In June, California Governor Gavin Newsom signed into law Senate Bill No. 92 , which makes third-party sellers on digital market places such as Amazon and eBay liable for three years of back taxes. It reduces the previous eight-year liability of back taxes imposed on sellers before California’s economic nexus rules came into effect on April 1st 2019.
The law includes all sellers who have established nexus by storing their products for sale in warehouses within the state. These merchants must now register and file tax returns by the end of September and pay them in full by the end of 2021.
However, the legislation will be difficult to enforce. Many of Amazon’s third-party sellers reside outside the US and its jurisdiction. Requiring Amazon and other online retailers to collect the sales tax would supply states with more revenue than if they pursued the third-party sellers individually.
Richard Allen, UK campaign manager for retailers against VAT abuse, points to Australia as an example of requiring online platforms to collect tax from overseas sellers. Last year, Australia passed legislation to make all imports of more than $75,000 subject to their goods and services tax. Initially, Amazon said they would block Australians from shopping from their US site, but later backed down after customer backlash.
For many of these sellers, the money that California claims they owe would bankrupt their business.
“In a nutshell, my entire business is at stake here,” an owner of a mid-sized business said. “As I have been trading for four years now, the back taxes, penalties and interest are quite draconian; six figures at least.”
He explained that, even without considering the back taxes, the administrative burden of collecting future sales tax in dozens of states is more than his businesses can afford. Even though third-party sellers do not have to pay the existing sales tax, the cost of both collecting and remitting it is a heavy burden, when multiplied by all the various states, regions and cities that have their own sales tax regimes.
The owner continues: “It has never been 100% clear who is liable for sales tax, Amazon or the marketplace seller, so I wanted to wait until that was resolved before investing in expensive tax collection systems. In my view, the customer belongs to Amazon, not the seller. Therefore, the sales tax collection responsibility also belongs to Amazon.”
Unlike a traditional marketplace, Amazon does not allow a third party seller to have any contact with the customer. Amazon handles all returns and exchanges, and sellers are forbidden from contacting the customer after the sale for marketing purposes. A customer’s phone number may only be used for shipping purposes.
“We got blindsided. Paying this would be devastating,” said Matt Behnke, owner of Orthotics Shoes. “Margins are already really thin on Amazon, especially in the shoe business, because of all the returns. It would be horrible because we don’t have piles of money set aside. If there had been a request to collect taxes all along I would have done it.”
The mid-sized business owner is worried that if other states start collecting back taxes from third-party sellers it could set off a wave of closures across the country.
“If all the states follow California’s example then I can only see thousands of businesses going to the wall,” said Behnke.
A funny thing happened on the way to the online forum
At the centre of the debate is Amazon’s claim that they are not retailers, but rather only a forum providing third-party sellers digital stalls to sell from within their online marketplaces.
The California Department of Tax and Fee Administration says a ‘retailer’ is obligated to collect sales tax if they maintain office or inventory within the state. The problem is that third party sellers relinquish control over their inventory to online retailers in return for the right to sell on their platforms.
In March Fiona Ma, Treasurer of the State of California, wrote an open letter to Governor Newsom urging him to reconsider the legislation. She argued that third-party sellers do not have nexus in California because they could have their products moved into the state by the online retailers without their knowledge or consent.
She wrote, “The third-party sellers were often never even told that their goods would end up in California, and even if they were told, the shifting of goods to various warehouses was solely at the online retailer’s discretion, not the third-party seller’s. The fact that the online retailer platform’s terms and conditions dictated that the legal title was retained by the third-party seller is factually misleading because these online retail platforms retain substantive constructive ownership rights, such as the ability to seize and even destroy inventory without a judgement or lien from a court.”
She adds that the US Supreme Court ruled the mere placement of goods into the stream of commerce by a third party does not establish nexus under the Due Process Clause.
If Amazon were classified as a retailer, like any other high street shop (or American mall) they would be in violation of California Regulation 1569. The regulation states that an entity is considered to be the retailer if they are in procession of property owned by another party and can transfer it to a third party without any action on the part of the original owner.
Allen told ITR that classifying themselves as a marketplace allows Amazon to keep their prices artificially low by avoiding any collection of sales tax.
There are two impacts, according to Allen. “There are impacts on those outside the marketplace for the potential for tax and competition abuse going on within Amazon and eBay. There is also an effect on prices outside Amazon, as far as the high street. The VAT-free product from some dodgy seller in China is cheaper than the high street. That affects prices across the market and distorts competition.”
Paul Rafelson, head of the Online Merchants Guild, said that if California accepts the premise that Amazon is not a retailer it could open a Pandora’s Box of any retailer shifting their tax collection burden to their supplier.
“The common sense tax policy problem is that if it was so easy to get out of paying tax by claiming somebody else is the seller that would open up the door to any retailer in the world to avoid tax. So, you could walk into a Walmart and they could just say they weren’t the seller and avoid paying tax,” Rafelson said.
Drawing on Australia’s experience, requiring online sellers to collect GST, Allen said governments should step in to protect smaller businesses from Amazon’s unfair business practices.
“When the states start to legislate these platforms, in the end, the platforms give in. I think, basically, politicians need to realise that like the industrial monopolies at the turn of the 20th century, an unfair market will continue; and it has an impact. High street shops are suffering more because the internet is artificially cheap,” said Allen.
He also argued that collecting VAT from the online platforms themselves has the added benefit of efficiency. Many of the small merchants selling on Amazon lack the tools necessary to collect the tax.
“This doesn’t make sense, said Allen. “If you want to collect tax and you are the state, why would you make the avenues for collecting that tax as difficult as possible? It would be much easier for Amazon because they have the computers and the data to do this.”
Amazon did not respond to ITR’s request for comment.
