The California Court of Appeals ruled on Jan. 9 in favor of Amazon on a tax issue that could cost California and its taxpayers billions of dollars in unpaid sales taxes.
The case, Grosz v. California Department of Tax and Fee Administration, relates to California's sales tax, which all California retailers, whether brick-and-mortar or online, are responsible to collect. The state has a longstanding tax regulation that extends the collection obligation to consignment shops, whether in physical storefronts or online stores like Amazon, who hold the property of third parties but control the point of sale and all aspects of the transaction.
But Amazon structured its many wholly owned and controlled subsidiaries in such a way that no single Amazon entity controlled all aspects of the sale. Instead, those powers were divided among its several sister entities in a way that Amazon believed would avoid the sales tax.
In September 2012, on the eve of Amazon opening its first distribution center in California, the state sales tax agency (then the California State Board of Equalization, now the California Department of Tax and Fee Administration) disagreed with Amazon on that issue, stating that the company was in fact subject to tax on its consignment sales. However, the agency reversed itself a day later, stating that Amazon's obligations would be borne by the businesses that supplied their products on Amazon's website under its Fulfilled by Amazon Program.
Numerous small-business owners were faced with surprise back tax bills and were forced into bankruptcy. Stanley Grosz, a Fresno camera store owner, filed a taxpayer lawsuit in 2019 under California's "taxpayer waste" law against the CDTFA and Amazon, alleging that Amazon owed the tax under the relevant regulation and a statute preventing business entities from avoiding sales taxes where several corporations are acting in combination as a retailer or as agents of one another.
The action was for failure to collect tax from FBA sales transactions prior to Oct. 1, 2019, when the state passed the Marketplace Facilitator Act. The trial court dismissed the suit, ruling that the agency has discretion to decide who the retailer is. Grosz's counsel, Marty Dakessian of Dakessian Law in Los Angeles, argued that this would contravene decades of authority and agency practice holding that, in a consignment arrangement, the consignee — in this case, Amazon — is liable for the tax to the exclusion of the consignor.
The Court of Appeals affirmed the trial court's ruling, holding that even if Amazon were liable for the tax under Regulation 1569, California's sales tax law did not actually compel the CDTFA to collect the tax from Amazon. CDTFA, it said, did in fact have discretion not to collect tax from Amazon and instead pursue the third-party merchants on Amazon's platform with back sales taxes "based on the language of several interrelated statutes."
"The decision was a surprise in the sense that we felt we were on sound legal ground on the law," said Dakessian. "Our legal position is rock solid but, based on how the oral argument went, we knew we had an uphill battle."
"It's pretty clear that we alleged a cause of action," he explained. "Amazon was a consignee, and consignees are subject to tax in consignment arrangements. That's been the California position for decades, so the decision was surprising to me."
The plaintiff, Grosz, did not stand to gain anything from the lawsuit, according to Dakessian. "He is just a small businessman from Fresno who stepped up. He didn't even sell anything on Amazon."
Dakessian noted that the definition of "person" not only includes a single person, but any combination acting as a unit, designed to prevent exactly what Amazon was doing.
"Because the trial court concluded that the determination whether Amazon or a given FBA merchant was the 'retailer' for purposes of sales and use tax was discretionary and not ministerial, the trial court concluded that Grosz did not have standing to challenge the DTFA's determination," the court concluded. "And because Grosz's lawsuit was premised on the alleged failure of the DTFA to perform a duty that was discretionary, rather than mandatory, the trial court concluded that there was no reasonable possibility that Grosz could amend his complaint to state a viable cause of action. On that basis, the trial court denied Grosz leave to amend his complaint."
Dakessian is considering further options, but there is no automatic right to appeal. "We have to request review, and it's at their discretion whether to hear it," he said.
