Supreme Court rules in state tax case

The United States Supreme Court recently decided Direct Marketing Association v. Brohl, a state tax case. In it, the Supreme Court ruled that a challenge in federal court to Colorado’s so-called “Amazon law” could go forward, contrary to Colorado’s argument that the Tax Injunction Act barred the suit. In perhaps a more interesting development for Texas tax law, Justice Anthony Kennedy filed a concurring opinion in which he urged the Supreme Court to overrule its prior decisions that bar states from requiring retailers with no physical presence in a state to collect that state’s sales tax from their customers in that state. We discuss both the Supreme Court’s decision and Justice Kennedy’s concurrence in further detail below.

The Supreme Court’s Opinion

The Supreme Court’s unanimous opinion in Direct Marketing Association v. Brohl addresses whether federal courts have the authority to hear certain state tax cases. The federal Tax Injunction Act generally prohibits federal courts from hearing lawsuits that seek to stop the collection of taxes. However, the lawsuit at issue in Direct Marketing Association v. Brohl challenges a Colorado law that requires certain out-of-state retailers to report information about their Colorado customers to the Colorado Department of Revenue that would allow Colorado to potentially collect use tax from those customers on their purchases from out-of-state retailers. Some out-of-state retailers challenged the law in federal court, arguing that it violated the Due Process and Commerce Clauses of the United States Constitution. The Supreme Court ruled that the Colorado challenge could go forward in federal court because the law at issue did not “enjoin, suspend, or restrain the assessment, levy, or collection of any tax” — it noted that the reporting requirements the challenged law imposes occur prior to such activity.

Kennedy’s Concurrence

Although the case before the Supreme Court did not actually address the validity of the Colorado law or any other law that seeks to impose state tax collection requirements on out-of-state retailers, Justice Kennedy nevertheless filed a concurring opinion describing why he believes that the Supreme Court’s prior decisions in National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corporation v. North Dakota should be overruled. These decisions state that a state may only require retailers with a physical presence in that state to collect the state’s sales tax from customers in that state. Both National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corporation v. North Dakota were decided before the proliferation of Internet sales. Justice Kennedy wrote that this change in the nature of commerce in the United States makes these decisions out of date and that this physical presence standard has cost states a great deal of harm through lost revenue.


While Direct Marketing Association v. Brohl has no effect on current Texas tax law, it does impact further efforts Texas may choose to make in order to collect sales tax on sales by out-of-state retailers.  While Texas has yet to impose a reporting requirement like Colorado has, it is now clear that any such reporting requirement could be subject to a challenge in federal court.  It remains to be seen how the challenge to Colorado’s law will play out in federal court, and what impact this will have on Texas decision making.  Further, Justice Kennedy’s concurrence may spur further action on eliminating the physical presence requirements established in National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corporation v. North Dakota.  We will post any further developments in these areas to this blog.

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