January 31, 2023

Internet retailers press their claims in High Court

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Internet-RetailBy Jamie Schuman, From Supreme Court Brief

’Tis the season for online gift-buying, and a fitting time for the U.S. Supreme Court to hear Direct Marketing Association v. Brohl, a case involving the rights of Internet retailers.

At issue is a law that requires merchants who do not have stores in Colorado to notify customers there to pay a state tax on mail-order goods. The Direct Marketing Association, a trade group in New York, has tried to block this provision, but the U.S. Court of Appeals for the Tenth Circuit threw out its suit. It found that, under the federal Tax Injunction Act, the claim belongs in state court.

The justices will consider this jurisdictional matter on Dec. 8.

George Isaacson, counsel of record for the DMA, argues that the TIA does not bar his case, and that the Tenth Circuit’s interpretation of it will make it hard for many litigants to sue in federal court.

“[T]he Tenth Circuit insulates from federal court review any law that a state may deem to have some bearing on the payment of a tax, no matter how tenuous the relationship,” wrote Isaacson, a partner at Brann & Isaacson in Lewiston, Maine.

Isaacson says the ruling is a problem for DMA members—who include electronic merchants and catalogue companies—because federal courts offer neutral forums for out-of-state businesses as well as expertise in constitutional law.

Isaacson should know. Since landing catalogue giant L.L. Bean, of Freeport, Maine, in the 1960s, his firm has developed a niche in legal issues surrounding e-commerce. Brann & Isaacson now represents about 25 businesses on Internet Retailer’s list of the top 100 online merchants.

The TIA prevents federal courts from stopping or restraining the “assessment, levy or collection” of state taxes so long as an efficient remedy is available in state court.

The Colorado law at issue would require online and mail-order retailers whose annual sales in the state exceed $100,000 to notify residents who purchased more than $500 of goods to pay a 2.9 percent use tax. The companies also would have to give the state contact and transaction details for these customers.

The law’s goal is to curb revenue loss from out-of-state companies that do not collect Colorado taxes on goods bought online. Though Coloradans are supposed to voluntarily pay a use tax on these items, many do not. By one estimate, the state may have lost upwards of $170 million in 2012.

The Tenth Circuit found last year that the U.S. District Court for the District of Colorado did not have jurisdiction to enjoin the law because doing so would restrain the “collection” of taxes. Isaacson argues that this word is a term of art, which should be defined with reference to the Internal Revenue Code. The reporting activities at issue are a “secondary aspect of state tax administration” and do not constitute “collection,” he says.

In its original merits case before the district court, the DMA argued that the reporting requirements violate consumer privacy, as well as the Commerce Clause, the First Amendment, and the Takings Clause. The district court found that the provisions interfere with interstate commerce. After the Tenth Circuit overturned this ruling, Colorado state courts enjoined the law while the federal appeal is pending.

On the jurisdictional matter before the Supreme Court, the DMA argues that the purpose of the TIA is to prevent taxpayers from using federal lawsuits to circumvent state tax requirements. The DMA says that since it does not pay taxes in Colorado, the TIA does not apply.

Isaacson warns that the Tenth Circuit’s ruling could lead states to sneak unrelated regulations into tax codes to take advantage of the TIA.

“If, in fact, a state can append onto its tax system obligations to third parties who are not taxpayers there is a real danger of having what we think are pretextual regulatory requirements,” said Isaacson, who teaches constitutional law at Bowdoin College.

Isaacson co-wrote the brief with Brann & Isaacson partner Matthew Schaefer, and will argue the case this month. It’s his first time before the high court. He has prepared by mooting with colleagues, and listening to oral arguments online to learn how the justices and attorneys engage with one another.

“Obviously, this is a major event in a lawyer’s career,” Isaacson said. “You double down on your efforts.”

Jamie Schuman is a freelance writer and graduate of The George Washington University Law School.

IMAGE: yuuurin / iStockphoto.com

For more on this story go to: http://www.nationallawjournal.com/supremecourtbrief/id=1202677958763/Internet-Retailers-Press-Their-Claims-in-High-Court#ixzz3Kw14p3ff


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