Legal Matters: Direct Marketers Take Colorado to the Supreme Court

Many online merchants have been watching closely the saga of the Direct Marketing Association's (DMA) constitutional challenge to a 2010 Colorado law targeting remote sellers. This legislation would require out-of-state catalog and internet retailers that do not collect Colorado state and local sales tax to turn over customer transaction information to the Colorado Department of Revenue.

The statute also requires those merchants to provide notices to their customers — both at the time of the transaction and by an annual First Class mailing — of their obligation to self-report taxes. The DMA filed its lawsuit in the United States District Court in Denver and obtained both a preliminary injunction and a permanent injunction barring the state from enforcing the law. The federal district court found that the statute violated the Commerce Clause of the United States Constitution because it discriminated against out-of-state retailers and was a burden on interstate commerce.

The injunction was dissolved, however, in late 2013 after the United States Court of Appeals for the Tenth Circuit ruled that a federal law known as the Tax Injunction Act (TIA) deprived the federal district court of jurisdiction to hear the case. The appellate court ruled that only the state courts in Colorado had jurisdiction over a challenge to the way the state's taxes are administered — even if the objection is based on federal constitutional grounds and doesn't involve the appeal of a tax assessment.

The DMA lawsuit objects to the notice and reporting obligations imposed on out-of-state retailers. Because the DMA believed that the appellate court ruling was incorrect, as well as being in conflict with the jurisdictional standard adopted by United States Courts of Appeal in other parts of the country, it filed a petition for a writ of certiorari asking the United States Supreme Court to review the decision. On July 1, 2014, the U.S. Supreme Court granted the DMA's petition, and the case will be scheduled for oral argument beginning in December of this year. The Supreme Court accepts review in only about 70 out of 7,000 petitions filed each year (a mere 1 percent).