Direct Marketing Association v. Brohl (appellant's opening brief)

No. 12-1175

IN THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

The Direct Marketing Association, Plaintiff-Appellee, v. Barbara Brohl, in her capacity as Executive Director, Colorado Department of Revenue, Defendant-Appellant.

On Appeal from the United States District Court

For the District of Colorado

The Honorable Judge Robert E. Blackburn D.C. No. 10-cv-01546-REB-CBS

APPELLANT'S OPENING BRIEF

JOHN W. SUTHERS Attorney General DANIEL D. DOMENICO* Solicitor General MELANIE J. SNYDER* First Assistant Attorney General STEPHANIE LINDQUIST SCOVILLE* Senior Assistant Attorney General GRANT T. SULLIVAN* Assistant Attorney General 1525 Sherman Street, 7th Floor Denver, Colorado 80203 (303) 866-5273 *Counsel of Record

Counsel requests oral argument.

Appellate Case: 12-1175 Document: 01018867917 Date Filed: 06/25/2012 Page: 1

TABLE OF CONTENTS

PAGE

i

STATEMENT OF JURISDICTION .......................................................... 1

STATEMENT OF THE ISSUES ............................................................... 2

INTRODUCTION ...................................................................................... 2

STATEMENT OF THE CASE .................................................................. 4

STATEMENT OF THE FACTS ................................................................ 6

STANDARD OF REVIEW....................................................................... 16

SUMMARY OF THE ARGUMENT ........................................................ 18

ARGUMENT ........................................................................................... 21

I. In enjoining the enforcement of Colorado Law, the district court lost sight of the core objective of the dormant Commerce Clause ........................................................................... 21

A. The aim of the dormant Commerce Clause is to preserve a national market free from state economic protectionism ........... 21

B. Colorado Law is not protectionist—the overall tax and regulatory scheme continues to treat out-of-state retailers better than in-state retailers........................................................ 24

II. Quill does not reach this far—the district court erred in finding that Colorado Law unduly burdens interstate commerce ........................................................................................ 27

A. The district court erred in expanding Quill’s dormant Commerce Clause nexus rule, which is strictly limited to the imposition of a duty to collect sales and use taxes................ 27

B. In the age of the Internet and given modern technology, it is especially important to decline invitations to extend Quill .............................................................................................. 33

C. The burdens of the Colorado Law on interstate commerce are incidental ................................................................................ 36


TABLE OF CONTENTS

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III. The district court erred in finding that Colorado Law discriminates against interstate commerce ................................... 44

A. Colorado Law passes the first-tier because it does not discriminate against interstate commerce .................................. 45

B. Under the second-tier Pike balancing test, Colorado Law advances strong state interests ................................................... 50

CONCLUSION ........................................................................................ 54


TABLE OF AUTHORITIES

PAGE

iii

CASES

Aldens, Inc. v. Ryan, 571 F.2d 1159 (10th Cir. 1978) ....................... 37, 38

Amazon.com, LLC v. N.Y. State Dep’t of Taxation & Fin., 913 N.Y.S.2d 129 (N.Y. App. Div. 2010) ..................................................... 10

American Target Adver., Inc. v. Giani, 199 F.3d 1241 (10th Cir. 2000) ..................................................................................................... 30

American Trucking Ass’n, Inc. v. Mich. Pub. Serv. Comm’n, 545 U.S. 429 (2005) ............................................................................... 37, 47

Ashwander v. TVA, 297 U.S. 288 (1936) ................................................ 18

Baude v. Heath, 538 F.3d 608 (7th Cir. 2008) ........................................ 44

Bendix Autolite Corp. v. Midwesco Enters., Inc., 486 U.S. 888 (1988) .................................................................................................... 49

Boston Stock Exch. v. State Tax Comm’n, 429 U.S. 318 (1977) ....... 24, 47

Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573 (1986) ......................................................................... 44, 46, 47

C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383 (1994) ........................................................................................ 26, 45, 51

Capital One Bank v. Comm’r of Revenue, 899 N.E.2d 76 (Mass. 2009), cert. denied, 129 S.Ct. 2827 (2009) ........................................... 30

Cardoso v. Calbone, 490 F.3d 1194 (10th Cir. 2007) .............................. 41

Carmichael v. S. Coal & Coke Co., 301 U.S. 494 (1937) ......................... 52

Commonwealth Edison, Co. v. Mont., 453 U.S. 609 (1981) ........ 23, 37, 52

Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983) .................................................................................................... 33

Dep’t of Revenue v. Davis, 553 U.S. 328 (2008) ......................... 22, 26, 50

Dows v. City of Chicago, 78 U.S. 108 (1871) ........................................... 26



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Exxon Corp. v. Governor of Md., 437 U.S. 117 (1978) ................ 42, 43, 49

Fair Hous. Council v. Roomates.com LLC, 521 F. 3d 1157 (9th Cir. 2008) ..................................................................................................... 54

Gen. Motors Corp. v. Tracy, 519 U.S. 278 (1997) ................................... 21

Gillmor v. Thomas, 490 F.3d 791 (10th Cir. 2007) ................................. 16

Golan v. Holder, 609 F.3d 1076 (10th Cir. 2010) .............................. 17, 18

Granholm v. Heald, 544 U.S. 460 (2005) .......................................... 33, 45

H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525 (1949) ...................... 21

Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64 (1963) ........... 7

Henneford v. Silas Mason Co., Inc., 300 U.S. 577 (1937) ......................... 7

Hughes v. Okla., 441 U.S. 322 (1979) ..................................................... 45

Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333 (1977) ... 21, 23

J.A. Tobin Constr. Co. v. Weed, 407 P.2d 350 (Colo. 1965) ...................... 6

KFC Corp. v. Iowa. Dept. of Rev., 792 N.W.2d 308 (Iowa 2010), cert. denied, 132 S.Ct. 97 (2011) .................................................... 30, 36

Kleinsmith v. Shurtleff, 571 F.3d 1033 (10th Cir. 2009) ............................................................ 21, 43, 44, 45, 46, 49, 50, 51

Nat’l Bellas Hess, Inc. v. Dep’t of Revenue, 386 U.S. 753 (1967) ............................................................................................ passim

Nat’l Endowment for the Arts v. Finley, 524 U.S. 569 (1998) ............... 17

Nat’l Geographic Soc’y v. Cal. Bd. of Equalization, 430 U.S. 551 (1977) ................................................................................................ 7, 24

New State Ice Co. v. Liebmann, 285 U.S. 262 (1932) ............................. 23

Or. Waste Sys., Inc. v. Dep’t of Env. Quality of State of Or., 511 U.S. 93 (1994) ........................................................................... 46, 47, 48

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) ............ 36, 43, 45, 50, 51



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Quik Payday, Inc. v. Stork, 549 F.3d 1302 (10th Cir. 2008) .................. 36

Quill Corp. v. N.D., 504 U.S. 298 (1992) ......................................... passim

Sabourin v. Univ. of Utah, 676 F.3d 950 (10th Cir. 2012) ..................... 18

Sabri v. United States, 541 U.S. 600 (2004) ........................................... 17

Schehl v. Comm’r of Internal Revenue, 855 F.2d 364 (6th Cir. 1988) ..................................................................................................... 53

Shivwits Band of Paiute Indians v. Utah, 428 F.3d 966 (10th Cir. 2005) ..................................................................................................... 16

St. German of Alaska E. Orthodox Catholic Church v. United States, 840 F.2d 1087 (2d Cir. 1988) ................................................... 53

Tax Comm’r of the State of W. Va. v. MBNA America Bank, N.A., 640 S.E.2d 226 (W. Va. 2006), cert. denied, 551 U.S. 1141 (2007) ...... 31

United Haulers Assoc., Inc. v. Oneida-Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330 (2007) ........................................... 22, 43, 51

United States v. Amon, 669 F.2d 1351 (10th Cir. 1981) ........................ 53

United States v. Catlett, 584 F.2d 864 (8th Cir. 1978) .......................... 53

United States v. Hoover, 727 F.2d 387 (5th Cir. 1984) .......................... 53

United States v. Raines, 362 U.S. 17 (1960) ........................................... 17

United States v. Richey, 924 F.2d 857 (9th Cir. 1990) ........................... 53

W. Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938) ............... 37, 52

Washington State Grange v. Washington State Republican Party, 552 U.S. 442 (2008) ........................................................................ 17, 18

STATUTES

§ 39-21-112(3.5), C.R.S. (2011) .................................................................. 4

§ 39-21-112(3.5)(c)(I), C.R.S. (2011) ........................................................ 12

§ 39-21-112(3.5)(d)(I), C.R.S. (2011) ........................................................ 13



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§ 39-21-112(3.5)(d)(II), C.R.S. (2011) ...................................................... 13

§ 39-21-112.3.5(3)(b), C.R.S. (2011) ........................................................ 40

§ 39-21-118(2), C.R.S. (2011) ......................................................... 8, 25, 42

§ 39-22-303, C.R.S. (2011) ....................................................................... 32

§§ 39-26-101 to 39-26-127, C.R.S. (2011) ............................................ 7, 25

§ 39-26-103(1)(a), C.R.S. (2011) .......................................................... 8, 25

§ 39-26-103(4), C.R.S. (2011) ......................................................... 8, 25, 42

§ 39-26-105, C.R.S. (2011) ................................................................... 8, 25

§ 39-26-105(1)(a), C.R.S. (2011) ................................................................ 8

§ 39-26-105(1)(g), C.R.S. (2011) ................................................................ 8

§ 39-26-202, C.R.S. (2011) ......................................................................... 6

18 U.S.C. § 1331 ........................................................................................ 1

28 U.S.C. § 1292(a)(1) ................................................................................ 2

28 U.S.C. § 1341 ...................................................................................... 31

68 Okla. Stat. Ann. § 1406.1(A) (2012) ................................................... 10

Maine Rev. State. Ann., § 1754-B(2)-(5) (2012) ...................................... 11

Okla. Admin. Code § 710:65-21-8 (2012) ................................................ 10

S.C. Code Ann., § 12-36-2690 (2012) ....................................................... 11

RULES

1 C.C.R. § 201-1: 39-22-303.11(a) ............................................................ 32

1 C.C.R. § 201-1: 39-22-303.11(c) ............................................................ 32

1 C.C.R. § 201-1:39-21-112.3.5 .................................................................. 4

1 C.C.R. § 201-1:39-21-112.3.5(1)(a)(iii) .................................................. 39

1 C.C.R. § 201-1:39-21-112.3.5(2) ............................................................ 12



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1 C.C.R. § 201-1:39-21-112.3.5(2)(a)(ii)(1) .............................................. 40

1 C.C.R. § 201-1:39-21-112.3.5(2)(d) ....................................................... 40

1 C.C.R. § 201-1:39-21-112.3.5(3) ............................................................ 13

1 C.C.R. § 201-1:39-21-112.3.5(3)(c)(ii) ................................................... 40

1 C.C.R. § 201-1:39-21-112.3.5(4) ............................................................ 13

1 C.C.R. §§ 201-1:39-21-112.3.5(2)(e) ...................................................... 40

Fed. R. Evid. 702 ..................................................................................... 50

OTHER AUTHORITIES

Billy Hamilton, Remembrance of Things Not So Past: The Story Behind the Quill Decision, State Tax Notes, Mar. 14, 2011, pp. 809-10 ................................................................................................... 28

Donald H. Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 Mich. L. Rev. 1091, 1120 (May 1986) ................................................................. 52

John A. Swain and Walter Hellerstein, The Questionable Constitutionality of Amazon’s Distribution Center Deals, State Tax Notes, Dec. 5, 2011 ........................................................................ 48

Leandra Lederman, Reducing Information Gaps to Reduce the Tax Gap: When is Information Reporting Warranted?, 78 Fordham L. Rev. 1733, 1738-1739 (March 2010) ................................ 12

PRIOR OR RELATED APPEALS – NONE


No. 12-1175

IN THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

The Direct Marketing Association, Plaintiff-Appellee, v. Barbara Brohl, in her capacity as Executive Director, Colorado Department of Revenue, Defendant-Appellant.

On Appeal from the United States District Court

For the District of Colorado

The Honorable Judge Robert E. Blackburn D.C. No. 10-cv-01546-REB-CBS

APPELLANT'S OPENING BRIEF

Defendant-Appellant, Barbara Brohl, in her capacity as Executive

Director of the Colorado Department of Revenue (“DOR”), submits this

Opening Brief.

STATEMENT OF JURISDICTION

The United States District Court for the District of Colorado had

jurisdiction over this matter pursuant to 18 U.S.C. § 1331. On March

30, 2012, the district court entered an Order on the parties’ cross


2

motions for summary judgment and entered a permanent injunction.

[Appx. 2142-63]. DOR filed a timely Notice of Appeal with the district

court on April 27, 2012. [Appx. 2164-66]. This Court has jurisdiction

pursuant to 28 U.S.C. § 1292(a)(1).

STATEMENT OF THE ISSUES

Does the dormant Commerce Clause require not only exempting

out-of-state retailers from collecting sales tax on sales to the state’s

consumers, but also exempting them from providing information

necessary for state enforcement and collection of taxes owed by

consumers on those sales?

INTRODUCTION

Contrary to popular belief, Internet and other remote retail

purchases are not exempt from state taxes. States impose sales and use

taxes on purchases of goods at retail, whether that purchase is made in

person, by phone, or via the Internet—and it is uncontested that doing

so is perfectly constitutional. The only dispute in this case is over what

states may do to enforce and collect these constitutional taxes.


3

Over four decades ago, the Supreme Court limited one method of

enforcing sales and use taxes, for one subset of interstate retailers—

those with no physical presence in the state. Those retailers, the Court

held, cannot be required to collect sales and use taxes and remit them to

the state. Colorado does not do so. Instead, Colorado requires retailers

who do not collect sales tax to provide information about such sales to

consumers and the state so that consumers may self-report and pay the

taxes owed.

The relative difficulty of collecting of sales and use taxes directly

from consumers has given rise to the popular misconception that

Internet and other remote sales are not taxed—and the related

misconception that online and remote retailers are entitled to a

significant and growing competitive advantage. The dormant

Commerce Clause is not meant to ensure that interstate commerce is

treated more favorably than instate commerce. Plaintiff-Appellee, the

Direct Marketing Association (“DMA”), however, wishes to shield its

members’ perceived price advantage—one that appears to exist solely

because taxes due are not collected at the point of sale. The dispute

here is whether the dormant Commerce Clause affords non-collecting


4

retailers the right to abet consumer tax evasion while stripping states of

the ability to enforce an undisputedly constitutional tax through

reasonable reporting requirements.

STATEMENT OF THE CASE

In 2010, DMA initiated this action to challenge a Colorado statute,

§ 39-21-112(3.5), C.R.S., and the implementing regulations, 1 C.C.R. §

201-1:39-21-112.3.5, (together, “Colorado Law”). DMA asserted eight

claims for relief against DOR: (1) discrimination against interstate

commerce under the United States Constitution; (2) improper

regulation of interstate commerce under the United States

Constitution; (3) violation of the right to privacy under the United

States Constitution; (4) violation of the right to privacy under the

Colorado Constitution; (5) violation of the right of free speech under the

United States Constitution; (6) violation of the right of free speech

under the Colorado Constitution; (7) deprivation of property without

due process of law under the United States and Colorado Constitutions;

and (8) taking of property without due process of law under the United


5

States and Colorado Constitutions. [Appx. 11-43, 46-83]. 1 DOR filed a

motion to dismiss all but the first two claims (“Commerce Clause

claims”). [Appx. 3204-39].2

DMA moved for a preliminary injunction solely on the Commerce

Clause claims. [Appx. 84-114]. The parties agreed to engage in limited

factual discovery, including expert discovery, related to the Commerce

Clause claims, and to defer discovery on the remaining claims. The

district court found DMA had a likelihood of success on the merits of the

Commerce Clause claims and granted the motion for a preliminary

injunction. [Appx. 1654-68].

At the parties’ joint request, the district court then approved a

briefing schedule for cross-motions for summary judgment on the

Commerce Clause claims and stayed all proceedings on the remaining

claims. [Appx. 1669-74, 1677-79]. Given this stipulated briefing

1 DMA voluntarily dismissed its claims under the Colorado Constitution. [Appx. 3254-90]. 2 Following DMA’s submittal of a sworn affidavit establishing that at least one of its members is subject to Colorado Law, DOR agreed not to contest DMA’s standing on the Commerce Clause claims and withdrew that portion of the motion to dismiss. DOR reserved the right to contest DMA’s associational standing on the remaining claims, as well as to contest DMA’s jus tertii standing. [Appx. 3291-94].


6

schedule, the district court denied DOR’s motion to dismiss as to the

non-Commerce Clause claims without prejudice and authorized DOR to

renew that motion after full resolution of the Commerce Clause claims.

[Appx. 3295].

The district court granted DMA’s motion for summary judgment,

denied DOR’s summary judgment motion, and permanently enjoined

DOR from enforcing Colorado Law (the “Order”). [Appx. 2142-63]. The

district court found Colorado Law discriminates against and unduly

burdens interstate commerce. [Id.].

STATEMENT OF THE FACTS

Colorado Sales and Use Tax. Colorado enacted a sales tax in

1935 and a complementary use tax in 1937. Use tax has long been due

on the storage, usage, or consumption of tangible property within

Colorado when sales tax has not been paid. § 39-26-202, C.R.S. The

obligation to pay the sales or use tax is upon the consumer. J.A. Tobin

Constr. Co. v. Weed, 407 P.2d 350, 353 (Colo. 1965). The use tax aims to

capture lost sales tax revenue when sales are diverted outside the state

or are accomplished remotely, as through catalog purchases or the

Internet.


7

The purpose of a complementary sales and use tax scheme is to

make all tangible property used or consumed in the state subject to a

uniform tax burden, regardless of whether it is acquired within or

without the state. Halliburton Oil Well Cementing Co. v. Reily, 373

U.S. 64, 66 (1963). Another proper function of this scheme is to “put

local retailers subject to the sales tax on a competitive parity with out-

of-state retailers exempt from the sales tax.” Nat’l Geographic Soc’y v.

Cal. Bd. of Equalization, 430 U.S. 551, 555 (1977). Although the use

tax, if looked at in isolation, is facially discriminatory, the Supreme

Court long ago determined that when paired with a sales tax of the

same rate, it does not run afoul of the dormant Commerce Clause.

Henneford v. Silas Mason Co., Inc., 300 U.S. 577 (1937).

Colorado requires retailers doing business in the state to collect

sales tax from consumers at the time of the transaction. Retailers who

collect Colorado sales tax must comply with a series of requirements:

obtain a license, calculate the state and local sales tax due, including

determining whether any exemptions apply, collect the tax at the time

of the transaction, file a return, remit the tax collected to the state, and

maintain records. See §§ 39-26-101 to 39-26-127, C.R.S. If they comply


8

with these requirements, collecting retailers may retain a small portion

of the taxes collected for the expense of collection and remittance. § 39-

26-105(1)(a), (g), C.R.S. Collecting retailers are themselves liable for

the sales tax even if they do not actually collect the tax from purchasers

and may be subject to criminal penalties if they fail to collect and remit.

§§ 39-26-105, 39-21-118(2), 39-26-103(1)(a), (4), C.R.S.

As a result of two Supreme Court decisions, these burdens

associated with state sales and use tax collection may be required only

of those retailers with a physical presence within the state. Quill Corp.

v. N.D., 504 U.S. 298 (1992); Nat’l Bellas Hess, Inc. v. Dep’t of Revenue,

386 U.S. 753 (1967). In Bellas Hess, the Court created a safe harbor

from sales and use tax collection obligations for mail-order businesses

whose only connection with customers in the state was by common

carrier or U.S. mail. 386 U.S. at 758. Twenty-five years later, Quill

affirmed the special Commerce Clause physical presence rule on stare

decisis grounds, noting the substantial reliance by the industry upon

the bright-line rule established in Bellas Hess. 504 U.S. at 308, 317. As

a result of these decisions, national retailers with locations in Colorado,

like Home Depot or Target, must collect and remit sales tax on their


9

online or other remote sales. Internet and mail-order companies with

no physical presence in the state, like Amazon.com or L.L. Bean, are not

required to do so.

The Explosion of E-Commerce and the Tax Gap. Since

Bellas Hess and Quill were decided, technology and retail business

practices have evolved dramatically. When Bellas Hess was decided,

the national mail-order sales industry was $2.4 billion annually. 386

U.S. at 763. When the Court decided Quill 25 years later, that industry

had ballooned to $180 billion annually. 504 U.S. at 329. With the

addition of E-commerce, the remote-sales industry has exploded. E-

commerce nearly tripled over the last decade alone, from $1.06 trillion

in 2000 to $3.16 trillion in 2008. [Appx. 1726-90, 1958].

States collect taxes due on E-commerce much less effectively than

on other transactions because retailers without a physical presence in

the state are not required to collect and remit the tax, and consumer

compliance with the use tax is very weak. Id. Consumers, whether

unknowingly or willfully, regularly fail to pay the tax owed if it is not

collected at the point of sale. Id. As a result, states and their

economies experience increased evasion of sales and use taxes and the


10

resulting lost revenue, lost sales by Main Street vendors who must

collect sales tax, and the economically inefficient alteration of business

practices to avoid collection responsibility. Id.

Sales and use tax revenue historically account for approximately

one-third of Colorado’s General Fund. [Appx. 1726-56, 1928-31].

Colorado state and local governments are estimated to have failed to

collect hundreds of millions of dollars in sales or use tax due on E-

commerce sales between 2010 and 2012 alone. Id. Colorado also loses

tax revenue on other types of remote sales, such as from mail-order

firms. Id.

Although Congress has the authority to enact a national scheme

to address the state sales and use tax gap, it has not done so. See Quill,

508 U.S. at 318. In the absence of action by Congress, the states have

approached the significant challenges created by Quill in different

ways. See, e.g., Amazon.com, LLC v. N.Y. State Dep’t of Taxation &

Fin., 913 N.Y.S.2d 129 (N.Y. App. Div. 2010) (discussing New York

affiliate nexus law requiring certain on-line retailers to collect sales tax

on purchases by residents); 68 OKLA. STAT. ANN. § 1406.1(A) (2012),

OKLA. ADMIN. CODE § 710:65-21-8 (2012) (creating consumer notice


11

requirements for non-collecting retailers); S.C. CODE ANN., § 12-36-2690

(2012) (creating sales tax collection exemption for retailers who own,

lease, or use a distribution facility in the state provided the retailer

makes a capital investment of at least $125 million and creates at least

2,000 jobs after 2013); MAINE REV. STATE. ANN., § 1754-B(2)-(5) (2012)

(identifying specific activities that do not constitute substantial physical

presence by retailers for sales tax collection, such as attending trade

shows in the state or holding a corporate board of directors or share

holders meeting in the state).

Third-Party Reporting and Tax Compliance. Tax compliance

improves dramatically when a third party reports taxable activity to the

taxing authority. The U.S. Department of the Treasury, Internal

Revenue Service, has conducted research on the income tax gap, the

“aggregate amount of true tax liability imposed by law for a given tax

year that is not paid voluntarily and timely.” [Appx. p. 1726-56, 1791-

96]. This research confirms the commonsense notion that compliance

with tax laws dramatically increases when a third party reports taxable

activity to the taxing authority. [Id. at 1803-07]; see also Leandra

Lederman, Reducing Information Gaps to Reduce the Tax Gap: When is


12

Information Reporting Warranted?, 78 Fordham L. Rev. 1733, 1738-

1739 (March 2010) (comparing third party information reporting to red

light cameras “spurring compliance in the first instance” because the

taxpayer is aware the government is watching).

Colorado Law. Colorado provides non-collecting retailers with

the choice between collecting sales tax, just like in-state retailers and

national retailers with a physical presence, or, complying with three

information reporting requirements. These third-party reporting

requirements aim to increase voluntary tax compliance by consumers

and improve DOR’s ability to collect tax due from consumers.

First, non-collecting retailers must notify Colorado purchasers

that, although the retailer is not collecting sales tax, the purchase may

be subject to Colorado’s use tax (the “Transactional Notice”). § 39-21-

112(3.5)(c)(I), C.R.S.; 1 C.C.R. § 201-1:39-21-112.3.5(2). The

Transactional Notice serves to educate consumers about their state use

tax liability with the aim of increasing voluntary compliance.

Second, non-collecting retailers must send Colorado customers

who purchase more than $500 from the retailer in a year an annual

summary listing the dates, general categories, and amounts of their


13

purchases and reminding them of their use tax obligation (the “Annual

Purchase Summary”). § 39-21-112(3.5)(d)(I), C.R.S.; 1 C.C.R. § 201-

1:39-21-112.3.5(3). The Annual Purchase Summary arms the consumer

with accurate information to facilitate reporting and paying the use tax.

Third, non-collecting retailers must send an annual report to DOR

listing only customer names, addresses, and total amounts spent (the

“Customer Information Report”). § 39-21-112(3.5)(d)(II), C.R.S.; 1

C.C.R. § 201-1:39-21-112.3.5(4). The Customer Information Report

serves two functions. First, it allows DOR to pursue audit and

collection actions against taxpayers who fail to pay the tax. Second, it

is designed to increase voluntary consumer compliance with state tax

laws because consumers know that a third party has reported their

taxable activity to the taxing authority.

Even before the enactment of Colorado Law, many out-of-state

retailers elected to collect sales tax although they are not required to do

so. For example, of the Internet retailers listed in the publication Top

500 Internet Retailers, at least 39 do not have a physical presence in

Colorado, but nevertheless collect Colorado sales tax. [Appx. 1726-56,

1932-33, ¶¶ 4, 6].


14

Colorado Law provides some leeway for variance in approaches to

compliance and also allows affected retailers to comply by means of

reasonable efforts. [Appx. 1726-56, 1934-62]. For example, a retailer

can comply with the Transactional Notice requirement by linking a

notice or popup window at the time of the online purchase, by slipping

the notice in as a packing slip for delivery, or through other methods.

[Appx. 1726-56, 1963-72, 1964:9-1965:6, 1965:13-15, 1966:10-20,

1967:20-1969:1]. DMA’s expert estimates a packing insert costs less

than ten cents per package. [Id. at 1972:3-5]. Further, no magic words

need be used to comply with Colorado Law, and DOR has provided

acceptable sample language for the Transactional Notice, so that

retailers need not interpret Colorado Law’s requirements on their own.

[Appx. 1726-56, 1973-79, 1975-78].

DOR also created templates to assist retailers in preparing and

electronically filing the Annual Purchase Summary. [Appx. 1726-56,

1980-81, ¶¶ 5-6, 1982-87]. Moreover, non-collecting retailers need not

create new data to comply—data for the Annual Purchase Summary

and Customer Information Report already exists. [Appx. 1726-56, 1963-


15

72, 1968:5-6, 1969:5-16]. Retailers track and maintain customer data in

very detailed ways. [Id; Appx. 1934-35, 1936-62].

Colorado Law is also narrow in its ambit, affecting only large non-

collecting retailers with significant sales in Colorado. Colorado Law

exempts retailers with less than $100,000 in gross annual sales in

Colorado, meaning the vast majority of retailers in the country are not

subject to the requirements. [Appx. 1726-56, 1934-60]. Because Annual

Purchase Summaries are required only for customers who spend more

than $500 annually, DMA’s expert estimated that retailers would have

to create reports for fewer than 20% of Colorado purchasers, and it

could be as low as 10%. [Appx. 1726-56, 1963-72, 1970:11-20; 1971:3-

5.].

For the affected retailers, the relative cost of compliance is

negligible, particularly given their existing participation in the Internet

economy. For the smallest affected non-collecting retailer, the reporting

requirements will result in estimated onetime, non-recurring costs in

the first year ranging from $2,571 to $6,000, or only 0.043% to 0.100%

of total national sales. [Appx. 213-43, 276-304]. Recurring annual costs

are estimated at $589 to $1,000, or 0.010% to 0.017% of gross annual


16

sales. [Id.] Larger retailers will be able to comply with the reporting

requirements as part of their ongoing system enhancements and

regular tax compliance efforts, all at a nominal cost. [Appx. 213-43,

276-304]. Even the smallest affected retailers’ costs may be mitigated

by reliance on third-party packaged E-commerce solution providers and

by incorporating the requirements of Colorado Law into regular process

improvements and existing annual tax preparation efforts. [Appx.

1726-56, 1934-35, 1936-60].

In contrast to the low costs of compliance, the estimated annual

revenue associated with Colorado Law as adopted is high—initially

estimated to be $12.5 million for fiscal year 2011-12 and expected to

increase over time as awareness of Colorado Law and enforcement

compliance increase. [Appx. 2079-2109, 2116-19].

STANDARD OF REVIEW

This Court reviews challenges to the constitutionality of a statute

de novo. Shivwits Band of Paiute Indians v. Utah, 428 F.3d 966, 972

(10th Cir. 2005). Furthermore, there is a strong presumption that

statutes are constitutional. Gillmor v. Thomas, 490 F.3d 791, 798 (10th

Cir. 2007).


17

Facial constitutional challenges are “generally disfavored as

‘[f]acial invalidation is, manifestly, strong medicine that has been

employed by the [Supreme] Court sparingly and only as a last resort.’”

Golan v. Holder, 609 F.3d 1076, 1094 (10th Cir. 2010) (quoting Nat’l

Endowment for the Arts v. Finley, 524 U.S. 569, 580 (1998)) (alterations

in original). A plaintiff can succeed on a facial challenge only “by

establish[ing] that no set of circumstances exists under which the Act

would be valid, i.e., that the law is unconstitutional in all of its

applications.” Washington State Grange v. Washington State

Republican Party, 552 U.S. 442, 449 (2008) (internal quotations

omitted; alteration in original). Courts reviewing claims of facial

invalidity must be careful not to go beyond the statute’s language and

speculate about “‘hypothetical’ or “imaginary’ cases.” Id. at 450 (citing

United States v. Raines, 362 U.S. 17, 22 (1960)).

The general disfavor of facial challenges is rooted in several

rationales: (1) claims of facial invalidity rest on speculation, causing the

risk of premature interpretations based on “factually barebones

records,” Sabri v. United States, 541 U.S. 600, 609 (2004); (2) facial

challenges run contrary to the rule of judicial restraint—that courts


18

should neither anticipate a question of constitutional law in advance of

the necessity of deciding it nor formulate a rule of constitutional law

broader than is required by the precise facts to which it is to be applied,

Ashwander v. TVA, 297 U.S. 288, 347 (1936) (Brandeis, J., concurring);

and (3) facial attacks threaten to short circuit the democratic process by

preventing laws embodying the will of the people from being

implemented in a manner consistent with the Constitution, Washington

State Grange, 552 U.S. at 451. Thus, plaintiffs bear a particularly

“heavy burden” in raising a facial constitutional challenge. Golan, 609

F.3d at 1094 (internal quotations omitted).

Similarly, this Court reviews a district court’s grant of summary

judgment de novo, applying the same standards that the district court

should have applied. Sabourin v. Univ. of Utah, 676 F.3d 950, 957

(10th Cir. 2012). This Court evaluates “the evidence in the light most

favorable to the non-moving party,” here, DOR. Id. at 957.

SUMMARY OF THE ARGUMENT

The district court’s permanent injunction should be reversed. In

mounting a facial challenge, DMA failed to meet its heavy burden to

establish that Colorado Law is unconstitutional in all its applications.


19

In enjoining Colorado Law, the district court lost sight of the core

objective of the dormant Commerce Clause—to prevent states from

engaging in preferential treatment of in-state interests over out-of-state

interests. Colorado Law does not do this. Because out-of-state retailers

are subject to only modest information reporting requirements and

possess a significant perceived price advantage since tax is not collected

at the point-of-sale, they maintain a significant competitive advantage

over in-state retailers and those national retailers with a physical

presence in the state who collect and remit sales tax.

Because the district court viewed DMA’s Commerce Clause claims

through an expanded reading of Quill, it erroneously and summarily

concluded that Colorado Law unduly burdens interstate commerce. In

the age of the Internet and modern technology, this Court should

continue to decline opportunities to extend the reach of the special

bright-line Quill rule. The modest reporting requirements of Colorado

Law do not unduly burden interstate commerce, and DMA did not meet

its burden to show that the requirements are “clearly excessive.”

The district court also erred in finding that Colorado Law

discriminates on its face against interstate commerce. The court


20

employed a before-and-after approach that analyzed in isolation how

non-collecting retailers were treated prior to and after Colorado Law

was enacted. Instead, the proper inquiry for a discrimination challenge

under the dormant Commerce Clause is to compare how in-state and

out-of-state retailers are treated and determine whether the former is

favored and the latter placed at a competitive disadvantage. Although

Colorado Law treats out-of-state non-collecting retailers differently, the

State’s overall tax and regulatory scheme continues to discriminate in

favor of these retailers. Colorado Law did not shift that balance.

Finally, Colorado Law advances Colorado’s considerable and

legitimate state interests in recovering tax revenue due to the state,

promoting the fair distribution of the cost of government, and enforcing

compliance with state tax laws.


21

ARGUMENT

I. In enjoining the enforcement of Colorado Law, the district court lost sight of the core objective of the dormant Commerce Clause.

A. The aim of the dormant Commerce Clause is to preserve a national market free from state economic protectionism.

The Commerce Clause establishes both an affirmative power in

Congress to regulate commerce amongst the states and also a dormant

limitation on the power of the states to enact laws that impose

substantial burdens on such commerce. Kleinsmith v. Shurtleff, 571

F.3d 1033, 1039 (10th Cir. 2009). The “fundamental objective” of the

dormant Commerce Clause is to preserve a “national market for

competition undisturbed by preferential advantages conferred by a

State upon its residents or resident competitors.” Gen. Motors Corp. v.

Tracy, 519 U.S. 278, 299 (1997); see also Hunt v. Wash. State Apple

Adver. Comm’n, 432 U.S. 333, 351 (1977) (referring to “the Commerce

Clause’s overriding requirement of a national ‘common market’”); H.P.

Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 539 (1949) (holding that

the Commerce Clause fosters a system of “free access to every market in

the Nation” where consumers may “look to the free competition from


22

every producing area in the Nation to protect him from exploitation by

any.”).

Modern interpretations of the dormant Commerce Clause are

“driven by concern about economic protectionism—that is, regulatory

measures designed to benefit in-state economic interests by burdening

out-of-state competitors.” Dep’t of Revenue v. Davis, 553 U.S. 328, 337-

38 (2008). In the absence of protectionism, the dormant Commerce

Clause “is not a roving license for federal courts to decide what

activities are appropriate for state and local government to undertake.”

United Haulers Assoc., Inc. v. Oneida-Herkimer Solid Waste Mgmt.

Auth., 550 U.S. 330, 343 (2007). In Davis, the Court emphasized that “a

government function is not susceptible to standard dormant Commerce

Clause scrutiny owing to its likely motivation by legitimate objectives

distinct from the simple economic protectionism the Clause abhors.” Id.

at 341. Of particular concern to the Court were the difficulties in

judicial attempts to weigh the costs and benefits of the tax-exempt bond

interest scheme at issue in that case; the judiciary’s unsuitability to

evaluate the relative burdens of different taxation methods; and the


23

dangers of “untoward consequences” for the bond market if a court were

empowered to strike down a decades-old scheme. Id. at 355-56.

Further, in the absence of economic protectionism, states remain

free to develop solutions in the area of tax administration. “Under our

federal system, the determination is to be made by state legislatures in

the first instance and, if necessary, by Congress, when particular state

taxes are thought to be contrary to federal interests.” Commonwealth

Edison, Co. v. Mont., 453 U.S. 609, 628 (1981); see also Hunt, 432 U.S.

at 350 (“in the absence of conflicting legislation by Congress, there is a

residuum of power in the state to make laws governing matters of local

concern which nevertheless in some measure affect interstate commerce

or even, to some extent, regulate it.”) (internal quotations omitted).

Such is the proper role of the states as laboratories for economic policy.

See New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis,

J., dissenting) (“It is the happy incidents of the federal system that a

single courageous State may, if its citizens choose, serve as a laboratory;

and try novel social and economic experiments without risk to the rest

of the country.”).


24

B. Colorado Law is not protectionist—the overall tax and regulatory scheme continues to treat out-of-state retailers better than in-state retailers.

Colorado’s Law is not protectionist, but rather encourages open

competition and tax-neutral decisions by consumers. National retailers

with stores in Colorado, as well as local Colorado businesses, are at a

competitive disadvantage because they must collect and remit sales tax

on all their sales, whether in-store, remote, or online. See Quill, 504

U.S. at 328-329 (White, J., dissenting) (noting that an out-of-state

business can undercut in-state companies with its comparative price

advantage in selling products free of use tax). The Supreme Court has

recognized that a proper function of complementary sales and use tax

schemes is to “put local retailers subject to the sales tax on a

competitive parity with out-of-state retailers exempt from the sales

tax.” Nat’l Geographic Soc’y, 430 U.S. at 555 (noting constitutionality of

such schemes is settled); see also Boston Stock Exch. v. State Tax

Comm’n, 429 U.S. 318, 332 (1977) (compensatory taxes leave a

consumer free to make choices without regard to tax consequences).

Colorado Law promotes such competitive parity by educating


25

consumers about their use tax obligation and promotes an open market

where consumers are not misled that no tax is due merely because it

was not collected at the point of sale.

Even with the information reporting requirements of Colorado

Law, non-collecting retailers continue to operate at a significant

commercial advantage over collecting retailers who must collect and

remit sales tax. In marked contrast to the non-collecting retailers’

information reporting requirements under Colorado Law, collecting

retailers must obtain a license, calculate the state and local sales tax

owed, determine whether any exemptions apply, collect the tax at the

time of the transaction, provide a tax receipt, file returns, remit the tax

collected on a monthly or quarterly basis, and maintain records. §§ 39-

26-101 to 39-26-127, C.R.S.; see also Bellas Hess, 386 U.S. at 766

(Fortas, J., dissenting) (“There is no doubt that the collection of taxes

from consumers is a burden.”). Moreover, collecting retailers ultimately

are liable for paying the tax whether they collect it or not, § 39-26-105,

C.R.S., and those who fail to collect and remit may be subject to

criminal penalties. §§ 39-21-118(2), 39-26-103(1)(a), (4), C.R.S. Yet

non-collecting retailers are free to do business in Colorado via the


26

Internet or mail catalog unfettered by any of these burdens. Non-

collecting retailers also maintain their perceived point-of-sale price

advantage since tax is not collected at the point of sale.

Like the tax-exempt bond interest scheme in Davis, Colorado’s

effort to spur consumer compliance with its use tax is a “legitimate

objective[] distinct from … simple economic protectionism.” 553 U.S. at

341. Inducing compliance with state tax laws permits the state to pay

for public projects, “a quintessentially public function.” Id.; accord C &

A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 429 (1994)

(protection of the public fisc is a legitimate non-protectionist interest).

Cf. Dows v. City of Chicago, 78 U.S. 108, 110 (1871) (“the modes adopted

[by the states] to enforce the taxes levied should be interfered with as

little as possible.”).


27

II. Quill does not reach this far—the district court erred in finding that Colorado Law unduly burdens interstate commerce.

A. The district court erred in expanding Quill’s dormant Commerce Clause nexus rule, which is strictly limited to the imposition of a duty to collect sales and use taxes.

The holding in Quill resulted from a very specific factual history

and narrow line of cases in the arena of state sales and use taxation. In

Bellas Hess, the Court held that both due process and the dormant

Commerce Clause preclude a state from imposing a use tax collection

obligation on a mail-order company whose only connection with

customers in the state was by common carrier or the mail. 386 U.S. at

758. Twenty-five years later in Quill, the Court revisited the very same

issues in an action by the North Dakota Tax Commissioner to require a

mail-order business to pay tax, interest, and penalties from sales to

North Dakota customers, from whom the business failed to collect and

remit taxes in reliance on Bellas Hess. 504 U.S. 298.

Noting modern minimum contacts due process standards, the

Quill Court overruled Bellas Hess to the extent it required physical

presence for the imposition of the duty to collect use tax on due process


28

grounds. Id. at 308 (“In ‘modern commercial life’ it matters little that

such solicitation is accomplished by a deluge of catalogs rather than a

phalanx of drummers: The requirements of due process are met

irrespective of a corporation’s lack of physical presence in the taxing

state.”). Under the Commerce Clause, however, the Court affirmed the

physical presence rule on stare decisis grounds, noting the “substantial

reliance” by the industry upon the bright-line Bellas Hess rule. Id. at

317. Because the duty to collect actually creates tax liability, the Quill

Court was particularly concerned with the retrospective consequences

of overruling Bellas Hess and creating unanticipated tax liability for the

mail-order industry where sellers had not collected sales tax based on

their reasonable reliance upon Bellas Hess. 504 U.S. at 318 n.10; see

also Billy Hamilton, Remembrance of Things Not So Past: The Story

Behind the Quill Decision, State Tax Notes, Mar. 14, 2011, pp. 809-10

(noting Supreme Court granted certiorari on the issue of whether Bellas

Hess was still good law but not issue of retroactive tax liability and

citing a critical exchange during oral argument wherein the state’s

attorney suggested state would pursue companies retroactively for

taxes not collected).


29

Acknowledging the “artificiality” of this rule, the Court noted the

benefit of encouraging settled expectations, which in turn fosters

investment by businesses and individuals. Id. at 315-316. In retaining

the physical presence nexus rule of Bellas Hess, however, the Court

suggested “contemporary Commerce Clause jurisprudence might not

dictate the same result were the issue to arise for the first time today.”

504 U.S. at 311. Quill, therefore, is more properly viewed as a

testament to the value of stare decisis than as an articulation of a

general physical presence standard under the dormant Commerce

Clause.

Quill’s explicit and consistent language compels the conclusion

that its holding is strictly limited to the imposition of a duty to collect

state sales and use taxes. See, e.g., 504 U.S. at 308 (“Comparable

reasoning justifies the imposition of the collection duty on a mail-order

house that is engaged in continuous and widespread solicitation of

business within a State.”); id. at 315 (“Under Bellas Hess, [vendors

lacking physical presence] are free from state-imposed duties to collect

sales and use taxes.”); id. (“Such a rule firmly establishes the

boundaries of legitimate state authority to impose a duty to collect sales


30

and use taxes and reduces litigation concerning those taxes.”); id. at 318

(“Congress is now free to decide whether, when, and to what extent the

States may burden interstate mail-order concerns with a duty to collect

use taxes.”) (emphasis added).

Consistent with this limited reading of Quill, this Court has

narrowly restricted the holding to the collection of taxes. American

Target Adver., Inc. v. Giani, 199 F.3d 1241, 1254-55 (10th Cir. 2000)

(limiting Bellas Hess and Quill rule to levy of taxes and declining to

extend special Commerce Clause nexus rule to state licensing and

registration requirements). Similarly, other appellate courts and the

Supreme Court have consistently declined opportunities to extend

Quill. In a corporate income tax case, the Supreme Court of Iowa held

that Quill’s physical presence nexus standard does not extend beyond

sales and use taxation. KFC Corp. v. Iowa. Dept. of Rev., 792 N.W.2d

308, 324-328 (Iowa 2010), cert. denied, 132 S.Ct. 97 (2011); see also

Capital One Bank v. Comm’r of Revenue, 899 N.E.2d 76, 84 (Mass.

2009), cert. denied, 129 S.Ct. 2827 (2009) (noting Quill Court “explicitly

emphasized on more than one occasion, a narrow focus on sales and use

taxes” and declining to extend physical presence rule to financial


31

institution excises); Tax Comm’r of the State of W. Va. v. MBNA

America Bank, N.A., 640 S.E.2d 226, 232-33 (W. Va. 2006), cert. denied,

551 U.S. 1141 (2007) (same result in business franchise and corporate

income tax case).

The bright-line rule of Quill therefore applies only when a state:

(1) imposes tax collection duties, including ultimate tax liability, (2) the

tax at issue is the sales and use tax, and (3) the retailer subject to the

tax lacks a physical presence within the state. The district court

ignored the first and most critical factor and focused solely upon the

last two factors.3

Further, because both Bellas Hess and Quill applied specifically to

the collection and remittance of sales and use tax, stare decisis is not

In doing so, the district court erroneously extended

Quill’s special dormant Commerce Clause nexus rule to regulatory or

information reporting requirements.

3 By treating the information reporting requirements of Colorado’s Law like a tax, the district court may have unnecessarily implicated the Tax Injunction Act (“TIA”). 28 U.S.C. § 1341 (providing federal courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State”). In any event, this Court may reverse the district court’s injunction without running afoul of the TIA or comity principles.


32

triggered here. Additionally, because the information reporting

requirements of Colorado Law do not impose a duty to collect or pay a

tax, the retroactivity considerations that weighed heavily upon the

Quill Court are not present here.

Without performing any analysis of the alleged burdens associated

with Colorado Law, the district court summarily concluded that those

burdens are “inextricably related in kind and purpose to the burdens

condemned by Quill.” [Appx. 2158]. This is not the case. Out-of-state

businesses without a physical presence can be subjected to a wide range

of obligations by the states in which they deliberately avail themselves

of economic opportunities. For example, the information reporting

requirements of Colorado Law are similar to the record-keeping and

reporting requirements long imposed on non-nexus, out-of-state

members of consolidated or combined entities for income tax. Many

states, including Colorado, require that all members of a combined

group be included in the income tax return for the group. See, e.g., § 39-

22-303, C.R.S.; 1 C.C.R. § 201-1: 39-22-303.11(a) & (c). Although no tax

is imposed on these non-nexus corporate members, they must maintain

appropriate records and participate in filing the group return. See, e.g.,


33

Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 167-68

(1983) (discussing state tax combined reporting methods). While these

burdens carry some cost, it is well-accepted that states may impose

those burdens despite the lack of nexus. See, e.g., Quill, 504 U.S. at 319

(Scalia, J., concurring) (discussing state regulatory jurisdiction,

including Blue Sky laws); Granholm v. Heald, 544 U.S. 460 (2005)

(state liquor licensing scheme).

B. In the age of the Internet and given modern technology, it is especially important to decline invitations to extend Quill.

Given the technological advancements and change in economic

realities in the 25 years between Bellas Hess and Quill, adherence to

the physical presence rule already made limited sense when Quill was

decided in 1992. Quill, 504 U.S. at 301-02 (agreeing with North Dakota

Supreme Court’s reasoning that “tremendous social, economic,

commercial, and legal innovations” rendered Bellas Hess holding

“obsolete,” but reversing nonetheless). In the age of the Internet and

modern technology, expansion of that rule makes even less sense today.


34

On the 20 year anniversary of Quill, the world of E-commerce and

remote sales looks vastly different and any asserted undue burdens of

Colorado Law must be viewed through this contemporary lens. Even in

1967, Justice Fortas recognized the advances of modern technology and

criticized the Bellas Hess majority for exempting the direct-mail

industry from collection burdens:

The burden is no greater than that placed upon local retailers by comparable sales tax obligations; and the Court’s response that these administrative and record keeping requirements could ‘entangle’ appellant’s interstate business in a welter of complicated obligations vastly underestimates the skill of contemporary man and his machines. There is no doubt that the collection of taxes from consumers is a burden; but it is no more of a burden on a mail order house…located in another State than on an enterprise in the same State which accepts orders by mail; and it is, indeed, hardly more of a burden than it is on any ordinary retail store in the taxing State.

386 U.S. at 766 (dissenting) (emphasis added).

The development of the Internet and the explosion of E-Commerce

since Bellas Hess and Quill counsel against the expansion of the special

bright-line rule created to address the unique history and burdens

associated with sales and use tax collection as applied to the direct-mail

industry. When Bellas Hess was decided, the national mail order sales


35

industry was $2.4 billion annually. 386 U.S. at 763 (Fortas, J.,

dissenting) (predicting “haven of immunity,” resulting from favored

position and exemption from bearing the fair burden of state taxes, will

increase in size and importance). When the Court decided Quill 25

years later, that industry had grown to $180 billion annually. 504 U.S.

at 329. Reaching $3 trillion in 2008, E-Commerce is no infant industry,

and expansion of a rule that already affords a substantial artificial

advantage is contrary to dormant Commerce Clause objectives.

The economic reality is that in the areas of Internet and remote

sales, non-collecting retailers have benefitted from a perceived price

advantage and windfall of customers who either unknowingly or

deliberately avoid paying the sales or use tax due on their transactions.

Any reliance non-collecting retailers have based on the “haven of

immunity” Bellas Hess and Quill created cannot reasonably entitle

them to a zone infinitely free from any state regulation, particularly

when such retailers have substantial economic presence and profit

handsomely from transactions with Colorado consumers. As the Iowa

Supreme recently noted, it simply does not make sense to require

Barnes & Noble to collect and remit sales tax on its online sales but not


36

impose the same burden on Amazon.com when the difference is in the

manner in which those retailers have chosen to do business and not the

degree to which they benefit from the provision of government services

in the taxing state. KFC Corp., 792 N.W.2d at 326 (“physical presence

is not a meaningful surrogate for economic presence”).

C. The burdens of the Colorado Law on interstate commerce are incidental.

Colorado Law imposes modest information reporting

requirements, none of which unduly burden interstate commerce. In

evaluating whether a law unduly burdens commerce, this Court looks at

whether “the burden [] imposed greatly exceeds the extent of the local

benefits.” Quik Payday, Inc. v. Stork, 549 F.3d 1302, 1309 (10th Cir.

2008); accord Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)

(burdens must be “clearly excessive” to violate dormant Commerce

Clause). See infra Part III. B. (discussing state interests under Pike

balancing test).

The Supreme Court recognizes businesses are often subject to

regulation and costs by the various states in which they do business and

that such costs do not run afoul of the dormant Commerce Clause. See,


37

e.g., American Trucking Ass’n, Inc. v. Mich. Pub. Serv. Comm’n, 545

U.S. 429, 438 (2005) (concluding businesses operating in multiple states

expect

Similarly, in Aldens, Inc. v. Ryan, 571 F.2d 1159 (10th Cir. 1978),

this Court upheld an Oklahoma statute that prevented state court

actions to collect on consumer credit balances where the interest rate

exceeded the statute’s maximum. It was stipulated that the out-of-state

mail-order retailer’s cost of complying with the Oklahoma statute’s

reduced finance charges and “special processing costs” amounted to

$160,500 annually. Id. at 1161. This Court held that the retailer’s

obligation “to sort out the Oklahoma credit transactions, and accord

them somewhat different treatment” was not an unreasonable burden.

Id. at 1162. Significantly, the Aldens court observed, “In the era of

computers, the record shows that a sorting of this nature, with separate

to pay local fees in each of those states); cf. W. Live Stock v.

Bureau of Revenue, 303 U.S. 250, 254 (1938) (Commerce Clause does

not “relieve those engaged in interstate commerce from their just share

of state tax burden even though it increases the cost of doing business.”

(emphasis added)); accord Commonwealth Edison Co., 453 U.S. at 623-

624.


38

Oklahoma contracts, would not be such an unreasonable burden as

compared to the local interest in the subject.” Id.

Today, 34 years after Aldens, the cost to even unsophisticated non-

collecting retailers to report information contained in data that they

already collect and store is even more negligible. See Bellas Hess, 386

U.S. at 766 (Fortas, J., dissenting) (“[T]he Court's response that these

administrative and record keeping requirements could ‘entangle’

appellant's interstate business in a welter of complicated obligations

vastly underestimates the skill of contemporary man and his

machines.”). Here, even the most conservative costs of compliance pale

in comparison to the costs in Aldens, since the smallest affected

retailers would spend no more than $6,000 in the first year and $1,000

annually thereafter. In fact, the vast majority of affected retailers

would incur no costs at all.

In light of the myriad of methods available to comply with the

modest reporting requirements, it is not surprising that the cost to non-

collecting retailers is negligible. Because the data needed for the

reporting requirements already exists in the non-collecting retailers’

computer systems, [Appx. 1726-56, 1963-72, 1968:14-16], the


39

compliance costs consist largely of one-time computer setup expenses

for redirecting the information. [Appx. 213-43, 276-304]. Larger

retailers will be able to comply with the reporting requirements as part

of their ongoing system enhancements and regular tax compliance

efforts, all at a nominal cost. [Appx. 283-84] Specifically, the reporting

requirements will result in an estimated one-time, non-recurring costs

in the first year ranging from $2,571 to $6,000, or 0.043% to 0.100% of

sales. [Appx. 213-43, 276-304]. Recurring annual costs are estimated

at $589 to $1,000, or 0.010% to 0.017% of gross annual sales.4

Beyond its negligible compliance costs, Colorado Law is both

narrow in its application and intentionally flexible in the means that

compliance may be accomplished:

[Id.].

These estimated expenses are not only de minimis relative to the large

size of the affected non-collecting retailers, but are also legally

permissible under traditional dormant Commerce Clause jurisprudence.

¾ Colorado’s reporting requirements apply only to the narrow group of non-collecting retailers whose annual gross sales in Colorado exceed $100,000. 1 C.C.R. § 201-1:39-21-112.3.5(1)(a)(iii). Hence, DOR’s expert estimated only “a relatively small number of

4 These estimated costs are conservative because they are based on the smallest affected non-collecting retailer. [Appx. 213-43, 276-304].


40

retailers” will be affected by the requirements. [Appx. 213-43, 276-304].

¾ Colorado Law requires the non-collecting retailer to send the Annual Purchase Summary only to Colorado customers who spend more than $500 annually. 1 C.C.R. § 201-1:39-21-112.3.5(3)(c)(ii). According to DMA’s own expert, this limitation results in non-collecting retailers sending the summaries to a mere 10 to 20 percent of their customers. [Appx. 1726-56, 1963-72, 1970:11-20, 1971:3-5].

¾ For the Transactional Notice and Annual Purchase Summary, Colorado Law allows for substantial compliance by non-collecting retailers subject to similar requirements in other states. 1 C.C.R. §§ 201-1:39-21-112.3.5(2)(e), 39-21-112.3.5(3)(b).

¾ Colorado Law provides leeway for variance in approaches to compliance, allowing affected retailers to comply through reasonable and nominal efforts. [Appx. 213-43, 276-304, 281-82]. For example, the Transactional Notice may be located either in close proximity to the total price, or on a “linking notice” popup window that directs the purchaser to the principal notice. 1 C.C.R. § 201-1:39-21-112.3.5(2)(d). Alternatively, if the non-collecting retailer indicates that no sales tax is being collected, the notice may be included on the invoice or immediately before, as part of, or immediately after the sale. 1 C.C.R. § 201-1:39-21-112.3.5(2)(a)(ii)(1). Other “workarounds” such as a packaging insert (at a cost of less than 10 cents) are also possible. [Appx. 1726-56, 1963-72, 1972:3-5].

¾ DOR has provided acceptable sample language for the Transactional Notice so non-collecting retailers need not draft the notice themselves. [Appx. 1726-56, 1973-79].

¾ DOR has provided instructions and templates to assist non-collecting retailers with preparing and electronically filing the Customer Information Report through a website secured with a


41

Secure Sockets Layer (“SSL”), ensuring the data is encrypted and that transactions are secure. [Appx. 1726-56, 1981 ¶¶ 5-6]. The transmission options, either online or by hard-copy media, would not result in any cost to the non-collecting retailer with respect to securing such data. [Appx. 213-43, 276-304].

DMA asserted below that Colorado customers are likely to cease

patronizing non-collecting retailers once they learn that the retailer is

obligated to report their purchase information to DOR. Aside from the

speculative nature of this hypothesis, see Cardoso v. Calbone, 490 F.3d

1194, 1197 (10th Cir. 2007) (evidence may not be based on speculation),

this conclusion does not create a dormant Commerce Clause violation.

Even under Colorado Law, non-collecting retailers are still able to offer

their goods for sale at a perceived discount as compared to their

collecting-retailer counterparts, since tax is not collected at the point-of-

sale —a commercial advantage that is both significant and, at its core,

discriminates in favor of and not against non-collecting retailers. See

Quill, 504 U.S. at 329 (White, J., dissenting) (“Also very questionable is

the rationality of perpetuating a rule that creates an interstate tax

shelter for one form of business-mail-order sellers-but no countervailing

advantage for its competitors.”). At most, Colorado Law results in a

modest change to non-collecting retailers’ “structure or methods of


42

operation”—areas not protected by the dormant Commerce Clause.

Exxon Corp. v. Governor of Md., 437 U.S. 117, 127 (1978).

Moreover, non-collecting retailers can opt out of the reporting

requirements of Colorado Law. Non-collecting retailers always have the

freedom to choose between two alternatives: either report the

information required by Colorado Law or collect and remit sales tax, as

many large retailers with no physical presence in Colorado have elected

to do. [Appx. 1726-56, 1932-33]. This is a voluntary choice not

available to retailers with a physical presence in Colorado—they must

When viewed against the estimated $12.5 million of revenue

generated by the reporting requirements in the first year alone, [Appx.

2079-2109, 2116-19], the limited reporting impositions asked of non-

collecting retailers cannot be said to be “clearly excessive,” particularly

when the bulk of such burden consists of onetime, non-recurring

expenses. [Appx. 213-43, 276-304]. Moreover, any nominal cost of

complying with Colorado Law may be passed on to Colorado consumers,

collect sales tax or face civil and criminal penalties. §§ 39-26-103(4), 39-

21-118(2), C.R.S. Thus, any differential treatment actually favors non-

collecting retailers to the detriment of collecting retailers.


43

whose elected representatives voted for the reporting requirements in

the first instance. See United Haulers, 550 U.S. at 345 (upholding

waste flow control ordinance where cost of compliance “is likely to fall

upon the very people who voted for the laws.”).

The remote possibility that some DMA members may elect to

withdraw from the Colorado market rather than comply, as DMA

insists without support, is speculative and beside the point. The

Commerce Clause “protects the interstate market, not particular

interstate firms, from prohibitive or burdensome regulations.” Exxon

Corp., 437 U.S. at 127-28. There is no reason to think that the

withdrawing non-collecting retailer’s supply “will not be promptly

replaced” by another non-collecting retailer—one willing to comply with

the reporting requirements to offer their goods for sale in Colorado. Id.

at 127.

Finally, DMA failed to sustain its evidentiary burden. See

Kleinsmith, 571 F.3d at 1043 (“[a]ny balancing approach, of which Pike

is an example, requires evidence. It is impossible to tell whether a

burden on interstate commerce is clearly excessive in relation to the

putative local benefits without understanding the magnitude of both


44

burdens and benefits.” (quoting Baude v. Heath, 538 F.3d 608, 612 (7th

Cir. 2008)). DMA submitted no evidence of any actual burden of

Colorado Law upon any of DMA’s members. Indeed, not even a scintilla

of proof was submitted establishing that any member investigated the

cost of altering their computer systems to comply with the reporting

requirements. [Appx. 2210:18-21, 2220:12-17, 2221:10-15]; see also

Kleinsmith, 571 F.3d at 1042 (noting plaintiff “fails to say that he has so

much as investigated the costs of complying with the present statute”).

III. The district court erred in finding that Colorado Law discriminates against interstate commerce.

The district court erred as a matter of law in finding that the

Colorado Law discriminates against interstate commerce.

Discrimination challenges brought under the Commerce Clause are

subject to a two-tiered analysis. Kleinsmith, 571 F.3d at 1039. “When a

state statute directly regulates or discriminates against interstate

commerce, or when its effect is to favor in-state economic interests over

out-of-state interests, [the Court has] generally struck down the statute

without further inquiry.” Id. (quoting Brown-Forman Distillers Corp. v.

N.Y. State Liquor Auth., 476 U.S. 573, 579 (1986)). “When, however, a


45

statue has only indirect effects on interstate commerce and regulates

evenhandedly, [the Court has] examined whether the State’s interest is

legitimate and whether the burden on interstate commerce clearly

exceeds the local benefits.” Id. Under this second tier, a law will be

upheld unless the burdens imposed are clearly excessive in relation to

the putative local benefits. Pike, 397 U.S. at 142. The burden to show

discrimination rests on the party challenging the statute. Hughes v.

Okla., 441 U.S. 322, 336 (1979). Colorado Law passes both tiers of

review.

A. Colorado Law passes the first-tier because it does not discriminate against interstate commerce.

The first-tier inquiry turns on whether the challenged law

“affirmatively or clearly discriminates against interstate commerce on

its face or in practical effect.” Kleinsmith, 571 F.3d at 1040 (quoting C &

A Carbone, Inc., 511 U.S. at 402 (emphasis added). Under the

Commerce Clause, discriminatory laws are those that “mandate

treatment of in-state and out-of-state economic interests that benefits

the former and burdens the latter.” Granholm, 544 U.S. at 472

(emphasis added) (internal quotations omitted). The challenging party


46

must demonstrate “both how local economic actors are favored by the

legislation, and how out-of-state-actors are burdened. Kleinsmith, 571

F.3d at 1041. The district court erred in finding Colorado Law

discriminates against interstate commerce.

The district court erroneously invoked a before-and-after approach

that analyzed in isolation the effect on non-collecting retailers prior to

and after Colorado Law was enacted. This before-and-after approach

has no support in Commerce Clause jurisprudence. In a discrimination

challenge, the “critical consideration is the overall effect of the statute

on both local and interstate activity.” Brown-Forman, 476 U.S. at 579.

Discrimination against interstate commerce requires a comparative

showing of “differential treatment of in-state and out-of-state economic

interests that benefits the former and burdens the latter.” Or. Waste

Sys., Inc. v. Dep’t of Env. Quality of State of Or., 511 U.S. 93, 99 (1994)

(emphasis added). This analysis, correctly performed, is not concerned

with whether out-of-state retailers are incrementally more burdened

before and after the passage of a law. Rather, the district court was

obligated to determine whether in-state retailers are favored or

provided a commercial advantage over out-of-state retailers. See, e.g.,


47

Boston Stock Exch., 429 U.S. at 329 (Commerce Clause precludes

discrimination that creates a “direct commercial advantage to local

business”) (emphasis added); Am. Trucking Ass’n, Inc., 545 U.S. at 433

(same).

Further, the district court stopped short its discrimination inquiry

upon a finding of differential treatment and failed to examine whether

that treatment amounted to discrimination against interstate

commerce. Relying upon Oregon Waste, the district court concluded the

degree of differential burden “is of no relevance” when “considering a

regulatory scheme that does not regulate evenhandedly.” [Appx. 2151].5

5 Supreme Court case law makes clear that to regulate “evenhandedly” simply means the statute does not discriminate on its face or in effect. Brown-Forman, 476 U.S. at 579.

In Oregon Waste, the degree of differential burden was irrelevant

because the statute discriminated on its face between in-state and out-

of-state waste sources by imposing a higher fee upon the disposal of

waste generated outside the state than that imposed on waste

generated within the state. 511 U.S. at 99-100 & n.4. Had the Oregon

Waste rates been reversed, so that out-of-state waste was subject to a

lower fee, clearly this would not amount to discrimination under the


48

Commerce Clause. Thus, Oregon Waste stands simply for the point that

the degree of burden beyond what is borne by in-state actors is

irrelevant. In order to constitute discrimination for purposes of the

dormant Commerce Clause, the burden borne by out-of-state actors

must still be greater than that borne by in-state interests.

Because out-of- state retailers are treated better than instate

retailers, Colorado Law does not discriminate. As described in Part I.

B. above, out-of-state retailers remain at a competitive advantage under

Colorado Law due to the heavier burdens associated with collecting,

being liable for sales tax, and their perceived point-of-sale price

advantage. See also John A. Swain and Walter Hellerstein, The

Questionable Constitutionality of Amazon’s Distribution Center Deals,

State Tax Notes, Dec. 5, 2011 (“[Quill] has created a world that

effectively forces states to discriminate against local commerce.”). Out-

of-state non-collecting retailers have a choice between collecting sales

tax, just like in-state retailers and national retailers with a physical

presence, or, complying with the information reporting requirements.

This choice is not available to in-state retailers or national retailers

with a physical presence within the state. Although the district court


49

found even this choice to be a burden, [Appx. 2152], logic warrants a

finding that discrimination is not present given such a choice.6

DMA failed to meet its heavy burden to establish Colorado Law

discriminates against interstate commerce. Kleinsmith requires actual

and not speculative evidence for a challenger to sustain a Commerce

Clause claim. Under the first tier, this Court explained the plaintiff

“has not presented evidence that could satisfy his burden to establish a

discriminatory effect,” that he “has not shown how the [Utah law] alters

the competitive balance between resident and nonresident attorneys,”

and that “even if” he had shown evidence of economic loss, “he would

still need to show a discriminatory effect upon interstate commerce in

attorney-trustee services as a whole.” Id. at 1042 (citing Exxon Corp.,

437 U.S. 117). Here, the dearth of actual evidence in the record reveals

DMA has similarly failed to meet its heavy evidentiary burden. DMA

relied solely on a survey of Colorado Internet consumers that it

commissioned. In addition to the fatally-flawed methodology the survey

6 Further, non-collecting retailers are not forced to choose between two unlawful burdens and therefore the district court’s reliance upon Bendix Autolite Corp. v. Midwesco Enters., Inc., 486 U.S. 888 (1988) was misplaced.


50

invoked, see [Appx. 924-44, 1603-11] (seeking exclusion of survey and

related testimony under F.R.E. 702), the speculative survey is not

evidence of any actual burden on or discrimination against interstate

commerce.

B. Under the second-tier Pike balancing test, Colorado Law advances strong state interests.

When the challenged law does not discriminate, the challenger

must rely on the second-tier inquiry by employing the balancing test set

forth in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). Kleinsmith,

571 F.3d at 1040. Under Pike, the statute “will be upheld unless the

burden imposed on such commerce is clearly excessive in relation to the

putative local benefits.” 397 U.S. at 142. State laws “frequently”

survive Pike scrutiny. Davis, 553 U.S. at 339.

Here, the district court conflated the per se standard from the

first-tier inquiry with the Pike balancing test by improperly weighing

the availability of nondiscriminatory alternatives against the putative

local benefits. [Appx. 2152-54]. Under Pike, the second tier requires

weighing the putative local benefits against the burdens on interstate


51

commerce, not the available nondiscriminatory alternatives. 397 U.S.

at 142.7

Any burdens on interstate commerce associated with Colorado

Law, discussed in Part II.C. above, are not clearly excessive in relation

to the three strong state taxing authority interests it advances. First,

Colorado Law enhances DOR’s ability to recover from consumers the

sales and use tax revenue due to the State—a vital component of the

State budget.

Colorado Law handily passes the Pike test.

8

7 Kleinsmith makes clear that the availability of non-discriminatory alternatives is relevant only under the first tier inquiry if there is a determination that the law is discriminatory. 571 F.3d at 1040. Because the Colorado Law does not discriminate, this Court need not reach the question of whether there are any sufficient non-discriminatory alternatives.

[Appx. 258-59, ¶¶ 7-8]. In United Haulers, 550 U.S. at

346, the Court determined that revenue generation “is a cognizable

benefit for purposes of the Pike test.” Id. at 346; see also C & A

Carbone, Inc., 511 U.S. at 429 (protection of public fisc is a legitimate

non-protectionist benefit); Donald H. Regan, The Supreme Court and

8 The district court overlooked the core aim of Colorado Law: to increase voluntary consumer compliance with the sales and use tax through information and third party reporting. Instead, the district court erroneously concluded that tax collection is enhanced only to the extent it encourages non-collecting retailers to collect and remit the tax rather than comply with Colorado Law.


52

State Protectionism: Making Sense of the Dormant Commerce Clause, 84

Mich. L. Rev. 1091, 1120 (May 1986) (“[R]aising revenue for the state

treasury is . . . a federally cognizable benefit.”).

Second, Colorado Law, which undisputedly provides an

enforcement mechanism for the sales and use tax scheme, promotes the

fair distribution of the cost of government. See Commonwealth Edison

Co., 453 U.S. at 622-623 (citing Carmichael v. S. Coal & Coke Co., 301

U.S. 494, 521-533 (1937)). In Commonwealth Edison Co., the Court

reaffirmed the fundamental principle that government exists primarily

to provide for the common good. 453 U.S. at 623. The Court noted that

nothing in the Commerce Clause divests the states of their broad taxing

latitude merely because the taxed activity has some connection to

interstate commerce. Id.; see also Quill, 504 U.S. at 328 (White, J.,

dissenting) (an out-of-state business derives numerous commercial

benefits from state in which it does business, such as sound local

banking institutions to support credit transactions and courts to ensure

collection of purchase price). To the contrary, interstate commerce may

be made to pay its “just share of the state tax burden even though it

increases the cost of doing business.” W. Live Stock, 303 U.S. at 254.


53

Third, Colorado Law promotes respect for and compliance with the

tax laws—a legitimate governmental interest recognized by a majority

of the Circuit Courts of Appeals, including the Tenth Circuit. See, e.g.,

United States v. Richey, 924 F.2d 857, 862 (9th Cir. 1990) (maintaining

a workable tax system is a compelling governmental interest); Schehl v.

Comm’r of Internal Revenue, 855 F.2d 364, 367 (6th Cir. 1988)

(promoting public compliance with tax laws is a legitimate

governmental interest); St. German of Alaska E. Orthodox Catholic

Church v. United States, 840 F.2d 1087, 1094 (2d Cir. 1988)

(enforcement of tax laws is a compelling governmental interest); United

States v. Hoover, 727 F.2d 387, 389-90 (5th Cir. 1984) (deterrent effect

offered by prosecution serves legitimate interest in promoting general

compliance with tax laws); United States v. Amon, 669 F.2d 1351, 1360

(10th Cir. 1981) (same as Hoover); United States v. Catlett, 584 F.2d

864, 868 (8th Cir. 1978) (same as Hoover).

This is no trivial concern in the use tax context. The dismal rate

of compliance with state use taxes in the era of booming E-commerce

underscores the need for heightened enforcement techniques. As

consumers make more and more purchases via the Internet from


54

businesses that do not collect the sales and use tax, the tax gap widens.

Id; see also Fair Hous. Council v. Roomates.com LLC, 521 F. 3d 1157,

1164 n.15 (9th Cir. 2008) (Internet is the “dominant and perhaps the

preeminent means in which commerce is conducted”). Third-party

reporting under Colorado Law combats this tax gap. The burdens upon

non-collecting retailers are, therefore, incidental and do not outweigh

the strong state interests furthered by Colorado Law.

CONCLUSION

Even if Colorado Law has the incidental effect of marginally

reducing the sizeable commercial advantage currently enjoyed by non-

collecting retailers, the dormant Commerce Clause does not preclude

this result. It would be ironic indeed to allow states to enact

constitutional sales and use tax schemes but then strip them of

reasonable means of enforcement to collect on those taxes. As a result,

DOR respectfully requests that this Court reverse the decision of the

district court granting judgment in DMA’s favor and enjoining Colorado

Law, and that the Court direct that summary judgment be entered in

DOR’s favor on DMA’s Commerce Clause claims.


55

DOR respectfully requests oral argument to address these

constitutional issues of first impression.

Respectfully submitted this 25th day of June, 2012.

JOHN W. SUTHERS Attorney General

s/ Daniel D. Domenico

DANIEL D. DOMENICO* Solicitor General MELANIE J. SNYDER* First Assistant Attorney General STEPHANIE LINDQUIST SCOVILLE* Senior Assistant Attorney General GRANT T. SULLIVAN* Assistant Attorney General 1525 Sherman Street, 7th Floor Denver, Colorado 80203 *Counsel of Record


CERTIFICATE OF COMPLIANCE

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As required by Fed. R. App. P. 32(a)(7)(c), I certify that this brief is proportionally spaced and contains 10,327

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Complete one of the following:

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s/Stephanie Lindquist Scoville


CERTIFICATE OF DIGITAL SUBMISSION AND PRIVACY REDACTIONS

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OPENING BRIEF, as submitted in Digital Form via the court’s ECF

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s/ Stephanie Lindquist Scoville


IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLORADO

Judge Robert E. Blackburn

Civil Case No. 10-cv-01546-REB-CBS

THE DIRECT MARKETING ASSOCIATION,

Plaintiff,

v.

ROXY HUBER, in her capacity as Executive Director, Colorado Department ofRevenue,

Defendant.

ORDER CONCERNING CROSS MOTIONS FOR SUMMARY JUDGMENT

Blackburn, J.

This matter is before me on the parties’ cross motions for summary judgment: (1)

Plaintiff’s Motion for Summary Judgment as to Counts I and II Alleging Violations

of the Commerce Clause [#98]1; and (2) Defendant’s Motion for Partial Summary

Judgment - Counts I and II (Commerce Clause) [#99], both filed May 6, 2011. The

parties both filed responses [#100 & #101] and replies [#102 & 103].2 I grant the

plaintiff’s motion, and I deny the defendant’s motion.

I. JURISDICTION & STANDING

I have jurisdiction over this case under 28 U.S.C. § 1331 (federal question).

1 “[#98]” is an example of the convention I use to identify the docket number assigned to aspecific paper by the court’s case management and electronic case filing system (CM/ECF). I use thisconvention throughout this order.

2 The issues raised by and inherent to the cross-motions for summary judgment are fully briefed,obviating the necessity for evidentiary hearing or oral argument. Thus, the motions stand submitted on thebriefs. Cf. FED. R. CIV. P. 56(c) and (d). Geear v. Boulder Cmty. Hosp., 844 F.2d 764, 766 (10thCir.1988) (holding that hearing requirement for summary judgment motions is satisfied by court's review ofdocuments submitted by parties).

Case 1:10-cv-01546-REB-CBS Document 105 Filed 03/30/12 USDC Colorado Page 1 of 22


Although the defendant challenges the plaintiff’s standing to pursue certain of its claims,

the defendant does not challenge the plaintiff’s standing to present its claims under the

Commerce Clause. I conclude that the plaintiff has standing on these claims. The

parties seek summary judgment only on the claims under the Commerce Clause.

Therefore, I need not and do not address standing further.

II. STANDARD OF REVIEW

Summary judgment is proper when there is no genuine issue as to any material

fact and the movant is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c);

Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265

(1986). A dispute is “genuine” if the issue could be resolved in favor of either party.

Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586,

106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); Farthing v. City of Shawnee, 39 F.3d

1131, 1135 (10th Cir. 1994). A fact is “material” if it might reasonably affect the outcome

of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505,

2510, 91 L.Ed.2d 202 (1986); Farthing, 39 F.3d at 1134.

A movant who bears the burden of proof at trial must submit evidence to

establish every essential element of its claim. See In re Ribozyme Pharmaceuticals,

Inc. Securities Litigation, 209 F.Supp.2d 1106, 1111 (D. Colo. 2002). Once the

motion has been supported properly, the burden shifts to the nonmovant to show, by

tendering depositions, affidavits, and other competent evidence, that summary

judgment is not proper. Concrete Works, Inc. v. City & County of Denver, 36 F.3d

1513, 1518 (10th Cir. 1994), cert. denied, 115 S.Ct. 1315 (1995). All the evidence must

be viewed in the light most favorable to the party opposing the motion. Simms v.

Oklahoma ex rel Department of Mental Health and Substance Abuse Services, 165

2



F.3d 1321, 1326 (10th Cir.), cert. denied, 120 S.Ct. 53 (1999).

III. BACKGROUND

The plaintiff, The Direct Marketing Association (DMA), asks the court to enter a

permanent injunction enjoining the defendant from enforcing the notice and reporting

obligations imposed on many out-of-state retailers under a Colorado law, now codified

at §39-21-112(3.5), C.R.S. (2010) (the Act), and under the concomitant regulations

promulgated by the Colorado Department of Revenue (DOR) to implement the Act, 1

Colo. Code Regs. § 201-1:39-21-112.3.5 (2010) (the Regulations).3 In general, the Act

and Regulations require retailers that sell products to customers in Colorado, but do not

collect and remit Colorado sales tax on those transactions, to report certain information

about the customers’ purchases from the retailer to each customer and to the Colorado

Department of Revenue.

The DMA is an association of businesses and organizations that market products

directly to consumers via catalogs, magazine and newspaper advertisements,

broadcast media, and the internet. The Act and the Regulations will affect many

members of the DMA. The defendant, Roxy Huber, is the Executive Director of the

Colorado Department of Revenue, the state agency charged with enforcing the Act and

the Regulations. The DMA alleges that certain requirements of the Act and the enabling

Regulations violate the constitutional rights of many members of the DMA. The present

motions concern the contention of the DMA that the Act and the Regulations violate the

rights of many of its members under the Commerce Clause of the United States

Constitution. U.S. Const. art. I, § 8.

3 Copies of the Act and the Regulations are attached to the DMA’s motion for preliminaryinjunction [#15] as Exhibits 1 and 2.

3



The Act and the Regulations establish three new obligations for retailers who sell

products to customers in Colorado, but who do not collect and remit Colorado sales tax

on those transactions. First, such retailers must notify their Colorado customers that the

retailer does not collect Colorado sales tax and, as a result, the purchaser is obligated

to self-report and pay use tax to the DOR (Transactional Notice).

Second, such retailers must provide each of their Colorado customers an annual

report detailing that customer’s purchases from the retailer in the previous calendar

year, informing the customer that he or she is obligated to report and pay use tax on

such purchases, and informing the customer that the retailer is required by law to report

the customer’s name and the total amount of the customer’s purchases from that

retailer to the DOR (Annual Purchase Summary). The Annual Purchase Summary must

be provided only to customers who spend more than 500 dollars in the calendar year

with the particular reporting retailer.

Third, such retailers must provide the DOR with an annual report concerning

each of the retailer’s Colorado customers stating the name, billing address, shipping

addresses, and the total amount of purchases from the retailer by each of the retailer’s

Colorado customers (Customer Information Report). The Law exempts retailers with

less than 100,000 dollars in gross annual sales in Colorado.

The Act and the Regulations are tools for DOR to enforce and collect the

long-existing Colorado sales and use tax. Colorado enacted a sales tax in 1935 and a

complementary use tax in 1937. Use tax is due on the storage, usage, or consumption

of tangible property within Colorado when sales tax has not been paid. §39-26-202,

C.R.S. Of course, the use tax is designed to capture sales tax revenue that is lost when

sales are diverted out of state or are accomplished remotely, as through catalog

4



purchases or via the Internet. The obligation to pay the sales or use tax is on the

consumer. J.A. Tobin Construction Co. v. Weed, 407 P.2d 350, 353 (Colo. 1965).

Ultimately, the DMA seeks a declaration that the Act and the Regulations are

unconstitutional because they violate the Commerce Clause. On the same basis, the

DMA seeks a permanent injunction enjoining enforcement of the Act and the

Regulations.

IV. THE DORMANT COMMERCE CLAUSE

The Commerce Clause expressly authorizes Congress to “regulate Commerce

with foreign Nations, and among the several States.” U.S. Const. art. I, § 8. The

Commerce Clause long has been read as having a negative or dormant sweep as well.

The clause, “‘by its own force’ prohibits certain state actions that interfere with interstate

commerce.” Quill Corp. v. North Dakota By and Through Heitkamp, 504 U.S. 298,

309 (1992) (quoting South Carolina State Highway Dept. v. Barnwell Brothers, Inc.,

303 U.S. 177, 185 (1938)). The negative Commerce Clause “denies the States the

power unjustifiably to discriminate against or burden the interstate flow of articles of

commerce.” Oregon Waste Systems, Inc. v. Department of Environmental Quality

of State of Or., 511 U.S. 93, 98 (1994).

The DMA asserts two claims under the dormant Commerce Clause. First, the

DMA contends that the Act and the Regulations discriminate impermissibly against

interstate commerce. I will refer to this claim as the discrimination claim. Second, the

DMA contends that the Act and the Regulations impermissibly impose undue burdens

on interstate commerce. I will refer to this claim as the undue burden claim.

V. DISCRIMINATION CLAIM

A state law violates the discrimination aspect of the dormant Commerce Clause if

5



it discriminates against interstate commerce either facially or in practical effect.

Hughes v. Oklahoma, 441 U.S. 322, 336 (1979). The United States Supreme Court

has adopted a two tier approach to analyzing discrimination claims. Brown-Forman

Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 578 - 579 (1986). At the

first tier, “(w)hen a state statute directly regulates or discriminates against interstate

commerce, or when its effect is to favor in-state economic interests over out-of-state

interests, we have generally struck down the statute without further inquiry.” Id. at 579.

When “a statute has only indirect effects on interstate commerce and regulates

evenhandedly, we have examined whether the State's interest is legitimate and whether

the burden on interstate commerce clearly exceeds the local benefits.” Id. (citing Pike

v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)). The second tier of the analysis is

the balancing of a state’s legitimate interests with the burden on interstate commerce

under the Pike analysis.

We have also recognized that there is no clear line separating thecategory of state regulation that is virtually per se invalid under theCommerce Clause, and the category subject to the Pike v. Bruce Churchbalancing approach. In either situation the critical consideration is theoverall effect of the statute on both local and interstate activity.

Id.; see also Kleinsmith v. Shurtleff, 571 F.3d 1033, 1039 - 1044 (10th Cir. 2009)

(describing and applying the two tier analysis).

Under the dormant Commerce Clause, a law discriminates against interstate

commerce if it imposes “differential treatment of in-state and out-of-state economic

interests that benefits the former and burdens the latter.” Oregon Waste Systems, Inc.

v. Department of Environmental Quality of State of Or., 511 U.S. 93, 99 (1994). In

Oregon Waste Systems, for example, the Supreme Court concluded that Oregon’s two

dollar and twenty-five cent per ton surcharge on out-of-state solid waste brought into

6



Oregon for disposal when compared to the eighty-five cents per ton surcharge imposed

on in-state solid waste was discriminatory in violation of the dormant Commerce Clause.

Id. at 100. The Oregon Waste Systems Court noted that the degree of a differential

burden or charge on interstate commerce “is of no relevance to the determination

whether a State has discriminated against interstate commerce.” Id. at 100 n. 4

(internal quotation and citation omitted). “If a restriction on commerce is discriminatory,

it is virtually per se invalid.” Id. at 99 (citations omitted). In Oregon Waste Systems,

the court found the statute in question to be facially discriminatory and “virtually per se”

invalid. Id. at 100. Facing that conclusion, the Court determined that the statute must

be invalidated unless the state can show that the statute “advances a legitimate local

purpose that cannot be adequately served by reasonable nondiscriminatory

alternatives.” Id. at 101 (citation and internal quotation omitted). Justifications for

discriminatory restrictions on commerce must pass the strictest scrutiny. Id. Strict

scrutiny leaves few survivors. City of Los Angeles v. Alameda Books, Inc., 535 U.S.

425, 455 (2002).

On their face the Act and the Regulations do not distinguish between in-state

retailers (those with a physical presence – a brick and mortar presence – in the state)

and out-of-state retailers (those with no physical presence in the state who make sales

to customers in the state). Rather, the Act focuses on the distinction between retailers

who collect Colorado sales tax and those who do not collect Colorado sales tax. See,

e.g., §39-21-112, C.R.S. As the defendant notes, this distinction between collecting and

non-collecting retailers is driven by the Commerce Clause law established in Quill

Corp. v. North Dakota By and Through Heitkamp, 504 U.S. 298, 309 (1992) and

related cases. Defendant’s motion [#99], p. 14.

7



Quill concerned an undue burden claim under the dormant Commerce Clause,

but its holding drives the analysis of the Act and the Regulations in relation to the

plaintiff’s discrimination claim. Under the law established in Quill and related cases,

Colorado may not impose any duty to collect sales and use taxes on out-of-state

retailers whose only connection to Colorado is by common carrier or the U.S. mail.

Quill, 504 U.S. at 315. Rather, a duty to collect such taxes may be imposed only on

retailers who have a physical presence in the state. Id. at 317 - 318. Thus, out-of-state

retailers that do not have a physical presence in Colorado are not obligated to collect

and remit sales tax on their sales to customers in Colorado. According to the plaintiff,

the Act and the Regulations discriminate impermissibly against this group of out-of-state

retailers by imposing on those retailers burdens that are not be borne by in-state

retailers.

A. FIRST TIER ANALYSIS

According to the defendant, the Act and the Regulations do not discriminate

against out-of state-retailers and interstate commerce because, reading the plain

language of the Act and the Regulations, they both apply to all retailers, in-state and

out-of-state, that sell to Colorado purchasers but do not collect Colorado sales tax.

Applying the law established by the Supreme Court, I conclude that the veil provided by

the words of the Act and the Regulations is too thin to support the conclusion that the

Act and the Regulations regulate in-state and out-of-state retailers even-handedly. This

is true because, viewed in the context of Quill and provisions of Colorado law that

require all in-state retailers to collect sales tax, I am constrained to conclude that the Act

and the Regulations directly regulate and discriminate against out-of-state retailers and,

therefore, interstate commerce.

8



Under Colorado law, all retailers doing business in Colorado and selling to

Colorado purchasers must obtain a sales tax license and must collect and remit the

sales tax applicable to each sale. §§39-26-103, 104, 106, 204, C.R.S. Civil and

criminal penalties may be imposed on a retailer who fails to comply. §§39-21-118(2),

39-26-103(1)(a), (4), C.R.S. Under Quill and related law, these duties and penalties

cannot be imposed on out-of-state retailers whose only connection to Colorado is by

common carrier or the U.S. mail. 504 U.S. at 315. Thus, under Colorado law, the

obligation to collect and remit sales tax is imposed only on in-state retailers, retailers

with a physical presence in the state. Under the Act and the Regulations, retailers who

collect and remit Colorado sales tax are not obligated to provide the Transactional

Notice, the Annual Purchase Summary, and the Customer Information Report otherwise

required by the Act and the Regulations. §39-21-112, C.R.S. Assuming they comply

with the mandates of Colorado law, in-state retailers are not subject to the Act and the

Regulations.4

Explicitly, the Act defines those who are subject to its reporting requirements as

“any retailer that does not collect Colorado sales tax.” §39-21-112, C.R.S. Given the

circumstances described above, only out-of state retailers must provide the Transaction

Notice and the Annual Purchase Summary to their customers. Only out-of state

retailers must provide the Customer Information Report to the state.5 The Act and the

4 Evidence submitted by the defendant indicates that the Tax Compliance Section of theColorado Department of Revenue discovers each year only a very small number of Colorado retailers whoare not complying with their legal obligation to collect and remit sales tax. Response to motion forpreliminary injunction [#50], Exhibit 16 (Reiser Affidavit). The existence of this inconsequential number ofnon-compliant in-state retailers does not change the Commerce Clause analysis.

5 As noted in the background section above, these requirements do not apply to retailers whosesales to a particular customer are below a certain level, or whose gross sales in Colorado during acalendar year are below a certain level. Even with these limitations, the Act and the Regulations will beapplicable to many out-of-state retailers. These limitations of the Act and the Regulations are not relevant

9



Regulations impose a notice and reporting burden on out-of-state retailers and that

burden is not imposed on in-state retailers. It is undisputed that compliance with the Act

and the Regulations would impose some burdens, including costs of compliance and

possibly lost sales, on out-of-state retailers.

The defendant argues that demonstrating differential treatment alone is not

sufficient to prove that the Act and the Regulations are discriminatory. Defendant’s

response [#101], pp. 14 - 15. That is true, but only when analyzing a statute that

regulates evenhandedly and has only indirect effects on interstate commerce. For

example, in Kleinsmith the court determined that the statute in question did not

discriminate on its face and, therefore, proceeded to determine if the evidence

established that the statute discriminated in its practical effect. Kleinsmith, 571 F.3d

1033, 1040 - 1041. In that context, the court concluded that “(n)ot every benefit or

burden will suffice [to show discriminatory effect] – only one that alters the competitive

balance between in-state and out-of-state firms.” Id. at 1041. However, when

considering a regulatory scheme that does not regulate evenhandedly between in-state

and out-of-state retailers, like the Act and the Regulations, the degree of a differential

burden or charge on interstate commerce “is of no relevance to the determination

whether a State has discriminated against interstate commerce.” Oregon Waste

Systems, 511 U.S. at 100 n. 4 (internal quotation and citation omitted).

The defendant argues also that the Act and the Regulations do not discriminate

because retailers subject to the Act and the Regulations, by definition out-of-state

retailers, may choose between two alternatives: comply with the Act and the

to the first tier discrimination analysis.

10



Regulations or voluntarily collect and remit Colorado sales tax. Defendant’s motion

[#99], pp. 15 - 16. Of course, the choice to collect and remit imposes the same burden

faced by in-state retailers. According to the defendant, “there can be no discrimination

against non-collecting out-of-state retailers who have a choice to be subject to precisely

the same burdens as in-state retailers who do not enjoy the same choice.” Defendant’s

response [#101], p. 17.

The state’s creation of this option does not resolve the problem. Under Quill

Colorado may not condition an out-of-state retailer’s reliance on its rights on a

requirement that the retailer accept a different burden, particularly when that burden is

unique to out-of-state retailers. See Bendix Autolite Corp. v. Midwesco Enterprises,

Inc., 486 U.S. 888, 893 (1988). Stated differently, without the Act and the Regulations,

out-of-state retailers did not have the burden of making this choice. The Act and the

Regulations impose the burden of this choice on out-of-state retailers but not on in-state

retailers. The choice does not eliminate, but instead, highlights the discrimination.

Regardless of the state’s salutary local purposes, its enactment of a statutory

scheme and concomitant regulations that produce, in effect, a geographic distinction

between in-state and out-of-state retailers discriminates patently against interstate

commerce. Given that patent discrimination, the Act and the Regulations violate the

Commerce Clause, unless the defendant can satisfy the requirements of the second tier

of the discrimination analysis.

B. SECOND TIER ANALYSIS

Under Oregon Waste, the second tier of the analysis requires a determination of

whether the Act and the Regulations advance a legitimate local purpose that cannot be

served adequately by reasonable nondiscriminatory alternatives. Oregon Waste, 511

11



U.S. at 101. When discrimination against commerce is demonstrated, “the burden falls

on the State to justify it both in terms of the local benefits flowing from the statute and

the unavailability of nondiscriminatory alternatives adequate to preserve the local

interests at stake.” Hughes v. Oklahoma, 441 U.S. 322, 336 (1979). The Oregon

Waste Court undertook this analysis, despite its discussion of per se invalidity when a

law is facially discriminatory. Id. Justifications for discriminatory restrictions on

commerce must pass the strictest scrutiny. Id.

The defendant argues that the State of Colorado has three important interests at

stake. First, the Act and the Regulations enhance the DOR’s ability to recover sales

and use tax revenue due to the state.6 Second, enforcement of sales and use taxes

promotes the fair distribution of the cost of government. Third, promoting the

enforcement of tax law promotes respect for and compliance with the tax laws. Without

question, these are legitimate state interests and purposes.

According to the plaintiff, there are at least three reasonable nondiscriminatory

alternatives to serve these purposes. First, some states include a line on their resident

income tax returns on which residents report use tax due. Second, the DOR could

increase audits of business consumers. Third, consumer education and notification

programs may increase compliance with use tax obligations. Plaintiff’s motion [#98], p.

9.

Relying on its contention that the Act and the Regulations are not discriminatory,

the defendant spends little time addressing reasonable nondiscriminatory alternatives.

6 The defendant argues that the Law and the Regulations also enhances DOR’s ability to recoversales taxes. The notice and reporting obligations at issue all relay information about the use tax liability ofa Colorado resident who buys something from an affected out-of-state retailer. Collection of sales tax isenhanced only to the extent the regulatory scheme encourages out-of-state retailers to collect and remitsales tax rather than comply with the Law and the Regulations.

12



Defendant’s response [#101], p. 12 n. 4. According to the defendant, Colorado has not

previously included a line on its income tax returns for reporting use tax. Defendant’s

response [#101], pp. 4 - 5. However, between 1966 and 1974, the DOR included a

consumer use tax return with income tax return forms. Id. That practice was

discontinued because the amount of tax collected did not justify the printing expense.

Id.

The record contains essentially no evidence to show that the legitimate interests

advanced by the defendant cannot be served adequately by reasonable

nondiscriminatory alternatives. Therefore, the defendant has not met its very high

burden of proof under the strict scrutiny standard applicable in the second tier of the

Commerce Clause discrimination analysis.

C. CONCLUSION

Quill puts states like Colorado in a difficult position. The state cannot require

out-of-state retailers, retailers with no physical presence in the state, to collect and remit

sales tax on sales those retailers make to residents of Colorado. Residents who make

purchases from those retailers are obligated to pay use tax on those purchases, but

enforcing the use tax is significantly more difficult than enforcing the sales tax. Seeking

to enhance enforcement of the use tax on those who make purchases from out-of-state

retailers, a state understandably looks to the out-of-state retailers for key information

that can enhance enforcement. However, if the state has a mandatory sales tax

system, as does Colorado, enforcing a reporting requirement on out-of-state retailers

will, by definition, discriminate against the out-of-state retailers by imposing unique

burdens on those retailers. Such a system imposes a differential burden on out-of-state

retailers because the different burden is imposed precisely because the retailer is an

13



out-of-state retailer entitled to the protection of Quill. Quill creates the in-state versus

out-of-state distinction, and the dormant Commerce Clause prohibits differential

treatment based on that distinction. Only a change in the law by the Supreme Court or

action by Congress can change this situation. Quill, 504 U.S. at 318 (“Congress is now

free to decide whether, when, and to what extent the States may burden interstate mail-

order concerns with a duty to collect use taxes.”)

Viewing the undisputed facts in the record in the light most favorable to the

defendant, I conclude that the Act, codified at §39-21-112(3.5), C.R.S. (2010), and the

concomitant Regulations promulgated by the Colorado Department of Revenue (DOR)

to implement the Act, 1 Colo. Code Regs. § 201-1:39-21-112.3.5 (2010), are

unconstitutional under the dormant Commerce Clause. That is true because the Act

and the Regulations directly regulate and discriminate against out-of-state retailers and,

therefore, interstate commerce. That discrimination triggers the virtually per se rule of

facial invalidity. The defendant has not surmounted that facial invalidity by showing that

the Act and the Regulations serve legitimate state purposes that cannot be served

adequately by reasonable nondiscriminatory alternatives. Thus, the plaintiff is entitled

to summary judgment on its first claim for relief for discrimination under the Commerce

Clause. Obversely, the defendant’s motion for summary judgment on this claim must

be denied.

VI. UNDUE BURDEN CLAIM

In its second claim for relief, the DMA alleges that the Act and the Regulations

impose improper and burdensome regulations on interstate commerce. The DMA relies

heavily on the law established in Quill Corp. v. North Dakota By and Through

Heitkamp, 504 U.S. 298, 309 (1992) to support its undue burden claim. To rehearse, in

14



Quill, the Court concluded that undue burdens on interstate commerce sometimes may

be avoided by the application of a bright line rule. According to Quill, the dormant

Commerce Clause and the Court’s earlier holding in National Bellas Hess, Inc. v.

Department of Revenue of State of Ill., 386 U.S. 753, 758 (1967) create a bright line

rule with regard to the collection of sales and use tax. This law creates a “safe harbor

for vendors whose only connection with customers in the [taxing] State is by common

carrier or the United States mail. Under Bellas Hess, such vendors are free from state-

imposed duties to collect sales and use taxes.” Quill, 504 U.S. at 315 (internal

quotation omitted). Many members of the DMA are vendors that have no physical

presence in Colorado and whose only connection with Colorado customers is by

common carrier, the United States mail, and/or the internet.

The Quill Court examined and applied the quadripartite test enunciated in

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). Under Complete

Auto, a state tax will survive 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. Complete Auto, 430 U.S. at 279.

Complete Auto rejected the previously applied distinction between direct and indirect

taxes on interstate commerce “because that formalism allowed the validity of statutes to

hinge on legal terminology, draftsmanship and phraseology.” Quill, 430 U.S. at 310

(internal quotation, citation, and brackets omitted). The Complete Auto test

emphasizes the importance of looking past the formal language of a tax statue to its

practical effect. Quill, 504 U.S. at 310. The first and fourth prongs of the Complete

15



Auto test “limit the reach of state taxing authority so as to ensure that state taxation

does not unduly burden interstate commerce.” Quill, 504 U.S. at 313. The safe harbor

established in Quill is a meant to delineate and define the limits of the substantial nexus

requirement of the Complete Auto test to ensure that a state tax law does not impose

an undue burden on interstate commerce. Id.

As the defendant notes, the Act and the Regulations do not require out-of-state

retailers to collect sales and use taxes. However, they do require out-of-state retailers

to gather, maintain, and report information, and to provide notices to their Colorado

customers and to the DOR. Those notices are required to provide information about the

out-of-state retailers and their Colorado customers. The sole purpose of these

requirements is to enhance the collection of use taxes by the State of Colorado. The

defendant asserts no other reason to require such reporting.

Correctly, the defendant notes that the holding in Quill has a very “narrow focus

on sales and use taxes.” Capital One Bank v. Commissioner of Revenue, 899

N.E.2d 76, 84 (Mass. 2009). When addressing taxes and regulations outside of that

narrow focus, many cases hold that Quill’s narrow focus should not be expanded into

other areas. See, e.g., Capital One 899 N.E.2d at 86 (Quill dormant Commerce

Clause standard is not applicable to financial institution excise taxes); American Target

Advertising, Inc. v. Giani,199 F.3d 1241, 1255 (10th Cir. 2000) (narrow analysis of

Quill not applicable to law requiring all professional fund raising consultants to register).

In this case, the burden of the notice and reporting obligations imposed by the

Act and the Regulations is somewhat different than the burden of collecting and

remitting sales and use taxes. However, the sole purpose of the burdens imposed by

the Act and the Regulations is the ultimate collection of use taxes when sales taxes

16



cannot be colleted. Looking to the practical effect of the Act and the Regulations, as

Quill instructs, I conclude that the burdens imposed by the Act and the Regulations are

inextricably related in kind and purpose to the burdens condemned in Quill. The Act

and the Regulations impose these burdens on out-of-state retailers who have no

physical presence in Colorado and no connection with Colorado customers other than

by common carrier, the United States mail, and the internet. Those retailers are

protected from such burdens on interstate commerce by the safe-harbor established in

Quill.

Viewing the undisputed facts in the record in the light most favorable to the

defendant, I conclude that the Act, codified at §39-21-112(3.5), C.R.S. (2010), and the

concomitant Regulations promulgated by the Colorado Department of Revenue (DOR)

to implement the Act, 1 Colo. Code Regs. § 201-1:39-21-112.3.5 (2010), are

unconstitutional under the dormant Commerce Clause. That is true because, under the

standard established in Quill, a state law that imposes a use tax collection burden on a

retailer with no physical presence in the state causes an undue burden on interstate

commerce. The burdens imposed by the Act and the Regulations are inextricably

related in kind and purpose to the burdens condemned in Quill. Thus, the Act and the

Regulations impose an undue burden on interstate commerce. The plaintiff is entitled to

summary judgment on their second claim for relief, asserting an undue burden claim

under the Commerce Clause. Thus, the defendant’s motion for summary judgment on

this claim must be denied.

VII. DECLARATORY & INJUNCTIVE RELIEF

A. DECLARATORY RELIEF

Under the Declaratory Judgment Act, 28 U.S.C. §§ 2201 - 2202, the court may

17



enter a judgment declaring “the rights and other legal relations of any interested party

seeking such declaration . . . .” 28 U.S.C. § 2201. Such a judgment or decree is

reviewable as a final judgment. Id. The DMA seeks a declaration that the Act and the

Regulations are unconstitutional. The DMA has established that the Act and the

Regulations are unconstitutional and, therefore, the DMA is entitled to a declaratory

judgment to that effect.

B. INJUNCTIVE RELIEF

A party may obtain a permanent injunction if it proves: (1) actual success on the

merits; (2) irreparable harm unless the injunction is issued; (3) the threatened injury

outweighs the harm that the injunction may cause the opposing party; and (4) the

injunction, if issued, will not adversely affect the public interest. Fisher v. Okla. Health

Care Auth., 335 F.3d 1175, 1180 (10th Cir.2003); See also Prairie Band Potawatomi

Nation v. Wagnon, 476 F.3d 818, 822 (10th Cir. 2007). The DMA has established each

of these elements.

1. Success on the Merits. In this order, the court grants summary judgment to

DMA on its two claims asserting that the Act and the Regulations violate the Commerce

Clause. With that, the DMA has achieved success on the merits of these two claims.

2. Irreparable Harm. When the impairment of a constitutional right is at issue, no

further showing of irreparable harm is necessary. Kikumura v. Hurley, 242 F.3d 950,

963 (10th Cir. 2001). In a recent case, the United States Court of Appeals for the Tenth

Circuit indicated that violation of Commerce Clause rights constitutes irreparable injury.

American Civil Liberties Union v. Johnson, 194 F.3d 1149, 1163 (10th Cir. 2010)

(citing American Libraries Ass’n v. Pataki, 969 F.Supp. 160, 168 - 183 (S.D.N.Y.

1997)). Although the Tenth Circuit’s statement in Johnson is dicta, I conclude that

18



violation of the constitutional rights of the members of DMA under the Commerce

Clause constitutes irreparable injury. Thus. the DMA has established irreparable harm.

3. Balance of Harms & Public Interest. When considering an injunction against a

law that has been found to be unconstitutional, the balance of harms and public interest

considerations largely collapse into each other. The Colorado Department of Revenue

does not have a legitimate interest in enforcing a law that is unconstitutional. Chamber

of Commerce of U.S. v. Edmondson, 594 F.3d 742, 771 (10th Cir. 2010). Moreover,

“the public interest will perforce be served by enjoining the enforcement of the invalid

provisions of state law.” Id. Both of these factors have been established.

4. Conclusion. The DMA has established the four elements necessary to

support the entry of a permanent injunction. The court will enter an order permanently

enjoining enforcement of the Act and the Regulations against retailers who have no

physical presence in the state of Colorado.

VII. CONCLUSION & ORDERS

The Act and the Regulations violate the Commerce Clause and, therefore, are

unconstitutional. This is true for two reasons. First, the Act and the Regulations directly

regulate and discriminate against out-of-state retailers and interstate commerce. That

discrimination triggers the virtually per se rule of facial invalidity. The defendant has not

overcome this facial invalidity by showing that the Act and the Regulations serve

legitimate state purposes that cannot be served adequately by reasonable

nondiscriminatory alternatives. Second, the Act and the Regulations impose an undue

burden on interstate commerce under the standard established in Quill Corp. v. North

Dakota By and Through Heitkamp, 504 U.S. 298, 309 (1992).

19



THEREFORE, IT IS ORDERED as follows:

1. That the Plaintiff’s Motion for Summary Judgment as to Counts I and II

Alleging Violations of the Commerce Clause [#98] filed May 6, 2011, is GRANTED;

2. That the Defendant’s Motion for Partial Summary Judgment - Counts I

and II (Commerce Clause) [#99] filed May 6, 2011, is DENIED;

3. That under 28 U.S.C. § 2201, the plaintiff, The Direct Marketing Association,

is entitled to a judgment declaring that the provisions of §39-21-112(3.5), C.R.S. (2010)

(the Act), and the regulations promulgated thereunder, 1 Colo. Code Regs. § 201-1:39-

21-112.3.5 (2010) (the Regulations), are unconstitutional to the extent that the Act and

the Regulations require

A. that a retailer must notify their Colorado customers that the

retailer does not collect Colorado sales tax and, as a result, the purchaser

is obligated to self-report and pay use tax to the Colorado Department of

Revenue (Transactional Notice); and

B. that a retailer must provide to each of its Colorado customers an

annual report detailing that customer’s purchases from the retailer in the

previous calendar year, informing the customer that he or she is obligated

to report and pay use tax on such purchases, and informing the customer

that the retailer is required by law to report the customer’s name and the

total amount of the customer’s purchases from that retailer to the Colorado

Department of Revenue (Annual Purchase Summary); and

C. that a retailer must provide the Colorado Department of

Revenue with an annual report concerning each of the retailer’s Colorado

customers stating the name, billing address, shipping addresses, and the

20



total amount of purchases from the retailer by each of the retailer’s

Colorado customers (Customer Information Report);

4. That effective forthwith defendant Roxy Huber, in her capacity as Executive

Director, Colorado Department of Revenue, together with her agents, servants,

employees, attorneys-in-fact, or anyone acting on their behalf, are PERMANENTLY

ENJOINED AND RESTRAINED from enforcing the provisions of §39-21-112(3.5),

C.R.S. (2010) (the Act) and the regulations promulgated thereunder, 1 Colo. Code

Regs. § 201-1:39-21-112.3.5 (2010) (the Regulations), to the extent that the Act and the

Regulations require

A. that a retailer must notify their Colorado customers that the

retailer does not collect Colorado sales tax and, as a result, the purchaser

is obligated to self-report and pay use tax to the Colorado Department of

Revenue (Transactional Notice); and

B. that a retailer must provide to each of its Colorado customers an

annual report detailing that customer’s purchases from the retailer in the

previous calendar year, informing the customer that he or she is obligated

to report and pay use tax on such purchases, and informing the customer

that the retailer is required by law to report the customer’s name and the

total amount of the customer’s purchases from that retailer to the Colorado

Department of Revenue (Annual Purchase Summary); and

C. that a retailer must provide the Colorado Department of

Revenue with an annual report concerning each of the retailer’s Colorado

customers stating the name, billing address, shipping addresses, and the

total amount of purchases from the retailer by each of the retailer’s

21



Colorado customers (Customer Information Report);

5. That this injunction SHALL LIMIT the enforcement of the Act and the

Regulations against retailers who sell to customers in Colorado, but who have no

physical presence in the State of Colorado and whose only connection to the State of

Colorado is by common carrier or the United States Mail; and

6. That the court will address in a separate order the parties’ request that the

court certify this order as a final judgment under FED. R. CIV. P. 54(b).

Dated March 30, 2012, at Denver, Colorado.

BY THE COURT:

22



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Direct Marketing Association v. Brohl, Docket No. 12-01175 (10th Cir. Apr 30, 2012), Court Docket

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Documents

Direct Marketing Association v. Brohl (appellant's opening brief)