On December 19, 2018, the US District Court for the Southern District of New York ruled in favor of McDermott’s client, the Healthcare Distribution Alliance (HDA), the trade association for pharmaceutical distributors. In Healthcare Distribution Alliance v. Zucker, the court granted summary judgment and enjoined enforcement of the New York Opioid Stewardship Act, which imposed a $600 million surcharge on manufacturers and distributors of opioid pharmaceutical products. The first $100 million installment was due on January 1, 2019. Continue Reading Court Strikes Down New York Opioid Surcharge on Manufacturers and Distributers
Today, the Chairman of the House Judiciary Committee, Rep. Goodlatte from Virginia, released the long-anticipated discussion draft of the Online Sales Simplification Act of 2016. Highlights of the bill include:
- The bill implements the Chairman’s much-discussed ‘hybrid-origin’ approach.
- The bill removes the Quill physical presence requirements for sales tax collection obligations under certain circumstances.
- States may impose sales tax on remote sales IF the state is the origin state and it participates in a statutory clearinghouse AND the tax uses the origin state base and the destination state rate for participating states (the origin state rate is used if the destination state does not participate in the clearinghouse).
- A remote seller will only have to remit the tax to its origin state for all remote sales.
- A destination state may only have one statewide rate for remote sales.
- Only the origin state may audit a seller for remote sales.
- States that do not participate in the clearinghouse have significant restrictions on the ability to extract the tax from the remote seller.
Below is a more in-depth discussion of the intricacies of the bill.
Earlier this month, the United States Court of Appeals for the D.C. Circuit held in Florida Bankers Ass’n v. U.S. Dep’t of the Treasury, No. 14-5036 (D.C. Cir. Aug. 14, 2015) that the Anti-Injunction Act (AIA, codified at 26 U.S.C. § 7421(a)) barred two state banking associations from challenging Treasury regulations that: (1) required banks to annually report interest paid to certain foreign account-holders, and (2) imposed a penalty on banks that fail to do so. Notwithstanding attempts to reconcile the holding with recent precedent, the majority’s decision directly conflicts with the recent unanimous Supreme Court decision in Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124 (March 3, 2015) (DMA), which found that the Tax Injunction Act (TIA, codified at 28 U.S.C. § 1341) did not bar a retail association’s challenge to comparable Colorado notice and reporting requirements (and accompanying penalty) imposed on out-of-state retailers. The TIA is modeled off of, and has consistently been interpreted to apply in the same fashion as its federal companion, the AIA. Given the striking similarities between the two cases, it is hard to reconcile the expansive application of the AIA in Florida Bankers with the narrow analysis of the TIA in DMA.
The majority opinion begins by highlighting the fact that the penalty imposed on the banks is technically a “tax” for purposes of the AIA because it is found in a specific section of the Internal Revenue Code (IRC, Ch. 68, Subchapter B) that states as much. See 26 U.S.C. § 6671(a). The majority emphasized that the Supreme Court recently confirmed that these types of penalties are treated as taxes when analyzing the application of the AIA, citing to the Nat’l Fed. of Indep. Bus. v. Sebelius decision. The majority distinguishes DMA on the basis that, unlike the tax-penalty in Chapter 68B of the IRC, the Colorado penalty imposed on out of state retailers that failed to report was not—or at least the parties never argued or suggested that it was—itself a tax. The majority was clear that “[i]f the penalty here were not itself a tax, the Anti-Injunction Act would not bar this suit.” Because the penalty was a “tax”, a favorable ruling for the plaintiffs “would invalidate the reporting requirement and restrain (indeed eliminate) the assessment and collection of the tax paid for not complying with the reporting requirement.” Because of this, the majority held that the banking associations’ challenge to the reporting requirements was barred by the AIA.
Practice Note: The majority relies heavily on the technical tax-penalty distinction in reaching their holding that the AIA applied. In making this distinction, the majority suggests that the label given to a penalty is controlling in determining whether the AIA and TIA apply to shut the door to federal district court. While at first glance it would appear that the holding is limited in scope to federal tax issues, it has the potential to spill over into the state tax world since many states have specifically conformed to the IRC in this respect, adopting an identical or substantially similar provision for their penalties. See, e.g., Ala. Code § 40-29-72(a); Ga. Code § 48-7-126(a); 72 Pa. Cons. Stat. § 7267(a). The court’s reasoning is problematic and contrary to the general principle that the name or terminology applied to a particular financial burden imposed by a legislature or other public body is not conclusive in determining whether or not it is a tax. Rather, the effect of a legislative assessment is more important than its label for purposes of determining its character. Specifically, if a particular charge clearly involves the idea of punishment for infraction of the law, it constitutes a penalty regardless of legislative label or designation as a “tax.” See, e.g., U.S. v. La Franca, 282 U.S. 568, 51 S. Ct. 278 (1931). Conversely, although the legislature may call that which is distinctly a tax by some other name, it nevertheless may be characterized or treated as a tax. If the label given to a tax or penalty is permitted to carry as much weight as the majority suggests, it would give states the unchallenged ability to flip the TIA on and off by superficially labeling a provision as a tax or penalty, respectively.
In a persuasive dissent, Judge Karen LeCraft Henderson pointed to DMA and several D.C. Circuit precedents that “make plain the AIA does not apply.” Specifically, she notes that the Treasury regulation imposes a pre-assessment tax-reporting requirement with a tax penalty attached, which the Supreme Court explicitly determined in DMA is not barred. She explained that the facts of the case are “even further removed from assessment or collection than Direct Marketing,” citing to the fact that the IRS does not even tax the interest earned by the non-resident aliens, but instead exchanges the information with other countries that provide information about U.S. citizens with foreign bank accounts, which the IRS only then assesses tax and interest upon.
Furthermore, the AIA (and TIA) articulate a bright-line rule, barring only suits that “restrain” (defined narrowly) the “assessment or collection” (defined narrowly) of taxes. Thus, even if a tax is involved, there still must be a “restraint” on the “assessment or collection” thereof. As indicated by the Supreme Court, this “restraint” must stop assessment, levy or collection, not merely inhibit them. See DMA, 135 S. Ct. 1124, 1133 (narrowly defining “restraint”). Because no “restraint” has occurred and the reporting requirements do not implicate an “assessment or collection” it was misguided of the majority to trigger the AIA.
The dissent also pointed to the faulty logic of the majority, highlighting the fact that just because the AIA is inapplicable when a penalty is not a tax does not mean the inverse is also true (i.e., if a penalty is a tax, then the AIA applies).
Finally, Judge Henderson points out that while D.C. Circuit “cases assume the AIA is a ‘jurisdictional’ bar” to suit, “it may be high time to revisit this assumption” in light of the Supreme Court’s recent attempts to bring some discipline to the use of the term.” See Florida Bankers, fn. 3. This is an interesting proposition, which would allow cases like DMA to continue in federal court as long as neither party raised the TIA.
Practice Note: Given the fact that the majority opinion in Florida Bankers appears to sidestep the controlling precedent established by the Supreme Court this March, one would hope that the plaintiffs file (and the D.C. Circuit grants) a request to rehear the case en banc. Oral arguments and briefing in the case occurred before the release of the DMA decision, lending itself to the possibility that the majority made up their mind before DMA was released, and attempted to mold the Supreme Court opinion to fit their analysis (as opposed to the other way around). Given the holes in the majority’s analysis (and the fact that the Supreme Court precedent is controlling), there is a legitimate case for simply ignoring this misguided opinion and continuing to follow the Supreme Court’s narrow interpretation of the TIA in DMA.
The practical implications are harsh as well—the majority concluding that taxpayers must violate the law (and risk severe business and regulatory implications), pay the penalty and then sue for refund to get their day in court and challenge the reporting requirements. The pre-assessment penalty here really isn’t a tax (rather it has been deemed a tax by the IRS). Ultimately, the purpose of the TIA and AIA is to protect the government’s ability to collect a consistent stream of revenue, which allowing a challenge to the pre-assessment reporting requirements only tangentially inhibit.
The United States Supreme Court released a unanimous decision today holding that the Tax Injunction Act (TIA), 28 U.S.C. § 1391, does not bar suit in federal court to enjoin the enforcement of Colorado notice and reporting requirements imposed on noncollecting out-of-state retailers. See Direct Marketing Ass’n v. Brohl, No. 13-1032, 575 U.S. ___ (March 3, 2015), available here. These requirements, enacted in 2010, require retailers to (1) notify Colorado purchasers that tax is due on their purchases; (2) send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state; and (3) report information on Colorado purchasers to the state’s tax authorities. See Colo. Rev. Stat. § 39-21-112(3.5). The TIA provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.”
The Court’s Opinion
The Court held that although the notice and reporting requirements are part of Colorado’s overall assessment and collection process, none of the requirements constitute an “assessment,” “levy,” or “collection” within the meaning of the TIA. Specifically, the Court looked to the Internal Revenue Code (IRC) to determine that the terms are “discrete phrases of the taxation process that do not include informational notice or private reports of information relevant to tax liability.” See Slip Op. at 5-8 (noting that no “assessment” or “collection” within the meaning of the IRC occurs until there is a recording of the amount the taxpayer owes the Government, which the notice and reporting requirements precede). Justice Thomas, who authored the opinion, concluded that “[t]he TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.” Id. at 9.
The Court rejected the Tenth Circuit’s reliance on (and expansive interpretation of) the term “restrain” in the TIA. Justice Thomas explained that such a broad reading of the statute would “defeat the precision” of the specifically enumerated terms and allow courts to expand the TIA beyond its statutory meaning to “virtually any court action related to any phase of taxation.” Id. at 11. Instead, he assigned the same meaning to “restrain” that it has in equity for TIA purposes, which is consistent with its roots and the Anti-Injunction Act (the TIA’s federal counterpart). Therefore, the Court concluded that “a suit cannot be understood to ‘restrain’ the ‘assessment, levy or collection’ of a state tax if it merely inhibits those activities.” Id. at 12.
The Court’s decision took “no position on whether a suit such as this one might nevertheless be barred under the ‘comity doctrine,’” under which federal courts – as a matter of discretion, not jurisdiction – refrain from “interfering with the fiscal operations of the state governments in all cases where the Federal rights of persons could otherwise be preserved unimpaired.” Id. at 13. The Court left it to the Tenth Circuit on remand to determine whether the comity argument remained available to Colorado. Id.
Justice Kennedy’s Concurrence
Justice Kennedy joined the Court’s opinion, but wrote separately to take the opportunity to point out his views on the physical presence standard for sales and use tax purposes established by the Court in Quill Corp. v. North Dakota more than 20 years ago. 504 U.S. 298 (1992). Citing to the far-reaching systematic and structural changes in the economy caused by Internet commerce, Justice Kennedy expressed his view that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill . . . [because it] now harms States to a degree far greater than could have been anticipated earlier.” Brohl (Kennedy, J., concurring at 3). He went on to state that Quill “should be left in place only if a powerful showing can be made that its rationale is still correct.” Id. at 3-4. While Justice Kennedy noted that Brohl was not the proper case to resolve this issue, he requested litigants to bring “an appropriate case for this Court to reexamine Quill.” Id. at 4.
Practice Note: While the Court’s opinion can certainly be viewed as a taxpayer victory, it is overshadowed by Justice Kennedy’s concurrence calling for the reconsideration of Quill. In terms of the main issue resolved by Justice Thomas, the door to the federal courts is now open—at least insofar as the TIA is concerned—to state tax cases that do not directly involve the assessment, levy or collection of tax. Because a federal court is generally a more favorable forum for taxpayers to litigate, we expect additional attempts to resolve more tangential state tax issues in the federal court system.