Small online retailers wanted more relief from California tax collectors than Gov. Gavin Newsom is prepared to give them.
Newsom’s administration released a budget bill that if passed next month would prohibit the California Department of Tax and Fee Administration from demanding more than three years of back taxes from out-of-state online merchants that sold products to Californians through larger platforms like Amazon.
That’s good news for online merchants in the sense that some of them feared owing as much as seven years of back taxes, but still disappointing for retailers who say they did not know they were required to pay California tax in the first place.
The Newsom administration doesn’t “seem to be recognizing the harm to the entrepreneurial community,” said Paul Rafelson, executive director of the Online Merchants Guild. “The state keeps piling on insult to injury.”
California over the past two years has been working to sort out its enforcement of online sales tax collection laws.
This year, Newsom signed a law that compels Amazon and other major internet retailers to collect California tax on behalf of independent merchants that sell products through them.
Separately, California has sought to more strictly enforce a 2012 law that allows it collect sales and use taxes from online retailers with a physical presence in the state, including going after smaller out-of-state companies whose products passed through Amazon warehouses on their way to California customers.
The state obtained a list of Amazon’s so-called third-party retailers and began demanding they pay tax if their products moved through California properties. In letters, the department indicated that retailers would be on the hook for back taxes.
When small businesses found out about the years of back taxes and penalties they didn’t know they owed, some companies feared going into bankruptcy.
Users flooded online sellers’ forums in 2018, sharing concerns over Amazon’s “Disclosure to the California Department of Tax and Fee Administration.” Most sellers who received the email were clients of Fulfillment by Amazon and shipped their products through California warehouses en route to their buyers.
“I’m really confused, nervous, and uncertain what to do and am thinking seriously about closing our business,” one user wrote.
“We purposely refuse to ship anything to any warehouse in California, and this is the reason why,” another wrote.
In a letter to the governor earlier this year, state Treasurer Fiona Ma argued the California Department of Tax and Fee Administration was going too far in its attempt to recover back taxes from what she considered to be small retailers.
Newsom’s proposed bill, should it pass with the 2019-2020 budget, will relieve “fulfillment sellers” of penalties on their back taxes and limit the tax department’s “look back period” to three years.
Rafelson from the Online Merchants Guild said it isn’t enough.
“I find it misleading that they think this is a valid budget filler,” Rafelson said. “They’re trying to use this money to fill a budget deficit.”
According to Rafelson, 50 percent of third-party retailers that sell on Amazon are located in foreign countries, making it impossible for California to pursue their taxes.
Under the Revenue and Tax Code, a fulfillment seller may fall under the category of “retailer engaged in business in this state” for their use of storage in California, albeit indirectly and through an “agent” like Amazon.
Independent sellers on Amazon have been growing rapidly in the past 20 years. In 2018, Amazon reported to the SEC that 58 percent of sales on the website were by made third-party retailers.