Online retailers win big in use-tax dispute – for now

Scotus reports:

Justice Clarence Thomas’s opinion for the Court Tuesday in Direct Marketing Association v. Brohl gave online retailers a big victory – something that certainly wasn’t all that clear after the rocky time their counsel experienced at the oral argument. The case involves a question of paramount importance to online retailers, at least those whose business model depends on not charging sales taxes. Colorado has a statute that requires online retailers selling to Colorado customers to file a report each year advising Colorado tax authorities of the purchases local residents have made from that retailer. Collectively, the reports would facilitate the state’s collection of use taxes from local taxpayers for their online purchases; because the use taxes substitute directly for the sales taxes charged on retail purchases, effective enforcement would end the advantage online retailers have when they can sell tax free.

The Direct Marketing Association (a trade group for online retailers) promptly filed suit seeking an injunction against the tax; the defendant is the head of Colorado’s taxing authority. The retailers argued that the statute violates the Commerce Clause; they said it is nothing more than a device to avoid the Supreme Court’s holding in Quill v. North Dakota that online retailers ordinarily don’t have to pay sales tax. The district court agreed and issued an order enjoining enforcement of the statute. On appeal, though, the Tenth Circuit held that the order violated the Tax Injunction Act; it did not reach the merits of the statute’s constitutionality.

The thing most in doubt after the argument was what the Court would say to justify a ruling in favor of the retailers. It seemed clear at the argument that the Court did not agree with the retailers’ contention that the Tax Injunction Act bars an injunction only if it comes in a suit brought by a taxpayer. Because the retailers are not the ones obligated to pay the tax, that argument would mean that this suit was not covered by the statute at all.

You'll be hearing more about this.