by Esther van Mourik

Loyal LegiSource readers are already experts in the Commerce Clause of the United States Constitution. (See: “United States Supreme Court Effectively Upholds Colorado Internet Sales Tax Law”) Well, this summer the United States Supreme Court (Supreme Court) issued an opinion that made significant changes in Commerce Clause jurisprudence!

South Dakota v. Wayfair is a case about e-commerce, a term used to describe purchases made from online retailers like Amazon, Wayfair, eBay, Newegg, and countless others. As described in earlier articles, until the Wayfair decision, when you made a purchase from an online retailer and the online retailer did not have physical presence in your state of residence, your state’s revenue department was not allowed to require that retailer to collect the sales tax owed on that purchase. Instead, you were required to pay the tax (now called use tax) on those purchases yourself. Unsurprisingly, most people did not voluntarily remit the use taxes they owed.

While states have nearly complete authority to tax commercial activities within their own borders, these broad taxing powers are subject to limitations in the United States Constitution when the commerce goes beyond the state’s borders. The Commerce Clause reserves to Congress the power to “regulate commerce . . . among the several states.” In general, a state law cannot discriminate against or unduly burden interstate commerce, even in the absence of federal legislation regulating the activity. In addition, a Supreme Court decision frequently referenced as “the Quill case” stood for the rule that states could not require retailers to collect the sales tax from consumers if the retailer did not have physical presence in the consumer’s state of residence.

The Quill case was decided in 1992, well before the era of e-commerce as we know it now. Consequently, the physical presence requirement became a big hurdle for states seeking parity between online purchases and purchases made in local stores. Many people figured it made more sense to buy an item online and not be charged sales tax rather than purchasing the same item in a local store where the price reflects the sales tax owed (conveniently ignoring the use taxes that were still due). The lost sales tax revenue provoked many states to deal with this issue in two ways: first, through numerous attempts to seek congressional action (not successful); and second, by individual states passing legislation that challenged the physical presence requirement (a description of Colorado’s effort can be found here). In 2016, South Dakota took the most direct position, passing a law requiring a retailer without physical presence in the state to collect sales and use tax on purchases and services at the point of sale. The legislative declaration even described the bill as a direct challenge to the Quill case.

Wayfair, Overstock, and Newegg sued South Dakota, arguing that the law was unconstitutional under the Commerce Clause. The South Dakota trial court found for the companies, and the South Dakota Supreme Court agreed, relying on the fact that the Quill case had not yet been overturned and still required physical presence in South Dakota before companies could be forced to collect the sales tax. South Dakota appealed to the Supreme Court. In its June 21, 2018, opinion, the Supreme Court overruled Quill, holding that “the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.” This means that the South Dakota law is constitutional insofar as a company’s physical presence is no longer required. However, the case was remanded back to South Dakota to determine whether the law is discriminatory or an undue burden on interstate commerce.

The Supreme Court stated, however, that, “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.” The Court focused on the following three particulars:

• The South Dakota law defined “retailer” as a business with annual gross sales revenue in the state exceeding $100,000 or having made 200 or more separate sales transactions in the state in a year;
• The law was not retroactive; and
• South Dakota had already adopted the Streamlined Sales and Use Tax Agreement.

So where does this leave Colorado? The Colorado Department of Revenue (Department) recently moved toward requiring retailers without physical presence (out-of-state retailers) to collect state sales tax and the sales taxes levied by certain cities, counties, and special districts that are currently collected and distributed by the Department. In addition, the Department adopted emergency rules to assist in administering the sales tax collections and, among other things, to specify that the state’s collection requirement would not be retroactive and would apply to the same definition of retailer that South Dakota adopted.

However, Colorado has not adopted the Streamlined Sales and Use Tax Agreement. In the Wayfair decision the Supreme Court described the agreement as follows:

This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.

The Colorado Constitution provides home rule jurisdictions the full right of self-government in both local and municipal matters, including the “assessment of property in such city or town for municipal taxation and the levy and collection of taxes thereon for municipal purposes….” This constitutional authority of home rule jurisdictions to levy and collect taxes is arguably an obstacle to statewide uniformity as contemplated by the Streamlined Sales and Use Tax Agreement. As of this writing, home rule jurisdictions have no coordinated requirement for out-of-state retailers to collect sales taxes.

While the Supreme Court has arguably made things simpler by overruling the physical presence requirement laid out in the Quill case, states that have complicated sales tax systems, like Colorado, will still see uncertainty. The Supreme Court could find that a fractured collection requirement is discriminatory or an undue burden to interstate commerce.  Commerce clause enthusiasts will have to wait to see if the Colorado General Assembly will take on this issue in the next legislative session starting in January 2019.

by Richard Sweetman

In the recent case of Fuentes-Espinoza v. People, 2017 CO 98, 408 P.3d 445, the Colorado Supreme Court overturned the convictions of a man who violated Colorado’s law against smuggling human beings (§ 18-13-128, C.R.S.) because it determined that federal law preempts the Colorado law. The case explains preemption jurisprudence and the circumstances under which a court may find that federal law preempts state law.

Background
In 2007, Bernadino Fuentes-Espinoza was arrested in Wheat Ridge, Colorado, after attempting to pass a counterfeit $100 bill to a gas station attendant. When police arrived, they discovered that Fuentes-Espinoza was driving a van full of people, two of whom fled and were not apprehended. It was later determined that Fuentes-Espinoza was transporting the passengers from Arizona to Kansas in exchange for $500. He was charged with, and later convicted of, seven counts of human smuggling in violation of § 18-13-128, C.R.S. (He was acquitted of one count of forgery for passing the counterfeit bill.)

The General Assembly enacted § 18-13-128, C.R.S., in 2006. It provides that a person commits a class 3 felony “if, for the purpose of assisting another person to enter, remain in, or travel through the United States or the state of Colorado in violation of immigration laws, he or she provides or agrees to provide transportation to that person in exchange for money or any other thing of value.”

Fuentes-Espinoza appealed his convictions, arguing that the federal “Immigration and Nationality Act”, 8 U.S.C. sec. 1101-1537 (2017) (INA) preempts § 18-13-128, C.R.S. The Colorado Court of Appeals rejected the preemption argument, concluding that Fuentes-Espinoza could not raise it on appeal because he had not raised it before the trial court. However, the Colorado Supreme Court chose to exercise its discretion to review the argument, and it agreed with Fuentes-Espinoza that the INA preempts § 18-13-128, C.R.S. Accordingly, the Court reversed the convictions on all counts.

Analysis
The Colorado Supreme Court began its analysis by noting that the U.S. Supreme Court recognizes three forms of federal preemption: Express, field, and conflict preemption.

Express preemption occurs when Congress “withdraw[s] specified powers from the States by enacting a statute containing an express preemption provision” (quoting Arizona v. United States, 567 U.S. 387, 399 (2012).

Field preemption occurs when “the States are precluded from regulating conduct in a field that Congress, acting within its proper authority, has determined must be regulated by its exclusive governance.” Id. Congress’s intent to preempt a particular field may be inferred “from a framework of regulation ‘so pervasive . . . that Congress left no room for the States to supplement it’ or where there is a ‘federal interest . . . so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.’” Id. (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)).

Conflict preemption occurs when a state law conflicts with a federal law. Such a conflict exists (1) when compliance with both federal and state law is physically impossible and (2) in “those instances where the challenged state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” Id. (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).

In Fuentes-Espinoza’s case, the Court found that Colorado’s human smuggling law is preempted under the doctrines of both field and conflict preemption.

As to field preemption, the Court found that the comprehensive nature of the INA demonstrates Congress’s intent to “maintain a uniform, federally regulated framework for criminalizing and regulating the transportation, concealment, and inducement of unlawfully present aliens, and this framework is so pervasive that it has left no room for the states to supplement it.”

As to conflict preemption, the Court found that Colorado’s human smuggling law “stands as an obstacle to the accomplishment and execution of Congress’s purposes and objectives in enacting the INA” because the law (1) conflicts with the “careful calibration” of the INA’s penalty scheme and (2) “sweeps more broadly” than the INA by criminalizing a wider range of conduct. “In doing so,” said the Court, “the Colorado statute disrupts Congress’s objective of creating a uniform scheme of punishment because some human smuggling activities . . . are punishable in Colorado but not elsewhere.”

For more information, contact Richard Sweetman at (303) 866-4333.

by Yelana Love

On June 27, 2018, the United States Supreme Court decided Janus v. American Federation of State, County, and Municipal Employees,[1]  The Court, explicitly overruling Abood v. Detroit Bd. of Ed.,[2]  held that an Illinois state law requiring all employees in a bargaining unit exclusively represented by a public-sector labor union, including employees who had chosen not to join the union and who opposed the union’s collective bargaining and other positions, to pay an agency fee to the union, violated the First Amendment to the United States Constitution. The Court reasoned that the problem with the law was that it forced employees who had chosen not to join the union “to subsidize [the union’s] private speech on matters of substantial public concern.”[3]

Factual and Legal Background of the Case
The Illinois Public Labor Relations Act (IPLRA) allows employees of the State of Illinois and its political subdivisions to unionize. Under the IPLRA, if the majority of employees in a bargaining unit vote to be represented by a labor union, the union is designated as the exclusive representative of all the employees within the bargaining unit, including employees who choose not to join the union. Employees who join the union must pay full union dues. The specific provision of the IPLRA at issue requires employees who do not join the union to pay a percentage of the union dues referred to as an “agency fee.” In Abood, the United States Supreme Court had rejected a First Amendment challenge to an agency fee, concluding that nonunion employees may be charged an agency fee for the portion of union dues used to pay for activities that are “germane to [the union’s] duties as collective bargaining representative,” but not for any portion of dues used to fund the union’s political and ideological projects.[4]

Mark Janus was an Illinois state employee working in a bargaining unit that voted to be represented by a union.[5]  Janus elected not to join the union because he opposed many of its policy positions, but he was required to pay an agency fee, which was automatically deducted from his pay.

Janus filed a complaint in federal court asserting that “nonmember fee deductions are coerced political speech” and “the First Amendment forbids coercing any money from the nonmembers.”[6]  Relying on Abood, the union moved to have the case dismissed. The District Court granted the motion to dismiss and the Court of Appeals for the Seventh Circuit affirmed the decision. The United States Supreme Court granted certiorari to consider whether the required payment of an agency fee for nonunion, public-sector employees is unconstitutional.

Analysis of the Decision
The Court begins its opinion by discussing Abood, noting that in that case “the Court upheld the constitutionality of an agency-shop arrangement like the one now before us,” but that “in more recent cases we have recognized that this holding is ‘something of an anomaly,’ and that Abood’s ‘analysis is questionable on several grounds.’”[7]  The Court then considers “whether Abood’s holding is consistent with standard First Amendment principles,”[8]  pointing out that the First Amendment forbids abridging the freedom of speech, which “includes both the right to speak freely and the right to refrain from speaking at all.”[9]  The Court recognizes that a “‘significant impingement on First Amendment rights’ occurs when public employees are required to provide financial support for a union that ‘takes many positions during collective bargaining that have powerful political and civic consequences’”[10]  and concludes that “[b]ecause the compelled subsidization of private speech seriously impinges on First Amendment rights, it cannot be casually allowed.”[11]

Next, the Court determines the appropriate level of scrutiny to be applied when determining the constitutionality of agency fees. Rejecting both the dissent’s view that the Court should “apply what amounts to rational-basis review, that is, that we ask only whether a government employer could reasonably believe that the exaction of agency fees serves its interests,”[12] and Janus’ request to subject the law at issue to strict scrutiny, the Court instead follows the precedent it set in Knox[13] and applies exacting scrutiny. Exacting scrutiny is a standard under which the compelled subsidy of an agency fee must “serve a compelling state interest that cannot be achieved through means significantly less restrictive of associational freedoms.”[14]

In Abood, the Court allowed agency fee agreements because they promoted the state’s interest in labor peace and the avoidance of free-riders. But the Janus Court rejects both of these rationales. Instead, it concludes that “[w]hatever may have been the case 41 years ago when Abood was handed down, it is now undeniable that ‘labor peace’ can readily be achieved ‘through means significantly less restrictive of associational freedoms’ than the assessment of agency fees.”[15]  The Court is equally unpersuaded by the free-rider argument, relying on Knox for the principle that “free-rider arguments…are generally insufficient to overcome First Amendment objections.”[16]  Accordingly, the Court concludes that because the state interests relied on in Abood fail to pass exacting scrutiny analysis, the Abood court erred in upholding public sector agency fee agreements as constitutional. The Court overrules Abood, holding that the agency fee provision of the IPLRA challenged by Janus violates the First Amendment.

Impact of the Decision on Colorado
The Janus decision appears to have little immediate, direct impact on Colorado. Colorado does not currently have statutes related to public sector unions and therefore does not have any statutes requiring nonunion, public sector employees to pay agency fees. However, Janus would presumably discourage a future Colorado General Assembly from enacting a law requiring the payment of agency fees by nonunion public sector employees, because such a law would clearly violate the First Amendment as interpreted by the Janus Court.

[1] Janus v. AFSCME, Council 31, 585 U.S. ___, 138 S. Ct. 2448, 201 L. Ed. 2d 924 (2018).

[2] 431 U.S. 209 (1977).

[3] Janus, 138 S. Ct. at 2460, 201 L. Ed. 2d at 934.

[4] Abood, 431 U.S. at 235-36.

[5] The specific union was the American Federation of State, County, and Municipal Employees, Council 31.

[6] Janus, 138 S. Ct. at 2462, 201 L. Ed. 2d at 937.

[7] Janus, 138 S. Ct. 2463, 201 L. Ed. 2d at 938.

[8] Id.

[9] Id. (quoting Wooley v. Maynard. 430 U.S. 705, 741 (1977)).

[10] Janus, 138 S. Ct. at 2464, 201 L. Ed. 2d at 939 (quoting Knox v. Service Employees, 567 U.S. 298, 310-311)(additional internal citation omitted).

[11] Id.

[12] Janus, 138 S. Ct. at 2465, 201 L. Ed. 2d at 940.

[13] Supra note 10.

[14] Knox, 567 U.S. at 310.

[15] Janus. 138 S. Ct. at 2466, 201 L. Ed. 2d at 941 (Quoting Harris v. Quinn, 573 U.S. ___ (2014)).

[16] Knox, 567 U.S. at 310.