Sacramento
Those of us who live in California are used to the state’s aggressive tax-collection policies. Despite record-setting budgets, the state never has enough revenue to fund all the programs it wants to create or expand so the tax authorities have to shake every last dime out of residents’ pockets. But now, thanks to confusion over how to collect online sales taxes, California’s tax-collection agency may be coming for you — even if you sell a few items from your kitchen table in Kansas.
The newly created California Department of Tax and Fee Administration (CDTFA) has been sending collection letters to small businesses that sell products via online retail platforms such as Fulfillment by Amazon. The agency claims that such third-party sellers owe eight years of back taxes because they are considered to have a physical presence in the Golden State. The agency threatens tens of thousands of dollars in fines and imprisonment of up to three years.
Against the State: An ...
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It’s a frightening proposition. As California Treasurer Fiona Ma noted in a recent letter to Gov. Gavin Newsom, she’s heard from a Washington state third-party seller who is “distraught and frightened” after receiving a letter from California telling her that she’s “facing tens of thousands of dollars in back taxes, penalties and interest” — something that “will force us out of business and into bankruptcy.” The seller has complied with California tax rules and signed up for a California business license, but now our state wants uncollected sales taxes going back eight years.
How can a Washington business potentially be forced into bankruptcy by Sacramento taxing authorities?
Well, the entire online tax-collection issue is complicated and unresolved. In 2018, the U.S. Supreme Court ruled in the South Dakota v. Wayfair decision that states can collect sales taxes from online businesses even if they do not have a physical presence in the state, and California (like many other states) begin collecting those this week. But California isn’t content collecting such taxes from that date going forward. It wants to get every cent it can from businesses going back years before that.
To do so, the agency is taking a novel and highly controversial reading of what it means to have such a presence in our state. “Your nexus in California may have been established because you use Fulfillment by Amazon services for sales you make over the Internet and some of your inventory is stored in fulfillment center warehouses in Californian for delivery to consumers in this state,” according to a CDTFA letter quoted by TechRepublic. The agency also is demanding that Amazon hand over private information from these companies.
In other words, California is saying that businesses in Washington, Mississippi, and elsewhere actually had a presence in California because — unbeknownst to them — the Amazon fulfillment service may have stored their product in a warehouse somewhere in, say, the San Joaquin Valley or the Inland Empire. Treasurer Ma, who is one of the few statewide officials with a history of standing up for California’s taxpayers, calls this action “unlawful, unconstitutional and impractical.”
In her letter to Newsom, Ma noted that these big online retail platforms have total control over how the products are stored, packaged, paid for, and delivered. It was the online platforms — not the small business in Kansas or Pennsylvania — that chose to store the goods in some California warehouse.
