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DMA Lawsuit: Twists and Turns Continue

The Direct Marketing Association (DMA) filed a motion for preliminary injunction in the U.S. District Court for the District of Colorado on August 13 in an effort to stop Colorado from enforcing the recen

September 21, 2010

The Direct Marketing Association (DMA) filed a motion for preliminary injunction in the U.S. District Court for the District of Colorado on August 13 in an effort to stop Colorado from enforcing the recently enacted—and highly controversial—sales tax notice and reporting obligations on remote retailers. Arguing that “affected DMA members will suffer irreparable harm to their businesses” without an injunction, the motion seeks to relieve remote retailers of the burdens of Colorado H.B. 1193 until the substantive issues in the lawsuit are resolved. The parties have attempted to narrow and expedite discovery on the Commerce Clause claims and to consolidate the preliminary injunction proceedings with a trial on the merits on those claims. It appears that the parties agree that resolution of these issues prior to enforcement of the end-of-year reporting requirements is beneficial to both the state and taxpayers.

DMA’s amended complaint, filed in federal court on July 23, alleges constitutional violations under the Commerce Clause, the First Amendment right to free speech of businesses and consumers, the right to privacy of Colorado residents, and the deprivation of the value of proprietary customer lists without due process or fair compensation. Not surprisingly, Colorado quickly filed a motion to dismiss challenging whether DMA has standing to file such a suit on behalf of its members and on behalf of third parties (consumers).

Interestingly, Colorado did not assert a jurisdictional challenge based upon the Tax Injunction Act (TIA) in its motion to dismiss. This is important because the TIA generally prevents a taxpayer from challenging a state or local tax in a federal court. A primary argument in the DMA lawsuit is that the physical presence standard of Quill v. North Dakota, 508 U.S. 294 (1992), should apply to this statute because it imposes a sales tax on interstate commerce. If Colorado had asserted the TIA as a means of having this case dismissed from federal court, it would seemingly be conceding that the Colorado reporting law is, indeed, a sales tax collection statute that would fall under the nexus standard espoused by Quill.

The parties have requested a hearing on the substantive issues on or before January 14, 2011, in advance of the deadline for taxpayers to prepare and send year-end reports of consumer purchases—which are due January 31.

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