DMA Takes State Tax Case to Supreme Court

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Direct Marketing Association v. Brohl could determine marketers' rights to access federal courts in sorting out state tax challenges.

Justices will decide on federal courts' role in state tax issues.
Justices will decide on federal courts' role in state tax issues.

The U.S. Supreme Court announced on Tuesday it would hear a case brought by the Direct Marketing Association that could affect the access businesses have to federal courts in state tax cases.

DMA's appeal to the highest court in the land stems from a lawsuit it filed in U.S. District Court in Colorado, challenging the constitutionality of a state law that required out-of-state merchants to submit customer transaction records to the Colorado Department of Revenue. Arguing that the law discriminated against out-of-state sellers and violated interstate commerce laws, DMA won a preliminary injunction and summary judgment against the practice. Then last year the U.S. Tenth Circuit Court of Appeals vacated the decision, declaring that, under the Tax Injunction Act (TIA), the federal district court lacked jurisdiction in the matter and that DMA should refile its case in state court.

The association did so, and last October won a temporary injunction from a Colorado district court. Concurrently, DMA filed a writ of certiorari with the Supreme Court, asking it to determine whether the state or the federal court system should adjudicate the case. “In similar cases, the First and the Second Circuits reached different conclusions than the Tenth Circuit over whether the TIA applies,” says Christopher Oswald, DMA's VP of state affairs. “One of the jobs of the Supreme Court is to state what the law is, and one of the ways they do that is to unify and harmonize the Circuits.”

In Direct Marketing Association v. Brohl, the association is asking the Supreme Court to rule on jurisdictional, and not substantive, issues of the case. However, the outcome could have ramifications on remote sales tax issues being debated by e-commerce companies and brick-and-mortar retailers. Remote sellers fear that, should the Marketplace Fairness Act pass Congress, they could be bankrupted by having to address grievances in hundreds of state and municipal courts.

The outcome could also have implications for consumer privacy. The original case DMA brought against Colorado complained that out-of-state merchants were required to turn over personally identifiable information on their customers, while in-state merchants were not. “DMA began this fight four years ago with the goal of protecting consumer privacy by safeguarding businesses from being forced to divulge their customers' purchase history to the State of Colorado,” says DMA SVP of government affairs Peggy Hudson.

But DMA's day in the Supreme Court will be first and foremost about preserving marketers' constitutional rights. “Direct marketers should be concerned about preserving their access to federal courts, which are the experts on what is and what is not constitutional when it comes to the regulations surrounding state taxes,” Oswald says.

That day is not likely to come until late in the fall. Now recessed, the Supreme Court does not start up until the beginning of October. In the interim, DMA has 45 days to file details of its case, and the Colorado Department of Revenue and the DMA each have 30 days for replies.

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