Let's Make a Federal Case Out of It: Time to Revisit the Tax Injunction Act; There's been no change in the TIA in more than 80 years-really.

AuthorFriedman, Jeffrey

Most state taxpayers would prefer to litigate state and local tax cases in federal courts. However, disputes over state and local taxes are almost always decided by state courts. Although litigation in state court may seem natural and obvious to most state tax professionals, it is somewhat odd given the general availability of concurrent jurisdiction that generally exists between state and federal courts. The limitations on federal court jurisdiction applicable to state and local tax cases in state courts can be traced back to 1937, when Congress enacted the Tax Injunction Act (TIA).

The TIA was enacted at a point in US history when there was little taxation of interstate commerce. Very few states imposed a sales tax or corporate income tax at the time, with the first general sales tax imposed by Mississippi in 1937. Furthermore, the national economy was much less interconnected than at present, in that the interstate highway system had not yet been created, commercial air travel was in its infancy, the first televisions would not appear in homes until the end of the 1940s, and the creation of the internet was decades away. Today, almost every state imposes both a sales tax and a corporate income tax, and countless interstate transactions take place every second due to the interconnected nature of the economy in the digital age.

That the TIA has not changed since 1937, despite the vast changes in the legal and business landscape, is a wonder. A modernization is long overdue. This article presents justifications for modernizing the TIA, including highlighting issues that the TIA has created and the legal and business changes that have taken place since 1937.

Background-What Is the TIA?

The TIA is a federal statute that provides that federal district 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 maybe had in the courts of such State."1 Although the TIA's limitation of federal court jurisdiction for state and local tax cases is broad, there are exceptions. First, the TIA does not prevent federal jurisdictions in suits that do not seek to "enjoin, suspend or restrain the assessment, levy, or collection of a tax." In 2015, the US Supreme Court held that this exception to the TIA permitted federal court jurisdiction in a challenge to Colorado's use tax notice and reporting requirements in the highly publicized case DMA v. Brohl, because Colorado's notice and reporting requirements at issue in that case preceded the "assessment" and "collection" of the tax.2

Additionally, the TIA does not apply to cases that involve "fees" rather than "taxes." This distinction can be murky, because the text of the TIA provides no definitions. Consequently, much litigation has centered on whether a particular imposition is classified as a "tax" or a "fee" for purposes of the TIA.

Finally, there is an exception to the TIA's limitation where there is no "plain, speedy, and efficient" remedy available in state court. Although this exception may appear to offer the promise of federal court jurisdiction for taxpayers who have been frustrated with long, drawn-out litigation in state courts, in practice this exception has been very narrowly construed. Generally, a state adversary may block a taxpayer's quest for federal court jurisdiction so long as the state provides a taxpayer with a "full hearing and judicial determination" at which constitutional objections to the tax may be raised.3

Issues Created by the TIA

The TIA has led to unforeseen and unintended consequences in its eighty-plus years. Some of these issues result from the text of the TIA itself, whereas others derive from changes in the national economy and legal framework that have taken place in the ensuing years.

First, the distinction between what constitutes, for purposes of the TIA, a "tax" and a "fee" or other charge that is not barred from federal courts has spurred a whole category of litigation. This litigation, which often originates in federal...

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