Direct Marketing Association, The v. Huber
RESPONSE to 98 MOTION for Summary Judgment on Counts I and II filed by Defendant Roxy Huber. (Attachments: # 1 Exhibit Ex. 1 - HB10-1193 Reengrossed, # 2 Exhibit Ex. 2 - Williams Decl., # 3 Exhibit Ex. 3 - August 2010 Fiscal Note)(Snyder, Melanie)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 10-cv-01546-REB-CBS
The Direct Marketing Association,
Roxy Huber, in her capacity as Executive Director,
Colorado Department of Revenue,
DEFENDANT’S RESPONSE IN OPPOSITION TO PLAINTIFF’S MOTION FOR
SUMMARY JUDGMENT AS TO COUNTS I AND II ALLEGING
VIOLATIONS OF THE COMMERCE CLAUSE
Defendant, Roxy Huber, Executive Director of the Colorado Department of
Revenue (“DOR”), submits this Response in Opposition to Plaintiff’s Motion for
Summary Judgment as to Counts I and II Alleging Violations of the Commerce Clause
[Dkt. #98] (“Pl. MSJ”).
INTRODUCTION AND BACKGROUND
DMA alleges a Colorado law, Colo. Rev. Stat. § 39-21-112(3.5) (2010), and its
implementing regulations, 1 Colo. Code Regs. § 201-1:39-21-112.3.5 (2010),
(collectively, “the Law”), violate the Commerce Clause of the United States Constitution.
Count 1 alleges that the Law discriminates against interstate commerce and imposes
notice and reporting requirements that burden out-of-state retailers to the benefit of instate retailers. First Amended Complaint (“Am.Compl.”), [Dkt. #10], pp.18-19. Count II
alleges the Law is an improper regulation of and imposes an undue burden upon
interstate commerce. Am.Compl., pp.20-22. In addition to a declaration that the Law is
unconstitutional, DMA also seeks a permanent injunction preventing DOR from
enforcing the Law. The parties do not disagree about the essential facts or how the
Law operates, only whether, as a matter of law, the Law violates the dormant
Commerce Clause. Pl. MSJ, p.14. DMA is not entitled to summary judgment; rather,
summary judgment for Defendant on Counts I and II is warranted. 1
This case is about a thriving $3 trillion-a-year industry’s attempt to expand its
existing artificial competitive advantage and stake out a new regulatory-free zone
through unsupported claims of discrimination, exaggerated and speculative burdens,
and allegedly coercive state action. DMA seeks an extension of the bright-line rule
establishing a discrete safe harbor from the unique burdens of collecting and remitting
use tax for retailers without a physical presence within the state. 2 There is no legal or
factual basis to support such an extension. The alleged compliance burdens flowing
from the Law are overstated and illusive, particularly given modern technology. While
the Law may have the eventual effect of leveling the playing field, in-state collecting
retailers will not gain a competitive advantage as a result of the Law. Non-collecting
retailers will continue to enjoy the price advantage because they do not charge sales or
use tax. Any marginal effects of the Law upon the competitive status of out-of-state
retailers do not amount to cognizable claims under the dormant Commerce Clause.
Defendant respectfully refers the Court to her Motion for Partial Summary Judgment- Counts I and II
(Commerce Clause), filed May 6, 2011 (“Def.’s MSJ”) [Dkt. 99].
See infra Part II.A (discussing the safe harbor for sales and use tax collection established by Quill Corp.
v. N.D., 504 U.S. 298 (1992) and Nat’l Bellas Hess, Inc. v. Dep’t Revenue of Ill., 386 U.S. 753 (1967)).
The Law is a wholly proper approach by the State of Colorado to address the
swelling tax gap between what consumers owe in sales and use tax and what is paid. 3
Contrary to DMA’s claims, the Law advances rather than offends the Commerce Clause
objective to preserve a national common market of open competition by promoting taxneutral decisions by consumers. Because the Law is not protectionist and neither
facially nor in effect discriminates against out-of-state retailers, it must be upheld
because any burdens on interstate commerce and not clearly excessive in relation to
the State’s strong interests. Further, the Law does not coerce out-of-state retailers to
surrender their Commerce Clause protections or regulate commerce occurring wholly
outside Colorado. DMA simply cannot meet its burden to overcome the presumption of
constitutionality afforded the Law and its claims fail as a matter of law.
RESPONSE TO DMA’S STATEMENT OF FACTS
Defendant disputes 4 the following facts (“Disputed Facts”):
Pl. MSJ, ¶ 17. Allegations supported solely by press reports are hearsay,
and are not proper summary judgment evidence. Estate of Smith v. Silvas, 414
F.Supp.2d 1015, 1020 (D. Colo. 2006).
For a detailed discussion of Colorado’s sales and use tax scheme, the tax gap, and the notice and
reporting requirements of the Law, see Def.’s MSJ, pp.2-6.
Due to the unusual procedural posture of this case, Defendant did not have the opportunity to engage in
discovery other than expert discovery. See Scheduling Order [Dkt. #40], p. 7, ¶ 8. As a result, she is
without sufficient information to admit or deny certain facts asserted by DMA. Solely for purposes of this
Response, Defendant admits the following facts, none of which are material to DMA’s Commerce Clause
claims: Pl. MSJ, ¶¶ 3, 5-10, 13. Defendant reserves the right to seek discovery in accordance with a new
scheduling order should the Court deny the parties’ cross motions for summary judgment.
Pl. MSJ, ¶¶ 22, 26. Defendant’s expert, Mr. Dieter Gable’s estimates do
not apply to all retailers. Mr. Gable estimated that the onetime, non-recurring first year
costs for the smallest affected retailers to comply with the Law, will be on average,
between $2,500 and $6,000 in the first year (0.043% - 0.1% as a percent of sales), with
an estimated additional cost of approximately $600 to $1,000 for the Annual Purchase
Summary (0.01% - 0.017% as a percent of sales). Def.’s MSJ, Ex. 5 [Dkt. #99-5], Decl.
Dieter Gable, Ex. 1 thereto (“Gable Report”), p. 5. Compliance costs for larger retailers,
particularly when normalized on a percentage of sales basis, are expected to be even
lower or even inconsequential. Id. at p.2. 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 the Act into regular process improvements and
annual tax preparation efforts. Id. at pp. 9, 13.
Pl. MSJ, ¶ 27. Legislative Council Staff estimated the annual revenue
associated with the reengrossed version of HB10-1193 to be $4.7 million per year. This
version of the bill required collection of sales and use tax by certain retailers and did not
include the notice and reporting requirements of the Law as adopted. See Ex. 1, HB101193, Reengrossed (available at:
Pl. MSJ, ¶ 29. While Colorado has not previously included a line on its
income tax returns for reporting use tax, between approximately 1966 and 1974, DOR
included a consumer use tax return with the income tax return forms, but later
discontinued this practice because the amount of use tax collected did not justify the
printing expense. Ex. 2, Decl. Stanley Williams, ¶¶ 2-3 (previously filed as Ex. 13 to
Defendant’s Response in Opposition to Plaintiff’s Motion for a Preliminary Injunction,
Pl. MSJ, ¶31. The methodology of the survey commissioned by DMA was
fatally flawed and no conclusions may be drawn from its results. See Def.’s Am. Pl.
MSJ Exclude Test. of Pl.’s Expert Witnesses F. Curtis Barry, Thomas Adler, and Kevin
Lane Keller (“Def.’s 702 Mot.”) [Dkt. #71], pp.11-14; Def.’s MSJ, Ex. 9 [Dkt. #99-9], Decl.
Prof. Donald Lichtenstein, Ex. A thereto, pp.12-17.
Pl. MSJ, ¶¶ 32, 33. The Oklahoma and South Dakota requirements are
substantively identical to the Law. Oklahoma and South Dakota require that a
transactional notice include the following information: 1) the non-collecting retailer is not
required, and does not collect the state sales or use tax; 2) the purchase is subject to
state use tax unless it is specifically exempt; 3) the purchase is not exempt merely
because it is made over the Internet or by remote means; 4) the state requires
purchasers to report untaxed purchases and pay tax due on those purchases; and 5)
appropriate forms are available on the state’s website. The first four items are required
by the Law and the fifth is optional in Colorado. See 1 Colo. Code Regs. § 201-1:39-21112.3.5(2)(c)(ii). Further, Oklahoma and South Dakota both allow a consolidated
transactional notice if similar notice is required for another state, provided it references
the state and meets the placement requirements. The Law similarly allows for
substantial compliance by retailers subject to other state requirements. See Regs. 3921-112.3.5(2)(e); 39-21-112.3.5(3)(b).
Defendant offers the following additional facts (“SOF”) as undisputed:
E-commerce in the United States has nearly tripled over the last decade,
from $1.06 trillion in 2000 to $3.16 trillion in 2008. Def.’s MSJ, Ex. 1 [Dkt. #99-1], Decl.
Professor William Fox, Ex. A thereto, Fox Report, p.2. As a result, state and local
governments and their economies experience increased evasion of sales and use taxes
and the 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. States collect taxes due on E-commerce much less effectively
because vendors are often not required to collect and remit the tax and buyer
compliance with the use tax is frequently very weak. Id. Colorado state and local
governments are estimated to fail to collect hundreds of millions of dollars in sales or
use tax due on E-commerce sales between 2010 and 2012. Id. Colorado also loses
revenue that is uncollected on remote sales, such as from mail order firms. Id. at 2-3.
The estimated annual revenue associated with the Law as adopted was
$12.5 million for fiscal year 2011-12. See Ex. 3, Final Fiscal Note, dated August 18,
2010, p.2 (available at:
6A80026BE0C?Open&file=HB1193_f1.pdf). Estimated annual revenue will steadily
increase over time with increased awareness of the Law and enforcement compliance.
Sales and use tax revenue historically account for approximately one third
of the State of Colorado’s General Fund. Def.’s MSJ, Ex. 3 [Dkt. #99-3], Decl. Todd
Saliman, ¶ 8.
The United States Department of the Treasury, Internal Revenue Service
has conducted research on the tax gap, the “aggregate amount of true tax liability
imposed by law for a given tax year that is not paid voluntarily and timely.” Def.’s MSJ,
Ex. 2 [Dkt. #99-2], “Reducing the Federal Tax Gap— A Report on Improving Voluntary
Compliance,” p.6. This research indicates that compliance with tax laws dramatically
increases when a third party reports taxable activity to the taxing authority. Id. (relevant
portions highlighted, see, e.g., pp. 12-16).
Of the Internet retailers in the Top 500 Internet Retailers, at least 39 do
not have a physical presence in the State of Colorado but nevertheless collect Colorado
sales tax. Def.’s MSJ, Ex. 4 [Dkt. #99-4], Decl. Elizabeth Corujo, ¶¶ 4, 6.
Because the Law exempts retailers with less than $100,000 in gross
annual sales in Colorado, the vast majority of retailers in the country are not subject to
the Law. Gable Report, pp.5-6.
The Law provides leeway for variance in approaches to compliance,
allowing affected retailers to comply with reasonable, and in many cases, nominal
efforts. Id. at pp.6, 19-20.
There are many ways a retailer can comply with the Transactional Notice
requirement- from a linking notice or popup window at the time of the online purchase,
to slipping the notice in as a packing slip for delivery, or other workarounds. Def.’s MSJ,
Ex. 6 [Dkt. #99-6], Dep. Curtis Barry (“Barry Dep.”), 93:9-94:6; 94:13-15; 95:10-20;
97:20-98:1. DMA’s expert estimates a packing insert costs less than ten cents per
package. Id. at 226:3-5.
DOR has provided acceptable sample language for the Transactional
Notice, so that retailers need not draft the notice themselves. Def.’s MSJ, Ex. 7 [Dkt.
#99-7], Decl. Shirley Stevens, Ex. A thereto, “FYI Sales 79;” Ex. B thereto
“Transactional Notice Template.”
Data for the Annual Purchase Summary and Customer Information Report
already exists. Barry Dep., 157:5-6; 158:5-16. Retailers track customer data in very
detailed ways and store that data. Id; Ex. 5, Gable Report, pp.8-9.
Because the Law only requires the Annual Purchase Summary for
customers who spend more the $500 annually, Mr. Barry estimates that retailers would
have to create reports for fewer than 20% of Colorado purchasers, and it could be as
low as 10%. Barry Dep. 169:11-20; 170:3-5.
DOR has provided instructions and templates to assist retailers with
preparing and electronically filing the Annual Purchase Summary. Def.’s MSJ, Ex. 8
[Dkt. #99-8], Decl. Edward Thompson, ¶¶ 5-6; Exs. A-D thereto.
There is no evidence in the record of any actual compliance costs incurred
by DMA members prior to entry of the Court’s Order granting the preliminary injunction.
There is no evidence in the record of any actual losses of sales or
customers sustained by DMA members from the Transactional Notice, effective March
1, 2010, until the Court’s Order granting the preliminary injunction.
SUMMARY JUDGMENT STANDARDS AND BURDEN OF PROOF
Summary judgment is proper when there is no genuine dispute as to any material
fact and a movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a);
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A dispute is “genuine” if the
evidence is so contradictory that a judgment could enter for either party. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is “material” if it might reasonably
affect the outcome of the case. Id. The moving party has the initial burden to show
“that there is an absence of evidence to support the nonmoving party’s case.” Celotex,
477 U.S. at 325. If the motion is properly supported, the burden shifts to the nonmovant
to show that summary judgment is not proper. Concrete Works, Inc. v. City & County of
Denver, 36 F.3d 1513, 1518 (10th Cir. 1994). When considering a motion for summary
judgment, a court views the evidence in the light most favorable to the non-moving
party. Garrett v. Hewlett-Packard Co., 305 F.3d 1210, 1213 (10th Cir. 2002).
DMA bears a heavy burden in overcoming the “‘venerable presumption’ that an
act of a state legislature is generally taken to be constitutional.” Hopkins v. Okla. Pub.
Employees Retirement Sys., 150 F.3d 1155, 1160 (10th Cir. 1998). Facial challenges
to statutes are generally disfavored as “strong medicine” applied “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)). To demonstrate that the
Law is facially unconstitutional, DMA must show “that no set of circumstances exists
under which [the Law] would be valid,” United States v. Salerno, 482 U.S. 739, 745
(1987), or that the Law “lacks any plainly legitimate sweep,” Washington v. Glucksberg,
521 U.S. 702, 740 n.7 (1997). United States v. Stevens, 130 S.Ct 1577, 1587 (2010).
DMA has the burden to establish that the Law violates the dormant Commerce
Clause. The Supreme Court’s dormant Commerce Clause jurisprudence is “driven by
concern about economic protectionism—that is, regulatory measures designed to
benefit in-state economic interests by burdening out-of-state competitors.” Kleinsmith v.
Shurtleff, 751 F.3d 1033, 1039 (10th Cir. 2009). The Tenth Circuit has identified a twotiered approach to examining challenges to state economic regulations under the
dormant Commerce Clause. Id. The first tier involves a determination of whether the
law directly regulates or discriminates against interstate commerce or has the effect of
favoring in-state economic interests over out-of-state interests. Id. If the challenging
party meets its burden to establish such discrimination, the burden falls to the state to
justify its law in terms of the local benefits and unavailability of nondiscriminatory
alternatives. Id. at 1040. State laws that regulate even-handedly with only indirect
effects on interstate commerce must be upheld under the second tier inquiry which
employs the balancing test of Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). Id. at
1040. Under that test, the law must be upheld unless the challenging party shows the
burden on interstate commerce “is clearly excessive in relation to the putative local
benefits.” Pike, 397 at 142.
THE LAW DOES NOT DISCRIMINATE AGAINST OUT-OF-STATE
RETAILERS OR INTERSTATE COMMERCE.
DMA cannot meet its heavy burden to establish that the Law discriminates
against interstate commerce or favors in-state retailers by burdening out-of-state
retailers. A discrimination claim under the dormant Commerce Clause necessarily
entails a comparative showing that in-state interests are favored over out-of-state
interests or put at a competitive disadvantage as a result of the challenged law. See Or.
Waste Sys., Inc. v. Dep’t of Env. Quality of State of Or., 511 U.S. 93, 99 (1994) (a law
discriminates if it imposes “differential treatment of in-state and out-of-state economic
interests that benefits the former and burdens the latter.”) (emphasis added)). DMA’s
exclusive focus on the differential treatment of collecting and non-collecting retailers is
fatal to its claim. Although the Law begins to level the playing field, non-collecting outof-state retailers will continue to enjoy a competitive advantage over in-state retailers
who are subject to the unique burdens of collecting and remitting sales and use tax.
Absent discrimination, the dormant Commerce Clause does not protect against this type
of market effect. See CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 93-94
(1987) (rejecting the notion that the Commerce Clause protects particular market
structures or methods of operation).
The Law Does Not Target Out-of State Retailers for
DMA’s contention that the Law singles out out-of-state retailers for discrimination
is incorrect. Pl. MSJ, pp.16-17. Discrimination for purposes of the dormant Commerce
Clause focuses on whether a law is motivated by economic protectionism, defined by
laws that burden out-of-state businesses in order to give a competitive advantage to instate businesses, Granholm v. Heald, 544 U.S. 460, 472 (2005), or shield in-state
interests from out-of-state competition. Maine v. Taylor, 477 U.S. 131, 148 (1986). The
Framers’ purpose was to “preven[t] a State from retreating into economic isolation or
jeopardizing the welfare of the Nation as a whole, as it would do if it were free to place
burdens on the flow of commerce across its borders that commerce wholly within those
borders would not bear.” Fulton Corp. v. Faulkner, 516 U.S. 325, 330-331 (1996)
(quoting Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 180 (1995)).
Nothing in the Law suggests it facially or in effect favors in-state interests or is
aimed at protecting such interests from out-of-state competition. 5 As part of the sales
and use tax scheme, the Law is a wholly proper approach by the State to address the
swelling tax gap created by the explosion in sales by non-collecting retailers. SOF, ¶ 1.
The Law is indifferent to a retailer’s location or contacts with Colorado but rather
focuses solely upon a retailer’s status as a collecting or non-collecting retailer. Colo.
Rev. Stat. § 39-21-112(3.5)(c) (referring to “each retailer that does not collect Colorado
sales tax.”). Thus the Law regulates even-handedly without regard to interstate or
intrastate commerce. See Minn. v. Clover Leaf Creamery Co., 449 U.S. 456, 471-72
(1981); Commonwealth Edison Co. v. Mont., 453 U.S. 609, 619 (1981).
Because the Law does not discriminate against out-of-state retailers or interstate commerce, Defendant
need not demonstrate reasonable nondiscriminatory alternatives. Although DOR has found alternatives
ineffective. Disputed Fact, ¶ 4.
DMA’s discrimination claim is based on the applicability of the Law to out-of-state
retailers. Pl. MSJ, pp.15-17. The fact that state regulation falls primarily upon interstate
interests, however, does not by itself, establish discrimination. See Exxon Corp. v. Md.,
437 U.S. 117, 125 (1978). The non-collecting retailer status is a function of the
Supreme Court’s holdings in Quill and Bellas Hess, not the Law’s alleged targeting of
out-of-state retailers. See, e.g. Ford Motor Co. v. Tex. Dep’t Transp., 264 F.3d 493, 502
(5th Cir. 2001) (no discrimination where law did not create classifications based on
Ford’s contacts with the state but rather on the basis of its status as an automobile
manufacturer). Further, 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 v. Cal. Bd. of Equalization, 430 U.S. 551, 555 (1977) (noting the
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); Exxon, 437 U.S. at 122 (upholding
a law designed to correct the inequities of past preferential treatment).
Finally, DMA’s facial challenge based upon the title of the bill and first fiscal note,
referring to “out-of-state retailers,” is a red herring. Pl. MSJ, p. 17. As originally
introduced, HB10 1193 required certain retailers to collect sales and use tax. The bill
was substantially amended to its current form; however, the title did not change. The
title of the bill is not part of the Law itself and does not affect the plain meaning of the
statute. See Johnston v. Comm’r of Internal Revenue, 114 F.3d 145, 150 (10th Cir.
1997). Moreover, any alleged improper motives to which DMA may refer do not
invalidate the Law. See Henneford v. Silas Mason Co., Inc., 300 U.S. 577, 586 (1937).
(“motives alone will seldom invalidate an otherwise lawful tax…[l]east of all … when
equality and not preference is the end to be achieved”).
Differential Treatment Alone Is Not Discrimination.
DMA’s expansive interpretation of discrimination is inconsistent with the Supreme
Court’s dormant Commerce Clause jurisprudence. Pl. MSJ, pp. 15-17. DMA cites the
proper test for discrimination set forth in Oregon Waste, 511 U.S. at 99 (“differential
treatment of in-state and out-of-state economic interests that benefits the former and
burdens the latter.”) (emphasis added)), but then proceeds to apply only the first half of
that test. Differential treatment alone does not suffice to establish a Commerce Clause
violation. Discrimination against interstate commerce necessarily entails preferential
treatment of in-state interests or punitive treatment of out-of-state interests. See, e.g.,
id. (striking down a law imposing a $0.85 per ton fee upon the disposal of waste
generated in-state when a fee of $2.50 was imposed on that generated outside the
state); see also 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. v. Mich. Pub. Serv. Comm’n, 545 U.S. 429,
433 (2005) (same). “Not every benefit or burden will suffice- only one that alters the
competitive balance between in-state and out-of-state firms.” Kleinsmith, 571 F.3d at
1041 (internal quotations omitted).
DMA’s incomplete application of the discrimination standard would lead to absurd
results. For example, if the fees in Oregon Waste were reversed so that a higher fee
was applied to in-state waste, the result would be differential treatment but would hardly
amount to a cognizable discrimination claim. Further, the fact that the Law was adopted
after the existing sales and use tax scheme does not mean that it should be viewed in
isolation. Had the fee on out-of-state waste in Oregon Waste been adopted after an
existing fee on in-state waste, it would be nonsensical for the Court to view the new fee
in isolation as applying solely to out-of-state interests.
The Law does not exist in a vacuum. It is one method to enforce the State’s
sales and use taxes and must be evaluated within this scheme. See Matthews, 562
P.2d at 417 (use tax is not a separate tax from the sales tax and should not be viewed
in isolation). Any challenge to the Law on dormant Commerce Clause grounds must
examine the relative burdens of Colorado’s sales and use tax scheme on non-collecting
out-of-state retailers as compared to collecting in-state retailers, rather than viewing in
isolation the Law’s application to the former. Kleinsmith, 571 F.3d at 1041 (party
claiming discrimination “must show both how local economic actors are favored by the
legislation, and how out-of-state actors are burdened”).
The Law Neither Favors In-State Retailers Nor Puts Out-of
State Retailers at a Competitive Disadvantage.
While it is true the dormant Commerce Clause does not permit discrimination
against any segment of interstate commerce or “de minimis” discrimination, DMA
cannot prove any segment of non-collecting out-of-state retailers is competitively
disadvantaged in relation to collecting in-state retailers as a result of the Law. Because
out-of-state retailers are not subject to the administrative costs and burdens of collecting
sales and use tax, they currently enjoy a significant competitive advantage as a result of
the safe harbor created by Quill and Bellas Hess. This competitive advantage is in
addition to the price advantage they enjoy by not charging sales tax. Any incremental
leveling of the playing field that may occur as a result of the regulatory requirements of
the Law still leaves out-of-state non-collecting retailers with a competitive advantage
over in-state collecting retailers.
Retailers that are required to collect sales tax must undertake extensive efforts to
comply with state tax laws, including, obtaining a license; calculating the state and local
sales tax owed, including determining whether any exemptions apply; collecting the tax
at the time of the transaction; providing a tax receipt; filing a return; remitting tax
collected to the State on a monthly or quarterly basis; maintaining records; and being
subject to regular audit. Colo. Rev. Stat. §§ 39-26-101 through 39-26-127. Collecting
retailers are ultimately liable for paying the tax, whether or not they collect it. See id. at
§ 39-26-105. DMA cannot prove that the modest notice and reporting requirements of
the Law outweigh the significant administrative requirements and tax liability to which
collecting retailers are subject.
Moreover, the Law does not discriminate against interstate commerce because it
allows non-collecting retailers the ability to choose to be subject to the same burden
imposed on their in-state competitors who have no such choice. In-state retailers
cannot elect to comply with the Law rather than collect and remit the sales and use tax.
In fact, many large retailers without physical presence in Colorado already voluntarily
choose to collect. SOF, ¶ 5. Logically, there can be no discrimination against noncollecting 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 benefit of that choice. See infra Part
II.C. (dispelling DMA’s contention that such choice is coercive).
THE LAW DOES NOT UNDULY BURDEN OR IMPROPERLY
REGULATE INTERSTATE COMMERCE
DMA cannot prove the Law’s modest notice and reporting requirements in the
post technology-boom age of the Internet unduly burden interstate commerce. The
carefully-limited physical presence requirement of Quill does not change this result.
Quill’s holding and policy considerations do not apply to the Law since it does not
impose a duty to collect the sales and use tax. DMA argues for an extension of the
bright-line rule of Quill, essentially seeking the recognition of a regulatory-free zone to
which its members are not entitled under existing Commerce Clause precedent.
Because the Law does not discriminate and has only incidental effects on interstate
commerce, it must be upheld. See Pike, 397 U.S. at 142. Further, because the Law is
a wholly permissible approach by the State to enforce its sales and use taxes, DMA
members are not forced to choose between two impermissible burdens. Rather, the
very fact that out-of-state retailers have a choice to comply with the Law or collect sales
and use tax when their competitors do not is dispositive.
Neither Quill Nor the Commerce Clause Bars the Imposition of
Notice and Reporting Requirements upon Non-Collecting
Retailers with No Physical Presence in Colorado.
Contrary to DMA’s suggestion that the physical presence nexus rule of Quill
derives from “core” Commerce Clause objectives, Pl. MSJ, p.22., it is not at all clear that
this is so. In fact, the Quill Court specifically suggested that had the issue been
presented as a matter of first impression, contemporary Commerce Clause
jurisprudence might not dictate the same result. 504 U.S. at 311. DMA members
without a physical presence in Colorado are not protected from the reach of the Law by
the carefully-limited bright-line rule of Bellas Hess and Quill, 6 which applies only to
sales and use tax collection and remittance obligations. DMA attempts to dismiss this
fundamental aspect of Quill. The main rationale in Quill for adhering to the physical
presence requirement of Bellas Hess was the principle of stare decisis and the
perceived “substantial reliance” by the industry upon the bright-line rule. Id. at 317.
Because the duty to collect actually creates tax liability, the Quill Court was primarily
concerned about the retrospective consequences of overruling Bellas Hess and creating
unanticipated tax liability for the mail-order industry. 504 U.S. at 318 n.10. Such
concerns are not implicated by simple notice and reporting requirements.
Quill is consistently and explicitly limited to the imposition of the sales and use taxes and the imposition
of the duty to collect those 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. (“the Due Process Clause does not bar enforcement of …the
use tax against Quill.”); 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 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
The Tenth Circuit and several state appellate courts have accordingly limited
Quill’s physical presence rule for Commerce Clause nexus to when a state may require
a business to collect and remit sales and use taxes. In American Target Adver., Inc. v.
Giani, 199 F.3d 1241, 1254-55 (2000), the Court declined to extend Bellas Hess and
Quill beyond the levy of taxes upon out-of-state entities to a state regulatory law.
Similarly, in a corporate income tax case, the Iowa Supreme Court recently concluded
Quill’s physical presence nexus standard does not extend beyond sales and use tax.
KFC Corp. v. Iowa. Dept. of Rev., 792 N.W.2d 308, 324-328 (Iowa 2010); see also
Capital One Bank, v. Comm’r of Revenue, 899 N.E.2d 76, 84 (Mass. 2009) (noting the
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 institution
excises); Tax Comm’r of the State of W. Va. v. MBNA America Bank, N.A., 640 S.E.2d
226, 232-233 (2007) (same result for business franchise and corporate income tax).
DMA’s suggestion that the nature of the Internet weighs in favor of enjoining
state regulations of commercial activity transacted over the Internet is unavailing. Pl.
MSJ., p. 24. It is true that the Supreme Court has recognized that some aspects of
trade, such as the railways, must remain free from excessive state interference under
the dormant Commerce Clause. See Kassel v. Consol. Freightways Corp. of Del., 450
U.S. 662, 669-671 (1981). The Tenth Circuit, however, has rejected attempts to define
new industries and areas that must remain free from lawful state regulation. In Quik
Payday, Inc. v. Stork, the Tenth Circuit upheld a Kansas law regulating Internet payday
loans against a Commerce Clause challenge. 549 F.3d 1302 (2008). Quik Payday, an
Internet-based lender, was headquartered in Utah and had no offices, employees, or
other physical presence in Kansas. Nevertheless, the Court upheld the law and refused
to interpret its holding in Johnson to bar regulation of commercial exchanges just
because parties use the Internet to communicate. Id. at 1312 (“[W]hen an entity
intentionally reaches beyond its boundaries to conduct business with foreign residents,
the exercise of specific jurisdiction by the foreign jurisdiction over that entity is proper.”
(citing Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.Supp.1119, 1124 (W.D. Pa. 1997)).
The Law does not attempt to regulate the Internet and its use as a medium to conduct
transactions with Colorado residents should not be used as a shield against a state’s
legitimate regulatory and taxing authority.
DMA cites the “structural concerns” discussed in Quill regarding the potential
effects of regulation by multiple taxing jurisdictions on the national economy. See Quill,
504 U.S. at 313-15. The dormant Commerce Clause is concerned with inconsistent
regulation by the states, that is, conflicting laws affecting the same transaction or
occurrence. See, e.g., Kassel, 460 U.S. at 679. In the Tenth Circuit, challenges based
on the alleged need for “national uniformity” are not independent claims but are rather
reviewed as part of the Pike balancing analysis. Quik Payday, 549 F.3d at 1307.
Contrary to DMA’s contention, the transactional notice laws recently passed in
Oklahoma and South Dakota do not conflict with the Law. Disputed Facts, ¶ 6. Further,
there is no reason to assume beyond speculation that multiple laws would cover the
same transaction or that every local jurisdiction with taxing authority will adopt similar
requirements. If anything, it appears such requirements will be set at the state level.
Moreover, the Law allows for substantial compliance by non-collecting retailers subject
to other state requirements. Disputed Facts, ¶ 6. Businesses are often subject to
regulation by the various states in which they do business. See, e.g., American
Trucking Ass’n, Inc. v. Mich. Pub. Serv. Comm’n, 545 U.S. 429, 438 (2005) (concluding
that businesses operating in multiple states expect to pay local fees in each of those
states). Further, state regulations are still evaluated by considering what unduly
burdens interstate commerce. See, e.g., Kassel, 450 U.S. at 669-671 (weighing the
nature of the regulation in light of the burden imposed). The dormant Commerce
Clause does not seek “to relieve those engaged in interstate commerce from their just
share of state tax burden even though it increases the cost of doing business.”
Commonwealth Edison, 453 U.S. at 623-624.
The world of E-commerce and remote sales looks vastly different from the mailorder world of Quill nearly twenty years ago and the burdens of the Law upon out-ofstate retailers must be viewed through a contemporary lens. Even in 1967, Justice
Fortas recognized the advances of modern technology and criticized the majority for
exempting the direct-mail industry from collection burdens as follows:
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.
Bellas Hess, 386 U.S. at 766 (dissenting) (emphasis added).
The development of the Internet and the explosion in 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. At the time of Bellas Hess, the mail order sales
industry was $2.4 billion annually. 386 U.S. at 763 (Fortas, J., dissenting and predicting
that the “haven of immunity,” resulting from the 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. See
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…but no countervailing advantage
for its competitors. If the Commerce Clause was intended to put businesses on
an even playing field, the majority’s rule is hardly a way to achieve that goal…I
would think that protectionist rules favoring a $180-billion-a-a-year industry might
come within the scope of such “structural concerns.
Reaching $3 trillion in 2008, E-Commerce is no infant industry and expansion of a rule
that already affords a substantial artificial advantage cuts against the objective of the
dormant Commerce Clause. SOF, ¶ 1.
The Incidental Effects of the Law Do Not Clearly Exceed
Colorado’s Interest in Enforcing its Sales and Use Taxes.
Because any effects on interstate commerce are incidental and not clearly
excessive in relation to the strong state interest in enforcing its tax laws, the Law must
be upheld. See Pike, 397 U.S. at 142. The Supreme Court has long recognized that
even interstate commerce must be made to pay its fair share of the state tax burden,
even if it increases the cost of doing business. W. Live Stock v. Bureau of Revenue,
303 U.S. 250, 254 (1938). Out-of-state businesses without physical presence can be
subjected to a wide range of obligations by a state in which they deliberately avail
themselves of economic opportunities. See, e.g., Quill, 504 U.S. at 319 (Scalia, J.
concurring) (discussing state regulatory jurisdiction including Blue Sky laws); Granholm,
544 U.S. 460 (state liquor licensing scheme). Further, “the modes adopted [by the
states] to enforce the taxes levied should be interfered with as little as possible.” Dows
v. City of Chicago, 78 U.S. 108, 110 (1871) (emphasis added).
The starting place for consideration of a dormant Commerce Clause challenge is
the interest of the state in the subject matter regulated and how fundamental this local
interest is. Aldens, Inc. v. Ryan, 571 F.2d 1159, 1161 (10th Cir. 1978). It is against the
backdrop of the State’s complementary sales and use tax scheme that the Law
advances several significant state interests. Contrary to DMA’s assertion that the sole
justification for the Law is revenue generation, the Law advances three strong state
taxing authority interests.
First, the Law enhances DOR’s ability to recover sales and use tax revenue due
to the State, a vital component of the State budget. SOF, ¶ 3.
In United Haulers
Ass’n., Inc. v. Oneida-Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330, 346 (2007), the
Court applied a truncated analysis under Pike and determined that “[w]hile revenue
generation is a not a local interest that can justify discrimination against interstate
commerce…it is a cognizable benefit for purposes of the Pike test.” Id. at 346; see also
C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 429 (1994) (protection of the
public fisc is a legitimate non-protectionist benefit). DMA attempts to discredit this
interest by utilizing a revenue estimate from an inapplicable fiscal note, see Disputed
Facts, ¶ 3, to suggest an insignificant fiscal impact. Pl. MSJ, ¶ 28. The State has
estimated that annual revenue will steadily increase over time with increased
awareness of the Law and enforcement compliance. SOF, ¶ 2. Further, the Commerce
Clause does not require states to adopt any particular economic theory and it is not the
role of the courts “to second-guess the empirical judgments of lawmakers concerning
the utility of legislation.” CTS Corp., 481 U.S. at 92 (quoting Kassel, 460 U.S. at 679
(Brennan, J., concurring)).
Second, the Law, an enforcement mechanism of the sales and use taxes,
promotes the fair distribution of the cost of government. The levying of taxes is a proper
means of distributing the burden of the cost of government and is a fundamental
principle of government existing primarily to provide for the common good.
Commonwealth Edison Co. v. Mont., 453 U.S. 609, 622-623 (1981) (citing Carmichael
v. S. Coal & Coke Co., 301 U.S. 494, 521-533 (1937); see also Quill, 504 U.S. at 328
(White, J. dissenting) (an out-of-state business derives numerous commercial benefits
from the state in which it does business, such as sound local banking institutions to
support credit transactions and courts to ensure collection of the purchase price).
Third, the Law promotes respect for and compliance with the tax laws. See 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. 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 the tax laws is a legitimate
Any burden upon DMA members due to the Law is incidental and does not
clearly outweigh these strong State interests. DMA alleges two burdens upon noncollecting retailers as a result of the Law: compliance costs and loss of sales and
customers. Am.Compl. ¶¶ 59-60. DMA relies upon three experts to establish these
alleged burdens. All three experts, however, utilized flawed methodology resulting in
opinions that amount to no more than speculation. See Cardoso v. Calbone, 490 F.3d
1194, 1197 (10th Cir. 2007) (“Evidence, including testimony must be based on more
than mere speculation, conjecture, or surmise. Unsubstantiated allegations carry no
probative weight in summary judgment proceedings.”); see also Def.’s 702 Mot. 7
Nevertheless, it is true that the smallest affected retailers may incur some onetime costs of up to $6,000.00 in complying with the Law. Disputed Facts, ¶ 2. Such
nominal costs, however, do not constitute an undue burden. For example, in Aldens,
Inc, 571 F.2d 1159, a mail-order business without physical presence in Oklahoma
challenged the state’s interest rate caps on goods sold to residents. The parties
stipulated that costs to comply with the law would exceed $160,000.00 annually. Id. at
1161. Aldens further alleged significant burdens associated with sorting out and
according different treatment to Oklahoma credit transactions. Id. at 1162. The Tenth
In the Order dated January 26, 2011 [Dkt. #78], the Court deferred resolution of this Motion “pending
further developments in this case.” Given that the parties’ cross motions on summary judgment will likely
lead to a final, appealable j judgment, it is appropriate for the Court to consider the Motion at this time.
Circuit nevertheless concluded the compliance costs and burdens did not unduly burden
interstate commerce and specifically noted that “in the era of computers,” such burdens
were not unreasonable compared to the local interest in consumer protection. Id.
The reality is that in the areas of Internet and remote sales, non-collecting
retailers have benefitted from a 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 entirely free from any state regulation,
particularly when such retailers have substantial economic presence and profit
handsomely from transactions with Colorado consumers. Finally, any costs to DMA
members are nominal, largely one-time costs that will decrease over time; costs to the
State from uncollected revenue due are substantial, recurring, and increasing over time.
The Law Does Not Coerce Out-of-State Retailers to Surrender
Commerce Clause Protections Afforded by Quill.
DMA’s suggestion that the Law improperly coerces out-of-state retailers to
surrender their Commerce Clause protections is wrong. Pl. MSJ, p.25-26 (citing Bendix
Autolite Corp. v. Midwesco Enters., Inc., 486 U.S. 888 (1988)). In Bendix Autolite
Corporation, the two choices available to out-of-state companies were both deemed to
be undue burdens upon interstate commerce. Id. at 893-895 (discussing the choice
between submitting to the general jurisdiction of Ohio courts by appointing an agent
within the state for service of process or forfeiture of the limitations defense).
DMA’s characterization of the Law as coercive does not make it so. See McLeod
v. J.E. Dilworth, Co, 322 U.S. 327, 331 (1944) (court could not “render unconstitutional
a tax, that in its actual effect violates no constitutional provision, by inaccurately defining
it.” (quoting Wagner v. City of Covington, 251 U.S. 95, 102, 104 (1919)). The Law
simply represents a constitutionally permissible way for DOR to gather information
needed to collect taxes due to the state. DMA cites the “onerous choice” between
complying with the Law and incurring penalties. Pl. MSJ., p.25. Many laws, however,
might be deemed “coercive” in the sense that failure to comply with them results in
penalties or even criminal consequences.
Bendix does not support DMA’s claims because out-of-state retailers are not
forced to choose between unlawful burdens as a result of the Law. As discussed
above, DMA’s members are not shielded from compliance with the Law by the Quill
physical presence rule because the notice and reporting requirements do not impose a
collection duty. Because the Law does not impose an undue burden upon interstate
commerce and because out-of-state retailers may choose whether to comply with the
Law or collect sales and use tax when in-state retailers have no such choice, Bendix is
inapposite. Likewise, DMA’s reliance upon Hemi Group LLC v. City of New York, a
case not even addressing dormant Commerce Clause claims, is misplaced. 130 S.Ct.
983 (2010). In Hemi Group LLC, the Court upheld the dismissal of the city’s claims
under the Racketeer Influenced and Corrupt Organizations Act (RICO) based upon lost
cigarette tax revenues where causation was too attenuated. Id. at 989. DMA’s
coercion argument is not bolstered by a passing remark in the lone concurrence. Id. at
994-95 (Ginsburg, J. concurring).
The Law Does Not Regulate Commerce Entirely Outside Colorado.
DMA’s claim that the Law seeks to regulate commerce that occurs wholly outside
Colorado is also wrong. Pl. MSJ, pp. 26-27. While the dormant Commerce Clause
precludes direct regulation by a state of interstate commerce that occurs wholly outside
the state, Edgar v. MITE Corp., 457 U.S. 624, 640-643 (1982), such is not the case
here. In Edgar, the Court struck down an Illinois law that reached beyond the state and
purported to determine whether tender offers could proceed anywhere in the nation. Id.
at 643. The Court distinguished the law from other permissible state regulations of instate activity with only incidental effects upon interstate commerce.
Id. at 641
(discussing state “blue-sky” laws regulating securities transactions where the disposition
of securities occurs within the state). Id. at641.
Because the Law is triggered only when there is a sale to a customer located in
Colorado or the goods are shipped to a Colorado address, there is no concern for
regulation of commerce that occurs entirely outside Colorado.
See Reg. 39-21-
112.3.5(1)(b) and (c) (defining Colorado Purchaser and Colorado Purchase,
respectively). In both cases, the transaction ends with the use or enjoyment of the
goods within the state, long-recognized as a permissible basis for state regulation. See
Henneford, 300 U.S. at 583.
DMA CANNOT PROVE THE ELEMENTS REQUIRED FOR A
DMA accurately describes the elements it must prove for a permanent injunction:
1) actual success on the merits of its claim; 2) irreparable harm if injunctive relief is not
granted; 3) that its threatened injury outweighs the harm that an injunction would cause
DOR; and 4) that the injunction, if issued, would not adversely affect the public interest.
Fisher v. Okla. Health Care Auth., 335 F.3d 375, 380 (10th Cir. 2003).
DMA cannot prove these elements. As demonstrated herein and in DOR's crossmotion for summary judgment, the Law does not violate the Commerce Clause, and
therefore, DMA does not succeed on the merits of its claim. Further, unless DMA
proves the Law is unconstitutional, the DMA cannot demonstrate irreparable harm, as
there can be no irreparable harm in complying with a valid law. For the same reason,
the DMA cannot demonstrate that any threatened injury to its members outweighs the
harm an injunction would cause DOR. Finally, DMA cannot show that an injunction
would adversely affect the public interest. Colorado has an interest in enforcing valid
laws. Thus, the converse of DMA’s argument that the public is best served by enjoining
a law that violates the Commerce Clause is equally true -- the public is best served by
the enforcement of a law that does not violate the Commerce Clause. See United
States v. Edmondson, 594 F.3d 742, 771 (10th Cir. 2010). This principle is particularly
true in this case because the public has an interest in enforcing a statute designed to
enhance collection of revenue due to the state, United Haulers Ass'n, Inc, 550 U.S. at
346; fairly distributing the costs of government; and seeing that tax laws are enforced
and those subject to the laws obey them. St. German of Alaska E. Orthodox Catholic
Church, 840 F.2d at 1094; Richey, 924 F.2d at 862.
For the foregoing reasons, DMA’s Motion should be denied and summary
judgment on Counts I and II should entered in favor of DOR.
Respectfully submitted this 27th day of May, 2011.
JOHN W. SUTHERS
s/ Melanie J. Snyder
MELANIE J. SNYDER, 35835*
Assistant Attorney General
STEPHANIE LINDQUIST SCOVILLE, 31182*
JACK M. WESOKY, 6001*
Senior Assistants Attorney General
1525 Sherman Street, 7th Floor
Denver, Colorado 80203
Telephone: (303) 866-5273 (Snyder)
Telephone: (303) 866-5241 (Scoville)
Telephone: (303) 866-5512 (Wesoky)
FAX: (303) 866-5395
*Counsel of Record
Attorneys for Defendant
CERTIFICATE OF SERVICE
I hereby certify that on May 27, 2011, I electronically filed the foregoing
Defendant’s Response in Opposition to Plaintiff’s Motion for Summary Judgment
as to Counts I and II Alleging Violations of the Commerce Clause with the Clerk of
the Court using the CM/ECF system which will send notification of such filing to the
following e-mail addresses:
Attorneys for Plaintiff
s/ Melanie J. Snyder
cc: Via interoffice mail
Ms. Roxy Huber
Colorado Department of Revenue
1375 Sherman Street
Denver, Colorado 80261