California is attempting to collect years of back taxes from e-commerce businesses that sold products on Amazon and at least temporarily housed their merchandise in the state.
The effort to collect use taxes reflects the state’s decision to more strictly enforce a 2012 law that compelled online retailers, such as Amazon, to collect tax from their customers if the company had any kind of physical presence in California.
For years, the state did not hold small companies selling products on platforms like Amazon and eBay to the same standard. Instead, it focused on the biggest players.
That left a significant loophole for retailers using services like Fulfillment by Amazon, which gave them access to the retail behemoth’s customers as independent operators.
Some of them have hefty earnings. Recode in May reported that almost a fifth of Amazon’s third-party sellers earned more than $1 million in sales in a single year.
Some of the companies are asking for leniency from tax collectors and reporting to California leaders that they did not have control of their products when they were stored at warehouses in the state, according to their lobbyist and to state Treasurer Fiona Ma.
Some of them say that paying back taxes they didn’t know they owed will put them out of business.
“We are facing tens of thousands of dollars in back taxes, penalties and interest,” wrote Mindy Wright of Renton, Washington in a letter that Ma shared with Gov. Gavin Newsom last week. “This alone will force us out of business and into bankruptcy. We just do not make much money and we are distraught and frightened.”
Ma in a letter last week asked Newsom to reconsider the California Department of Tax and Fee Administration’s effort to collect tax from so-called third-party sellers on online retail platforms.
She encouraged Newsom “to spare those who will lose their business if they comply with (the state’s) demands.”
Her letter also included excerpts from notices the state has sent to e-commerce companies demanding back taxes. They date back to March 2018 and warn that retailers could face fines of $5,000 and time in prison for evading California law.
The California Department of Tax and Fee Administration has touted its initiative to collect online sale tax since 2017, when Director Nicolas Maduros asked state employees to identify e-commerce companies that promised same-day delivery but did not pay sales tax.
He reasoned that companies advertising same-day delivery in California probably had a physical presence in the state, which meant that the state’s 2012 online tax law applied to them.
Last year, he told lawmakers that his department sent notices to 2,500 online retailers notifying them that they might owe California tax. He estimated the companies owed “hundreds of millions of dollars.”
“It’s not an area we can afford to overlook,” he said at a hearing last year.
Paul Rafelson, executive director of the Online Merchants Guild, argues the state should shift its focus from third-party sellers and instead compel Amazon to pay back taxes.
Wright and other members of the association say they don’t control where Amazon moves their merchandise when they send shipments to it.
“This is a new crop of entrepreneurs. There are 180,000 in California, and what the state is doing is hurting the whole marketplace,” he said.
Amazon did not respond to a request for comment. Tax attorneys reported in October that the company had disclosed to California tax collectors information on third-party sellers that had moved merchandise through the state.
Third-party sellers participating in the Fulfillment by Amazon program sign a 20,000-word contract that says they might owe state and local taxes if their merchandise is housed at Amazon warehouses in various states.
Wright of Washington state obtained a California business license and began collecting California sales tax from her customers in the state. They registered with the state in anticipation of a new policy that allows states to collect sales tax from online merchants regardless of whether the business has a physical presence in a jurisdiction.
Wright and her husband have been in business since 2009 with a company that sells home furnishings and other items through sites like Amazon and eBay.
She said she and her husband were blindsided by California’s demand that they pay back taxes for their company, MBW Northwest.
“We’re just good people. We thought we were following the law, and it’s not nice to have people say we’ve been breaking the law since 2012. We’re not bad people,” said Wright, 34.
California’s tax department can negotiate settlements and payment plans.
“Even if they put us on payment plan, we’ll pay until we die,” she said.