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January 31, 2017

Your Presence May No Longer Be Needed: Implications of the DMA Litigation (article)

Since 1992, the Quill decision from the U.S. Supreme Court has stood for the proposition that a state may not impose a sales or use tax collection and reporting obligation on a taxpayer who does not have a physical presence in that state. State tax agencies in recent years have called for the repeal of Quill claiming that it is no longer relevant in light of technological advances, such as the rise of e-commerce. On Dec. 12, 2016, the United States Supreme Court declined to review the appeal of Direct Mktg. Ass'n v. Brohl, et al. (the DMA litigation). In doing so, the Court essentially refrained from ruling on the current validity of Quill v. North Dakota, which was the central issue of the appeal. Even without a ruling on the current validity of the Quill physical presence standard, the DMA litigation may provide the blueprint for the eventual downfall of Quill, along with insight into the approach states may use to determine the taxation of remote sellers.   


Sales and use tax cases like DMA have become more common with the rise of ecommerce.To fully understand the implications of the DMA litigation, a review of its procedural history is necessary. Colorado enacted H.B. 10-1193 in 2010 to aid in the collection of Colorado’s use tax. This new law imposed notification and reporting requirements on out-of-state retailers who were not collecting sales tax from their customers. Under the Colorado law, such out-of-state retailers with more than $100,000 in gross sales would have to:

  1. Notify customers that they are required to self-report use tax on all non-exempt purchases;
  2. Send year-end statements that summarize each customer’s purchases for the previous year to Colorado customers with more than $500 in sales and inform each customer that Colorado requires the filing of a return and payment of taxes on certain purchases; and
  3. Report to the Colorado Department of Revenue (Department) certain information regarding the retailer’s Colorado customers, including the customer’s name, billing and shipping address, and the amount of purchases during the prior year.

Direct Marketing Association (DMA), a trade group, filed a lawsuit in federal district court on Jun. 30, 2010,  challenging the constitutionality of the law, claiming that it violated the Commerce Clause (of the U.S. Constitution) by discriminating against and unduly burdening interstate commerce. On March 30, 2012, the federal district court granted summary judgment to DMA and permanently enjoined the Department from enforcing the law. The Department appealed to the U.S. Court of Appeals for the Tenth Circuit (Tenth Circuit).  In August of 2013, the Tenth Circuit held the federal district court lacked jurisdiction to the original challenge under the Tax Injunction Act (TIA), thereby remanding the case back to district court for dismissal and dissolution of its injunction order. DMA then brought suit against the Department in state court, with the City and County of Denver district court issuing a preliminary injunction enjoining the Department from enforcing the law on Feb. 18, 2014.  

DMA also petitioned the United States Supreme Court to review the Tenth Circuit's dismissal based on the TIA. The Supreme Court granted certiorari and on March 3, 2015, reversed the Tenth Circuit's decision by holding that the TIA does not bar DMA's suit and remanded the case back to the Tenth Circuit for a decision on the merits. 

On Feb. 22, 2016, upon remand, the Tenth Circuit reversed the ruling of the district court, holding that Colorado's statutory scheme was not in violation of the Commerce Clause because it does not discriminate against or unduly burden interstate commerce. In so holding, the Tenth Circuit rejected the district court’s application of Quill, noting that Quill only applies to and has not been extended beyond tax collection. As a result, the restrictions of Quill are not applicable to the notification and reporting requirements of the Colorado law (the court deemed these to be regulatory obligations). 

DMA responded with a petition with the U.S. Supreme Court on Aug. 29, 2016, to appeal the Tenth Circuit’s decision. The U.S. Supreme Court denied DMA’s writ of certiorari on Dec. 12, 2016, effectively ending the litigation process and upholding the Colorado reporting requirements.       


The DMA litigation has several ramifications on a state, regional and national level. Since the Tenth Circuit’s decision in February of 2016, retailers have been curious as to how and when these rules will be implemented, but the Department has not issued any further guidance. With the dust still settling, the Colorado Department of Revenue is determining the next steps regarding enforcement. The first step will involve a request to remove the injunction against enforcement issued by the state court. As the Colorado Department of Revenue sorts through this process, out-of-state retailers who have more than $100,000 in gross sales in Colorado should begin preparing to comply with the state’s notification and reporting requirements.    

The decision under the DMA litigation is now binding on a regional level to all of the other states within the Tenth Circuit including Kansas, New Mexico, Oklahoma, Wyoming, and Utah. Of these, Oklahoma has passed legislation requiring similar reporting obligations by out-of-state sellers.

On a national level, the implications of the decision under the DMA litigation perhaps are the most fascinating because the continuing validity and applicability of Quill’s physical presence standard is called into question. The DMA litigation seemingly has provided two avenues to invalidate Quill. The first method would be to consider Justice Kennedy’s invitation set forth in his concurring opinion of the U.S. Supreme Court’s March 3, 2015 decision. In that opinion, he suggested that now may be the right time to re-examine the current validity of the Quill physical presence standard due to “dramatic technological and social changes.” He acknowledged that any such re-evaluation of Quill would likely need to be done with another case, as this one was not the “appropriate case.”

A few states have taken steps to directly challenge the validity of Quill by adopting rules to impose sales tax nexus on any remote seller who exceeds a certain sales threshold, either through a number of transactions or in dollar amounts. These states include Alabama, South Dakota, Tennessee and Vermont. Alabama and South Dakota adopted rules with the specific intent of repealing Quill.   Litigation already is proceeding both in Alabama and South Dakota challenging the constitutionality of Quill. Other states, such as Mississippi and Wyoming, are in the process of adopting similar nexus standards. Clearly, the states are taking Justice Kennedy’s suggestion to heart, and taxpayers should anticipate the challenge of Quill to be resolved in the judicial or legislative bodies of the government.

Quill’s physical presence standard also could be circumvented by capitalizing on the narrow application of Quill by the Tenth Circuit, where notification and reporting requirements similar to those imposed by Colorado could be enacted. So far, Louisiana, Oklahoma and Vermont have emulated the Colorado law, and enacted similar notification and reporting requirements. Given this outcome from the DMA litigation, the proverbial floodgates may swing open in the upcoming legislative sessions for states that seek to bypass the physical presence standard of Quill. This approach by states could also persuade taxpayers to merely comply with sales tax collection and reporting obligations, where such efforts may be more cost-effective than efforts to establish and implement systems that would comply with the new use tax reporting obligations.


Quill’s fate is certain to be one that state and local tax practitioners will monitor closely. Although the DMA litigation is finally over and Quill remains intact, pundits are likely to point to the DMA litigation as a slippery slope that could lead to an eventual repeal of Quill’s physical presence nexus standard(either by judicial or congressional action). Such a repeal could lead to new sales tax collection responsibilities on out-of-state sellers. In the meantime, tax practitioners and remote sellers should consider the broad implications of the DMA decision. A new era involving notification and reporting responsibilities on remote sellers is now possible, with the physical presence standard of Quill hanging in the balance of future litigation.      

For more information concerning the state sales and use tax nexus, contact a local CBIZ MHM tax advisor and visit the National State and Local Tax webpage.

Copyright © 2017, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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