“Direct Marketing” Supreme Court Case Points Out Federal Courts’ Obligation to Exercise Jurisdiction

supreme courtYesterday’s oral argument in Direct Marketing Assoc. v. Brohl indicated that the Supreme Court does not think very highly of the Tenth Circuit’s expansive interpretation of the Tax Injunction Act (TIA). The appeals court concluded that the TIA deprived federal courts of jurisdiction to hear a challenge to a Colorado statute that imposes notice and reporting requirements on out-of-state retailers. Questions at yesterday’s argument suggested that most justices interpret the TIA’s limitations on jurisdiction as inapplicable when, as here, the plaintiff is not seeking to enjoin the collection of a state tax. However, Direct Marketing’s greater significance may lie in its illustration of lower federal courts’ continued resistance to hearing matters involving States and their laws. That resistance, largely the byproduct of overcrowded dockets and a sense that state issues are often of insufficient importance to warrant the attention of federal judges, is inconsistent with federal courts’ obligation to hear each case in which jurisdiction has been properly invoked.

The Petitioner in Direct Marketing is a trade group that represents online and mail-order retailers. They object to a statute adopted by the Colorado legislature to assist the State in collecting sales and use taxes from its own citizens who purchase products from out-of-state retailers. The Supreme Court’s 1992 Quill decision held that a State may not require out-of-state retailers to collect sales/use taxes on such purchases, even if the retailer ships its product into the State. Colorado’s response: it adopted a statute imposing onerous notice and reporting requirements on any out-of-state retailer that does not voluntarily collect sales/use taxes on such sales, including requiring submission to tax officials of an annual Customer Information Report that details all purchases made by Colorado residents. The Petitioner asserts that the statute violates numerous provisions of federal and state law.

The Tenth Circuit held that the TIA deprived federal courts of jurisdiction to hear the lawsuit. The TIA provides that district courts may not “enjoin, suspend, or restrain” the “assessment, levy, or collection” of a state tax where the State’s own courts provide the plaintiff with a “speedy and efficient remedy.” The appeals court acknowledged that the lawsuit did not seek to stop Colorado from collecting a tax; indeed, out-of-state retailers are not themselves liable for any sales/use tax payments, and they do not contest Colorado’s right to collect use taxes from its own citizens. Nonetheless, it determined that the requested relief would “restrain” Colorado’s tax collection efforts because the State’s ability to compel its citizens to pay use taxes would be weakened if it lacked information about their out-of-state purchases.

Yesterday’s arguments suggest that the justices are skeptical that the TIA should be read so expansively. Several justices expressed concern over the absence of a limiting principle in Colorado’s claim that a federal court injunction “restrains” state tax collection whenever it interferes with collection efforts. Noting that Colorado asks the Court to rule that the TIA bars a suit by non-taxpayers who do not challenge the State’s right to impose any taxes, Justice Breyer said, “Once we start down your road, there is no stopping place.” Responding to Colorado’s contention that the TIA applied because the information-gathering statute was critical to the State’s tax collection efforts, Justice Sotomayor questioned why, if the statute was so critical, no other State has adopted a similar statute. Justice Alito even questioned whether the TIA should be deemed “jurisdictional” in nature. If not, then Colorado waived the TIA argument by failing to raise it in the Tenth Circuit.

Counsel for Colorado could not point to anything that suggested requiring Petitioner to seek relief in state court would serve the objectives Congress sought to achieve when it adopted the TIA in 1937. The Court has explained that Congress enacted the statute based on fears that permitting challenges to state taxes in federal court could throw tax administration into “disarray” and compromise a State’s ability to raise the revenues necessary to finance budgeted expenditures. Counsel could not articulate how granting Petitioner its requested relief from Colorado’s information-reporting requirements might create havoc of that nature.

While the decision below seems nearly certain to be overturned, the Tenth Circuit’s atextual restrictions on the scope of federal court jurisdiction illustrate an emerging trend among lower federal courts. Such restrictions are particularly common when, as in this case, a lawsuit raises state-law issues and/or focuses on a State’s administrative procedures. Many federal courts, faced with burgeoning dockets and limited resources, would prefer to devote more of their resources to cases raising novel claims arising under the Bill of Rights. These courts apparently harbor a thinly disguised hostility to diversity-jurisdiction cases and to business-community complaints of unfair treatment at the hands of state and local governments. In this case, for instance, the Tenth Circuit barred federal court review of the Petitioner’s claims despite Colorado’s concession that the TIA was inapplicable.

Indeed, Direct Marketing is the second occasion this Term on which the Court has reviewed a Tenth Circuit decision that adopted a very narrow understanding of federal court jurisdiction. In October, the Court heard arguments in Dart Cherokee Basin Operating Co. v. Owens, a case in which the Tenth Circuit let stand a district court decision narrowly construing the right to remove cases from state to federal court under the Class Action Fairness Act on the basis of diversity of citizenship. Citing an alleged presumption against removability, the district court held that a defendant forfeits its removal rights if its removal petition merely alleges the jurisdictional prerequisites without including in the petition documentary evidence to support the allegations.

The Supreme Court should use Direct Marketing and Dart Cherokee to remind federal courts that exercise of jurisdiction over properly pleaded complaints is not optional. Indeed, the Court has stated on a number of occasions that federal courts have a “virtually unflagging obligation” to exercise the jurisdiction given them. See, e.g., Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). The Tenth Circuit’s recent decisions illustrate that additional reminders are required. The Founders created a system of federal courts in principal part because they wanted to ensure that out-of-state litigants would have access to a judicial forum unlikely to exhibit bias in favor of in-state parties. Federal courts are being unfaithful to that constitutional mandate when their distaste for deciding state-related issues motivates them to adopt unwarranted restrictions on federal court jurisdiction.

Also published by Forbes.com at WLF’s contributor page

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