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California Treasurer Urges End to Pursuit of Back Taxes From FBA Sellers

POSTED ON Mar. 13, 2019

California's state treasurer is urging Gov. Gavin Newsom (D) to end the state’s pursuit of back sales taxes from remote Amazon marketplace sellers with inventory nexus in the state.

“As a matter of sound policy and consistency, I urge you to ensure that third-party sellers whose goods are sold via online retail platforms — many of whom are women and minority-owned businesses — are not subject to sales tax, either prospectively or retroactively,” State Treasurer Fiona Ma (D) said in a March 8 letter to Newsom.

The California Department of Tax and Fee Administration (CDTFA) is seeking back taxes from sellers who’ve made California sales using Amazon’s Fulfillment by Amazon (FBA) service, which stores their goods in warehouses in the state before selling them to customers there. Before the U.S. Supreme Court's 2018 South Dakota v. Wayfair Inc. decision, which eliminated the physical presence standard for sales tax collection, California and many other states had determined that warehoused goods constituted physical presence for the seller and that remote FBA retailers owed sales tax on their in-state sales. However, many other states participated in the Multistate Tax Commission-designed amnesty for such sellers.

Ma, a former member of the California State Board of Equalization (the agency that previously oversaw sales tax administration until the CDTFA took over that duty in 2017), has previously criticized efforts to pursue back payments from such sellers. She told Tax Notes March 9 that her letter to the governor is partly in light of legislation that she is backing along with Sen. Mike McGuire (D) and Assembly member Autumn Burke (D) — A.B. 147 — that would require remote sellers with over $500,000 in annual sales into the state to prospectively collect and remit sales tax, and require online marketplace operators like Amazon to collect sales taxes on behalf of their third-party sellers, including FBA sellers. However, that legislation’s provisions wouldn't nullify the sales taxes that the CDTFA believes FBA sellers owe the state for sales prior to Wayfair.

Ma said she and the bill's sponsors wanted to put language in A.B. 147 to protect sellers with pre-Wayfair inventory nexus, “but people felt it was more important to codify the Wayfair decision [going forward], and [that] if we put in the retroactivity portion, it could slow down the legislation.” She said that “the decision was, 'Why don’t we try and get the governor to act? He can do that through an executive order'” since he oversees the CDTFA.

Ma said the issue has become urgent because the CDTFA was able to obtain records from Amazon identifying their California FBA sellers. Previously, identifying the individual sellers was “hit and miss,” but once the department obtained the records, “things went crazy,” she said.

According to Ma’s letter, the state’s efforts to secure back taxes are a threat to remote sellers, many of whom can’t afford to pay the taxes due on pre-Wayfair transactions. The CDTFA is “pursuing these small businesses with threats of audit, claiming they owe eight years of back taxes, and even going so far as threatening felony prosecution and imprisonment,” she wrote.

Ma said the CDTFA’s position on inventory nexus is wrong. Amazon’s relationship with sellers is similar to that of a consignment store, she said, and because of the degree of Amazon’s control over FBA sellers’ goods and sales in California, it is the de facto retailer for sales taxation purposes.

Marketplace providers like Amazon send goods to warehouses in California without direction from their third-party sellers, and “typically do not allow these third-party sellers to retain customer information, engage in direct marketing, [resolve] customer service disputes or dictate return policies,” Ma wrote. “These online retail platforms typically also handle the storage, packaging, payment processing, logistics, and delivery of the products. By doing so, they step into the shoes of the third-party seller in every meaningful respect.”

Ma noted that under California regulations, “a person who has possession of property owned by another, and also the power to cause title to that property to be transferred to a third person without any further action on the part of its owner . . . is a retailer when the party to whom title is transferred is a consumer” and is responsible for sales tax collection.

The CDTFA didn’t respond to a request for comment, but the agency in 2018 disagreed that Publication 109 protects FBA sellers from the obligation to collect and remit sales taxes, and also referenced National Geographic Society v. California Board of Equalization (1977), arguing that the decision upheld that a state “may require a retailer to collect its use tax if the retailer has a place of business in the state.”

Ma also argued in her letter that the Supreme Court has ruled that “the mere placement of goods into the stream of commerce does not establish nexus under the Due Process clause,” and argued that the Wayfair decision could be read to imply not only that physical presence is not necessary to create nexus for sales tax purposes, but that it is also insufficient to create nexus on its own.

The letter urges Newsom to take action to “direct CDTFA to cease this activity through the issuance of a CDTFA Special Notice and through the promulgation of an article in CDTFA’s quarterly Tax Information Bulletin,” arguing that the governor’s “ability to do so is plain and unmistakable.”

Ma told Tax Notes that she’s hopeful that Newsom will be more receptive than the Brown administration was, since A.B. 147 promises to establish new rules for remote sellers and online marketplace facilitators.

Amazon declined to comment for this article.