The Supreme Court gives e-retailers a win on sales taxes, but it may be short-lived
March 4, 2015 11:11 AM
(Bloomberg View)—The U.S. Supreme Court gave Amazon.com and other direct marketing retailers a victory Tuesday with one hand, then used the other hand to take it back.
Formally, in Direct Marketing Association v. Brohl, the court unanimously reinstated a lawsuit brought by a direct retailer to block a Colorado law requiring them to notify the state about purchases that fall under Colorado’s sales or use tax. That much was a win for the direct shippers. But in a nonbinding message, the court strongly hinted that the appeals court should block the suit on different grounds than it used the first time, which would give the victory back to Colorado.
I know, I know, this kind of reasoning is what gives lawyers a bad name. Don’t kill the messenger, at least not before I’ve explained what the heck the court actually did. That’ll take a couple of minutes of your time—no more, I promise.
The federal district court that first heard the challenge to the Colorado law hated it. Relying on Supreme Court precedent, the trial court said that by requiring direct marketers to provide Colorado with information about who made online or other out-of-state purchases, how much they bought, and where they lived, the state was violating the U.S. Constitution. Specifically, the court said that the law violated a doctrine known as the “dormant commerce clause.”
If word “dormant” sounds irritatingly legal, that’s because it is. We should probably call it the negative commerce clause, except that sounds kind of negative.
The commerce clause itself says only that Congress may regulate interstate commerce. But over the centuries, the Supreme Court has come to interpret it to include the distinct idea that the states may not themselves interfere with interstate commerce.
That idea is “dormant” because, well, it’s a sleeper: Though based on an inference from the structure of the Constitution, it has far-reaching consequences. The simplest way to think about it is that the dormant commerce clause functions as a kind of American version of the European Union’s foundational Maastricht Treaty. It facilitates a single unified national economy by blocking the states from gumming up the works.
The federal trial court thought that Colorado was in effect impeding the smooth flow of interstate commerce by trying to tax the direct marketers.
On appeal, the U.S. Court of Appeals for the 10th Circuit reversed the marketers’ win. It relied on a law called the Tax Injunction Act of 1937. Court aficionados or those with long memories may remember that law from the first Affordable Care Act case, in which Chief Justice John Roberts and the rest of the court’s majority held that the individual mandate was not a tax for purposes of the Tax Injunction Act but was a tax for purposes of congressional authorization.
The Tax Injunction Act says that 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.” That means essentially that the federal courts can’t issue an opinion blocking a state tax if the state courts could address the issue easily. The 10th Circuit said that under this law, the federal courts lacked the authority to hear the direct marketers’ case—as they could’ve gone to the state courts to get a remedy.
The appeals court decision vacated the direct marketers’ victory before the district court, so the direct marketers went to the Supreme Court. The justices unanimously reversed the 10th Circuit’s reversal. They held that the appellate court had misapplied the Tax Injunction Act. Because the Colorado law only requires the marketers to inform the state about purchases and does not actually require anyone to pay taxes, the court said, it didn’t count as “the assessment, levy or collection of any tax.”
Logically, of course, the reversal of a reversal should’ve left the original district court opinion in place, which would be a huge win for the direct marketers.
But that logic is precisely what stands between an intelligent person and a lawyer. Justice Clarence Thomas writing for the court added two paragraphs containing what lawyers call “obiter dicta,” usually just shortened to “dicta,” which means legally nonbinding observations that the parties and the courts below are supposed to listen to if they’re smart.
Thomas’s dicta said that “we take no position” on whether the 10th Circuit should dismiss the case again on the grounds of “comity,” defined by the court as a doctrine that “counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction.” According to the doctrine of comity, the courts technically could decide an issue, but choose not to out of respect for the state courts. In a footnote to its opinion, the 10th Circuit had said that the comity doctrine “militates in favor of dismissal.”
Lawyers are trained to read such dicta as a kind of telegraphic message directing the lower courts what to do without requiring them to do it. Thomas was basically telling the 10th Circuit to go back to the drawing board and re-reverse the district court’s decision in favor of the direct marketers, but using different logic.
Why on earth did the court go to so much trouble to do this? The answer can be gleaned from Justice Anthony Kennedy’s solo concurrence. Kennedy simply stated that although under current Supreme Court doctrine the direct marketers’ case should succeed in the dormant commerce clause that doctrine was in serious need of transformation in the light of changing economic circumstances and the rise of direct marketing on the Internet.
Kennedy spoke only for himself, but the other justices pretty clearly are sympathetic to the states that are losing sales tax revenue—not to mention local retailers, who suffer a competitive disadvantage by having to charge sales tax.
But the court would like to spare the trouble of overturning its dormant commerce clause doctrine. It therefore apparently wants the lower courts to find a way to uphold Colorado’s law—just not using the Tax Injunction Act. All that clear? Well, at least it was faster than going to law school.
You can also say “dictum” to refer to a single nonbinding statement or observation, but that technically correct usage is fading fast from legal discourse, and it might make you seem pretentious, like you know Latin grammar or something embarrassing like that.