On January 26, 2011, the U.S. District Court for the District of Colorado granted the Direct Marketing Association’s (DMA) motion for a preliminary injunction preventing the Colorado Department of Revenue (Department) from enforcing its sales tax notice and reporting regime enacted in 2010 and set to become effective January 31, 2011. The Direct Mktg. Ass’n v. Roxy Huber, Civil Case No. 10-cv-01546-REB-CBS, Order Granting Motion for Preliminary Injunction (D. Colo. Jan. 26, 2011). The DMA’s amended complaint, which provided the basis for the injunction, alleged 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. The preliminary injunction was premised only on the Commerce Clause claims and left open the consideration of the other claims in the amended complaint.
The court concluded that the DMA had demonstrated the four requirements to be granted a preliminary injunction:
- The plaintiff has a substantial likelihood of success on the merits;
- The plaintiff has an irreparable injury;
- The injury to the plaintiff outweighs the injury to the defendant; and
- The preliminary injunction is in the best interests of the public.
Substantial Likelihood of Success on Commerce Clause Claims
The DMA asserted that the Colorado reporting regime violated the Commerce Clause because:
- The regime discriminates against out-of-state retailers; and
- The regime imposes an undue burden on out-of-state retailers. The second claim was heavily based on the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
First, the court determined that the impact of the regime would be imposed only on out-of-state retailers because in-state retailers are already required under other laws to collect and remit taxes. The court found that the regime was unconstitutionally discriminatory as applied to the out-of-state retailers. The court also determined that there were other non-discriminatory methods available to the Department to achieve its goal of collecting tax on sales by out-of-state retailers; specifically, the Department could have taxpayers report and remit use tax on personal income tax returns.
Next, the court held that the regime also violated the Commerce Clause because it imposed an undue burden on out-of-state retailers. While the court did not explicitly compare the burden of the reporting regime on out-of-state retailers to the sales and use tax reporting and collection requirements required of in-state retailers, it analogized Colorado’s regime to the unconstitutional imposition of use tax collection inQuill. The court found that although the burden of collecting and remitting sales taxes are different than those imposed by the reporting regime, the burdens are “inextricably related in kind and purpose to the burdens condemned in Quill.” Thus, the court concluded that the out-of-state retailers impacted by this legislation “likely are protected from such burdens on interstate commerce by the safe-harbor established in Quill.”
Irreparable Injury to the DMA
Because the court determined that there was a substantial likelihood of success on the merits, the court then evaluated whether the DMA would be irreparably harmed without an injunction. The court concluded that there was irreparable harm for two reasons:
- A recent 10th Circuit Court of Appeals case indicated (in dicta) that the violation of rights under the Commerce Clause constitutes irreparable injury; and
- The DMA members would be liable for compliance costs, and would be prohibited under the 11th Amendment from suing the state to recover those costs.
Finally, the court concluded that the balance of harms favors the plaintiff (third prong) and the injunction promotes the public interest (fourth prong). The court held that the harm to the DMA outweighs the harm to the Department because, while the Department may experience some delay in collecting its taxes as a result of the injunction, without an injunction the DMA members would be liable for costs that they could not recover. Further, without an injunction, the Department may be enforcing an unconstitutional law—the prohibition of which is in the public interest.
The injunction is the latest twist in the ongoing efforts by states to force out-of-state retailers to collect sales tax.