Private citizen Stanley Grosz has appealed a decision of the California Court of Appeal that, if left unchecked, will result in hundreds of small-business bankruptcies by holding them liable for back taxes on items sold for them by Amazon.
Grosz, a Fresno camera store owner who has no financial interest in the case, brought the action in 2019 as a taxpayer under California's "taxpayer waste" law against the California Department of Tax & Fee Administration and Amazon.
The suit alleges that Amazon had an obligation to pay sales tax on purchases made through its website under its "Fulfilled By Amazon" program.
The Court of Appeal's decision affirmed a sales tax break for Amazon despite the existence of a statute preventing business entities from avoiding taxes where several corporations act in concert as a retailer or as agents of one another. As it now stands, when the California Department of Tax & Fee Administration goes after the smaller third-party sellers to collect back taxes, it forces most of them into bankruptcy.
The state has a longstanding tax regulation that extends the collection obligation to consignment shops, whether they're 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, several sister entities divided those powers among themselves in a way that Amazon believed would avoid the sales tax, despite the statute preventing business entities using such combinations to avoid sales tax.
Initially, when Amazon was about to open its first distribution center in California, the state sales tax agency (then known as the State Board of Equalization, now the Department of Tax & Fee Administration) said that Amazon would be subject to tax on its consignment sales. However, the board reversed itself the next day, and decided that Amazon's obligations would be due from the businesses that supplied their products on the site.
The trial court dismissed the lawsuit, ruling that the agency has discretion to decide who the retailer is, irrespective of the regulation and its application to consignment arrangements. 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 Appeal affirmed the trial court 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. Instead, the appellate court found that the CDTFA did in fact have discretion not to collect tax from Amazon and instead pursue the third-party merchants on Amazon's platform for back taxes.
"If left to stand, the opinion would undercut a pillar of California's tax enforcement regime, disrupt taxpayers' expectations, and create an administrative quagmire for the state," alleged Grosz's petition. "The Court of Appeal has effectively disregarded a directly controlling tax regulation, throwing a wrench into California's well-settled statutory scheme regarding sales and use taxes, which are a critical source of state revenue and affect millions of individuals and businesses."
Although the agency doesn't release exact figures, Dakessian estimates that the position of the CDFTA has been detrimental to numerous businesses.
"They keep their collection data close to their vest, but we suspect they have collected next to nothing," he said. "To a small business, having a $50,000 or $60,000 bill for transactions that occurred in 2015 is not easy to deal with. Many are overseas, and the cost of collecting doesn't make any sense. The consignment regulation was designed to collect from the point of sale — that's the person who should collect the tax, not the thousands who listed their property on the website."
Dakessian is optimistic that the California Supreme Court will hear the case. "There's a large number of people impacted by it, and it involves a huge amount of money — we believe at least a billion dollars. Moreover, the opinion was clearly wrong at the lower level. They have a specific regulation that applies in these situations. The Court of Appeal said that whether a taxpayer is a retailer for purposes of the sales tax is a discretionary determination and not a ministerial task. Therefore, the plaintiff's suit failed because the taxpayer waste statute could only be used to compel a mandatory duty. Neither the CDTFA nor Amazon argued that point — the court came up with this on its own. So the opinion is based on a glaring irony. It holds that the CDTFA had discretion to collect tax from Amazon or the FBA merchants, even though the CDTFA itself, as well as Amazon, conceded that it had no such discretion. We're hopeful that California's high court will grant review and take a closer look at the case."
For plaintiff Stanley Grosz, a victory would be meaningful despite the fact that he has no financial interest at stake, remarked Dakessian: "It would give him the satisfaction of knowing that he did something right, and that he made an impact for good."
