Direct Marketing Association v. Huber, 2011 WL 250556 (D. Colo., Jan. 26, 2011).
Factual Background Edit
The Direct Marketing Association (DMA) is a trade association comprised of businesses involved in direct marketing. On behalf of its members, the DMA filed an action against the Colorado Department of Revenue, and the Executive Director Roxy Huber, to enjoin the state from enforcing Colorado law §39-21-112(3.5), C.R.S. (2010) (the Act) and Colorado Department of Revenue Regulation Act, 1 Colo. Code Regs. § 201-1:39-21-112.3.5 (2010) (the Regulations). The Act and the Regulations each impose certain requirements against retailers that sell products to customers in Colorado but that do not collect and remit Colorado sales tax for those transactions. The DMA challenged the Act and the Regulations and was granted a preliminary injunction after the court determined that the DMA had demonstrated a substantial likelihood of success on both its discrimination claim and its undue burden claim under the dormant Commerce Clause.
The Act and the Regulations impose three obligations on retailers who sell products to customers in Colorado without also collecting and remitting sales tax on those transactions: (1) such retailers must notify their Colorado customers that the retailer does not collect Colorado sales tax and that the purchaser is required to self-report any applicable state tax; (2) retailers must provide their Colorado customers with an annual report showing purchases from the previous calendar year and must also report customer names and purchase amounts to the state; and, (3) retailers must provide the state with an annual report showing Colorado customer names, billing addresses, shipping addresses, and the total amount of purchases from the retailer by each of the retailer's Colorado customers.
Trial Court Proceedings Edit
A plaintiff is entitled to a preliminary injunction if it can prove (1) that there is a substantial likelihood that it will prevail on the merits; (2) that it will suffer irreparable harm unless the injunction is issued; (3) that the threatened injury to the plaintiff outweighs the potential harm to the defendant; and (4) that the preliminary injunction is in the public interest.
The DMA's first claim alleged that the Act and the Regulations discriminate against out-of-state retailers who do not collect Colorado sales tax, by imposing additional obligations that are not also applied to Colorado retailers. The court rejected the State's argument that the law applied equally to all retailers by noting that the only Colorado retailers that would be affected would be those that chose to ignore existing Colorado law requiring retailers to collect and remit sales tax. Under the dormant Commerce Clause, a law is discriminative if it imposes "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Holding that the Act and the Regulations ultimately burdened out-of-state retailers, the burden shifted to the State to justify the discrimination in terms of local benefits and the unavailability of nondiscriminatory alternatives. Because the court agreed that nondiscriminatory alternatives existed, such as the recommendation by the DMA to collect use tax directly from Colorado taxpayers, the court concluded that the DMA had demonstrated a substantial likelihood of success on its discrimination claim.
The DMA’s second claim alleged that the Act and the Regulations impose improper and burdensome regulation of interstate commerce. Under Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), a state tax will be sustained against a Commerce Clause challenge as long as the tax: (1) is applied to an activity with a substantial nexus with the taxing state; (2) is fairly apportioned; (3) does not discriminate against interstate commerce; and (4) is fairly related to the services provided by the state. In applying Complete Auto, the court ruled that the requirements imposed by the Act and the Regulations were substantially related to the collection of use taxes when sales taxes cannot be collected. Essentially, the Act and the Regulations impose burdens on out-of-state retailers who have no connection with Colorado customers other than by common carrier and as such the restrictions imposed are likely to be held an undue burden under the dormant Commerce Clause.
In determining the issue of irreparable harm, the court analyzed the costs of compliance that many members of the DMA would be forced to pay if the Act and the Regulations were enforced. Under the Eleventh Amendment, Colorado would be immune from a suit for damages and as such, the costs of compliance would be deemed an irreparable injury . The court also concluded that the balance of harms favored the DMA as its members would be forced to pay unrecoverable compliance costs if the Act and the Regulations were enforced whereas Colorado would be able to gather compliance information following a determination on the merits with the only possible damage being lost time. Similarly, the public interest is best served through enjoining the enforcement of a law that may violate the Constitution where such a violation can be avoided with little or no cost to the State.