Has California’s tax authority lost its mind? According to thousands of Amazon sellers, the answer is YES! To fill state coffers, the Sunshine State is attempting to crawl back millions in online sales taxes. But is it legal?
The Tax Tale of Brian Freifelder: Amazon Seller Slapped with a Giant California Sales Tax Bill
An Amazon Success Story
At 16, Brian Freifelder started a small business buying and selling CDs. Over decades, the entrepreneur’s operation mushroomed into Philadelphia Media Exchange Corp., an Amazon.com store that earned $3 million in revenue last year selling clothing, groceries, and shoes. Freifelder acquires goods and ships them to Amazon. Amazon then handles “every aspect of the sale to the consumer.” Freifelder only controls the price and the items he sends to Amazon. (Make a note; this fact it will become important.)
In normal times, Freifelder employs eight workers and three contractors to keep his Pennsylvania warehouse operating. But these aren’t normal times for Freifelder, and thanks to an outrageous California sales tax bill, he’s cut his staff to one.
California’s “Bonkers” Demand for Sales Tax
Everything was going swimmingly for Freifelder until a few weeks back when a letter from the State of California demanding $1.6 million in back sales taxes landed in his mailbox. Authorities claim he didn’t charge California residents sales tax for online purchases and should have.
“It’s absurd. I haven’t sold enough inventory over time to warrant a tax bill like that. You could take every sale I’ve ever done. You could take the biggest sellers on Amazon, and I don’t think they would have a bill like that. They’re trying to scare people,” Freifelder said.
He added: “I would have had to have done at least $15 [million] to $20 million in sales to get a bill like this. That would be in California alone. I would have had to have done $150 million to $200 million in sales in the United States.”
Because of the letter, Freifelder is “drastically cutting things back until the dust settles” because he didn’t want to be stuck with a “ridiculous bill a year or two down the road.”
Background: The History of Online Sales Tax
Before we dive into why California sent Freifelder — and thousands of others — an outrageous bill, we need to review some online sales tax history.
Back in the day, before the Internet, the “nexus tax standard” was the rule of the land. Authorities didn’t require businesses without brick-and-mortar stores in a given state to collect and remit sales tax for out-of-state sales. The system made sense back then because the vast majority of people weren’t calling up general stores one state over to buy milk and sugar.
Things changed a bit with the advent of catalog sales, and the Supreme Court tested the “nexus tax” standard when considering Quill Corp. v. North Dakota. It prevailed. Businesses continued to only charge sales tax to people who shopped at their brick-and-mortar establishments.
But then along came the Internet and its spawn, e-commerce. The nexus tax standard was a boon for online retailers, like Amazon.com. They only remitted sales taxes (which were passed on to third-party sellers) in states where they had offices and warehouses. Arguably, the loophole fueled the e-commerce industry. Without the burdens of sales tax, buying online became the cheaper option.
In 2018, however, things changed. In its South Dakota v. Wayfair Inc. ruling, the Supreme Court effectively axed the nexus tax standard. Subsequently, states hurried to pass online sales tax laws. The fresh revenue filled regional coffers, plus the new “Amazon tax” leveled the playing field between online and brick-and-mortar stores.
California’s Recent Attempt to Collect Taxes
Recently, the California Department of Tax and Fee Administration sent aggressive tax demand letters to online sellers, like Freifelder. Collection efforts are linked to the South Dakota v. Wayfair Inc. ruling.
Authorities argue that Amazon’s opening of a California warehouse in 2013 means third-party sellers with inventory in the warehouse must now remit California sales tax.
Are California’s Back Sales Tax Demands Legal? Maybe Not.
Here’s the rub: Freifelder — and thousands of other Amazon sellers — had no idea that Amazon stocked their goods in California warehouses. Neither Amazon nor California alerted the sellers. Furthermore, the Amazon store owners couldn’t predict the law change and prepare for it. As such, the sellers’ due process rights are in jeopardy, and they may not have to comply with California’s demands.
Some state legislators are fighting on behalf of the e-commerce community. Fiona Ma, California’s treasurer, sent a letter to Gov. Gavin Newsom and encouraged him to stop collectors from harassing third-party sellers, like Freifelder.
“They are not the ones responsible for uncollected taxes under state law,” Ma admonished, “nor is it constitutionally permissible to impose such burdens on these businesses.”
Connect with an E-commerce Sale Tax Consultant
Did you receive a letter from California demanding back taxes? If so, our team of e-commerce tax lawyers can help. We regularly work with people in similar predicaments and have the skills and knowledge to make sure you don’t pay what’s not required under the law. Get in touch today to begin exploring your options.