Direct Marketing Association v. Brohl

This case provides the Supreme Court with the opportunity to decide whether the TIA’s language bars federal court review of a statute that imposes notice and reporting obligations on a tax-exempt party but that does not create a tax liability on that party.

DMA argues that the Tenth Circuit erred in barring federal jurisdiction over DMA’s suit challenging the Collection Act’s reporting and notice requirements. DMA asserts that the Tenth Circuit misinterpreted the language of the TIA and mischaracterized the language of the Collection Act. Furthermore, DMA contends that the comity doctrine does not apply in this case.

In opposition, Barbara Brohl, the executive director of Colorado Department of Revenue (“CDR”), counters that the Tenth Circuit correctly held that the TIA bars federal jurisdiction over DMA’s suit challenging the Collection Act. Brohl argues that the Collection Act’s reporting and notice requirements is the means by which Colorado collects state sales and use taxes on purchases made by Colorado residents from out-of-state retailers. Thus, the TIA would bar DMA’s suit since the DMA seeks to enjoin the assessment and collection of tax under state law—something which the plain text of the TIA prohibits. Also, Brohl states that the doctrine of comity provides another reason for barring DMA’s suit.

THE PURPOSE OF THE COLLECTION ACT AND THE LANGUAGE OF THE TIA

DMA argues that the Tenth Circuit erred in characterizing the Collection Act’s notice and reporting requirements as methods for collecting taxes. DMA contends that the Collection Act’s notice and reporting requirements do not “constitute the assessment, levy or collection of a state tax within the meaning of the TIA.” According to DMA, these terms are “terms of art in the area of taxation” and as such, have specific definitions. By referencing the Internal Revenue Code, DMA defines “assessment” as the recording of a taxpayer’s tax liability, “levy” as the seizure of property by any means, and “collection” as the recovery of amounts due. DMA thus argues that the actions these terms refer to are not what the Collection Act’s requirements set out to do. Consequently, DMA submits that the Collection Act’s requirements do not come within the language of the TIA because the actions mandated by the Collection Act are not the “assessment, levy or collection” of a state tax. DMA asserts that this mischaracterization of the Collection Act’s requirements as methods for the collection of taxes stemmed from the Tenth Circuit’s misinterpretation of the word “restrain.” DMA states that in the TIA’s context, “restrain,” “enjoin,” and “suspend” are understood only with reference to equity jurisdiction (where a court would grant anticipatory relief). Together, DMA maintains, the terms are used in the TIA in order to withdraw a federal court’s power to grant anticipatory relief that would prevent state officials from assessing and collecting taxes. Thus, DMA urges that the Tenth Circuit erred by relying on the word “restrain” since “restrain” refers to relief that would bar the assessment and collection of taxes by the state—something that the Collection Act’s notice and reporting requirements do not do.

Brohl counters that DMA is indeed attempting to enjoin or restrain the assessment or collection of a tax under state law. Brohl characterizes the Collection Act’s notice and reporting requirements as the “core method” for collecting state sales and use taxes from local consumers who purchase from out-of-state retailers. Brohl describes this method as the only way to ensure that individuals pay sales and use taxes on out-of-state purchases that, absent the Collection Act’s requirements, would escape assessment and collection. According to Brohl, by giving Colorado purchasers notice that they may be subject to the state taxes, the requirements promote the payment of taxes. Furthermore, Brohl submits that retailer reports submitted to the CDR that include Colorado purchasers’ information and their total amount spent on purchases from out-of-state retailers allows Colorado taxing authorities to “perform their standard audit and enforcement functions.” Brohl therefore argues that the Collection Act’s requirements involve the assessment and collection of taxes. Brohl notes that the TIA bars all federal suits that seek to “enjoin, suspend or restrain the assessment, levy or collection” of state taxes, and because DMA sought an injunction against the Collection Act, this relief is what the word “restrain” describes. Moreover, Brohl asserts that since the Collection Act’s requirements are methods for assessing and collecting taxes, DMA is seeking to “restrain” Colorado’s “assessment” and “collection” of its use and sales tax. As a result, Brohl argues, the plain text of the TIA bars DMA’s suit and the Tenth Circuit was correct in reaching that conclusion.

THE DOCTRINE OF COMITY

For courts, the doctrine of comity is the legal principle that courts of different jurisdictions will mutually recognize each other’s judicial acts. This doctrine, however, can also come in the form of a federal court refraining from involving itself in certain state matters, like state taxation.

DMA argues that the doctrine of comity does not apply in this situation for various reasons. First, DMA states that Brohl did not raise comity in either the district court of D.C. Court of Appeals; consequently, Brohl cannot raise a comity argument now. Furthermore, because Brohl took part in the federal court proceedings, DMA states that Brohl either did not believe that comity applied or she chose to proceed in federal court to avoid delays that would result from moving the suit to a state court. DMA asserts that Brohl’s actions preclude the application of comity because they indicate either an acceptance of federal jurisdiction or a belief that comity was not a bar to federal jurisdiction. Second, DMA contends that none of the concerns relevant to comity in state tax cases are present in this case, primarily because this case challenges the Collection Act’s requirements, which DMA argues are non-tax matters. Finally, DMA submits that the factors that determine the applicability of comity are not present in this case: (1) DMA’s suit does not involve a fundamental right or classification requiring heightened judicial scrutiny; (2) DMA does not seek the federal courts to improve DMA’s position relative to other competitors in the market; and (3) the Colorado state courts are not better positioned to fix an unconstitutional discrimination arising from Colorado’s legislation.

On the other hand, Brohl argues that the doctrine of comity is a second reason for barring DMA’s suit. Brohl states that not raising the issue in the district court or D.C. Court of Appeals does not constitute error, and in fact, the Supreme Court has addressed comity in other cases despite comity not being raised in lower court proceedings. Brohl also asserts that comity principles are “embraced within the TIA’s legislative history and text,” as the TIA encourages federal courts to not interfere in state tax matters. Lastly, Brohl argues that the three factors that determine that applicability of comity are present in this case. First, DMA’s claim of a Commerce Clause violation does not rise to the level of being deprived of a fundamental right. Second, Colorado’s state courts are in a better position to sever any portion of the Collection Act found to be unconstitutional since they are more knowledgeable about what the Colorado legislature would have done had the legislature been aware of the unconstitutionality of certain parts. Third, DMA would have access to federal courts while its competitors would not, thereby giving DMA an advantage in the market.