–REB–CBS, 2012 WL 1079175 (D.Colo. Mar. 30, 2012).
  5. Importantly, the Court held that because Colorado’s use tax reporting regime was not a “tax” for purposes of the Tax Injunction Act, no jurisdictional barrier prohibited DMA from filing suit in federal court.
  6. Direct Marketing Ass’n v. Brohl, Case No. 12-1175 (10th Cir., Feb. 22, 2016).
  7. Direct Marketing Ass’n, 575 U.S. at __.
  8. Id.
  9. Docket No. 16-267.
  10. Docket No. 458.
  11. Direct Marketing Ass’n, 575 U.S. at __ (Kennedy, J. concurring).
  12. Colo. Rev. Stat. § 39-21-112(3.5)(d).


Client Alert 2016-317