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Amazon, California Urge Dismissal of Back Sales Tax Suit

Posted on Dec. 18, 2019

California and Amazon are urging a superior court to dismiss a lawsuit in which a taxpayer argues that Amazon is responsible for paying back taxes owed on sales that the retail giant facilitated for its third-party sellers.

In filings with the Los Angeles County Superior Court, Amazon and the California Department of Tax and Fee Administration (CDTFA) argue that Grosz v. California Department of Tax and Fee Administration should be rejected on a variety of grounds, including that the suit is blocked by the enactment of a new state law in 2019 that prospectively requires marketplace facilitators like Amazon to collect and remit sales tax on their third-party sellers’ sales in the state.

California is seeking to force third-party “Fulfillment by Amazon” (FBA) sellers to pay the sales taxes owed on sales they made in the state before the implementation of the new marketplace facilitator collection law. According to the state, those sellers had inventory nexus in California because their goods were stored in Amazon warehouses there. However, the lawsuit filed by California camera store owner Stanley Grosz in August argues that by arranging those sales online and operating in-state fulfillment centers where FBA sellers’ goods were stored and then shipped to buyers, Amazon itself was the de facto in-state retailer, and is thus liable for three to eight years’ worth of back payments of sales and use tax on sales it facilitated in the state for its FBA sellers.

California and Amazon dispute that interpretation in their filings. Attorneys with Hueston Hennigan LLP, representing Amazon, argue that the lawsuit improperly conflates different corporate entities, including parent company Amazon.com Inc., Amazon Services LLC, Amazon Fulfillment Services Inc., Amazon Payments Inc., and Amazon Capital Services Inc., as a single entity that should be treated as a retailer for purposes of sales tax collection.

“Plaintiff refers to these five corporations ‘collectively’ as ‘Amazon,’ and then loosely argues that ‘Amazon’ is liable for the taxes at issue,” according to Amazon’s filing. However, “the law is clear that a corporation is a separate and distinct legal person from its subsidiaries, parent corporations, and affiliated entities,” it says.

Amazon argues that a business qualifies as a retailer under California law if it has possession of another person’s property, is empowered to transfer title to another person, and exercises that power. It says that because the Amazon-owned entities in question are all separate, no single entity satisfies all three requirements, adding that staff with the State Board of Equalization — which handled sales tax collection before its tax enforcement wing was split off into the CDTFA — wrote in a 2012 opinion that two of the Amazon companies “are distinct entities that must be assessed individually and not collectively.”

Both Amazon and the CDTFA point to the 2019 California legislation requiring marketplace facilitators with economic nexus to collect and remit the sales tax due on their third-party sellers’ sales in the state, noting that the law is prospective. They claim that that means seeking sales tax payments from Amazon for FBA sales it facilitated before the passage of that legislation would conflict with lawmakers’ intent.

“By making A.B. 147 prospective only, the Legislature made clear that it did not intend the marketplace facilitator provisions to apply to prior sales and use tax questions,” according to California.

Amazon’s filing also notes that lawmakers approved separate legislation in June that created a limited amnesty for Amazon sellers that the CDTFA says had inventory nexus and therefore owe sales tax on their previous sales into the state. By approving the amnesty, “the Legislature recognized that the third-party sellers are the ‘retailers’ liable for paying taxes on sales that occurred before the [marketplace facilitator law] became effective,” according to Amazon’s filing.

Grosz's lawsuit — which doesn't involve a question of his own tax liability — cites as its source of standing to file suit section 526a of the Code of Civil Procedure, which allows legal challenges to be brought by citizen taxpayers against the government to prevent the loss or misuse of funds. Amazon and the state, however, argue that section 526a suits are restricted, and that the suit in question is barred because the CDTFA has legal discretion to determine who to tax under the law.

To initiate a section 526a challenge, “a taxpayer must allege a governmental action was mandatory, not discretionary,” according to California’s filing. Although Grosz’s suit argues that the CDTFA had a “mandatory duty” to treat Amazon as the retailer, the state’s filing argues that that claim is incorrect.

“Under the Tax Code and Constitution, the CDTFA has the exclusive authority to determine issues of taxability in the first instance,” according to the state’s brief. Although a taxpayer can appeal to the courts regarding a CDTFA decision about its own tax liability, “under the Tax Code, there is no remedy for a nontaxpayer like Grosz to initiate a court action to resolve complex issues of taxability, particularly with respect to transactions in which he had no part,” the filing says.

A hearing on the case may be held February 4, 2020. The case itself is related in part to the effort by the CDTFA — and previously the BOE — to demand sales tax payments from FBA sellers that had inventory nexus for sales they made before the Wayfair decision. Advocates for those sellers — including Paul Rafelson, one of the attorneys in the Grosz case, and State Treasurer Fiona Ma (D) — say many small sellers lack the money to pay the back taxes, which they didn’t collect on prior sales because they didn’t realize that they might be obligated to do so.

Lawmakers approved an amnesty for FBA sellers forgiving all but three years’ worth of back taxes, provided that specific criteria and conditions are met. However, critics argue that the tax forgiveness is inadequate, and that the potential unpaid liability could still bankrupt many FBA sellers.

And although the suit by Grosz doesn’t seek to “prevent or enjoin the collection of any tax paid, or payable, to any government entity by FBA Merchants or any other taxpayer,” establishing that Amazon was liable for the sales tax would potentially relieve some of those FBA sellers of the obligation to pay the back taxes by shifting it to Amazon.

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