The Supreme Court this month turned down an excellent opportunity to provide further clarity in one of the biggest problem areas in the fallout of its 2018 decision in South Dakota v. Wayfair: retroactive enforcement.
The Court’s opinion in Wayfair highlighted the South Dakota law in question’s specific prohibition on retroactive enforcement as a key factor in deciding that the law, which allowed states to assess sales tax collection and remittance obligations on the basis of economic activity in that state rather than physical presence, did not impermissibly burden interstate commerce. However, it did not explicitly state that retroactivity was a red line states could not cross, nor did it close the door on retroactivity “gray areas.”
One such gray area concerned voluntary collection agreements made by large corporations like Amazon prior to the Wayfair decision. Amazon entered into one such agreement with California in 2011, beginning to collect and remit sales tax to the state by 2012.
Yet while Amazon understood this agreement to apply to Amazon products, California has since claimed that the agreement should apply to Fulfilled By Amazon (FBA) orders as well that stored inventory in California warehouses. California’s position fundamentally misunderstands the relationship between FBA sellers and their inventory once it is turned over to Amazon.
FBA is a fulfillment service that allows smaller sellers to outsource the fulfillment process to Amazon. Amazon receives inventory from the FBA seller, then ships it out to its warehouses around the country before it is delivered to its final destination. Once FBA sellers turn over their inventory to Amazon, they have no knowledge or control over where that inventory goes.
As even California’s State Treasurer has pointed out, this is effectively the same as the relationship between consignment stores and consignees. Much like sellers to consignment stores, control over the inventory and transaction effectively passes out of FBA sellers’ hands at a certain point, making them not responsible for collection of sales tax from the final customer.
Nevertheless California’s position is that these FBA sellers are responsible for sales taxes they never collected from customers and never knew they were supposed to collect (they may never have even known their inventory ever made it to California at all!) going back to 2012. Consequently, it would be money taken out of small sellers’ pockets.
And while not precisely a case of retroactive enforcement, as the basis for California’s argument goes back to 2012, California’s case would have been far weaker without the Court deciding as it did in Wayfair. Any time business owners are effectively expected to predict how the legal landscape will shift, it represents a somewhat unfair obligation being placed upon taxpayers who should not have to be tax law experts as well as business experts.
Unfortunately, while a group of online sellers affected by California’s harsh position attempted to get the U.S. Supreme Court to rectify the lack of clarity in this area, the Court declined to do so. That may mean that these sellers have no opportunity to have their day in court at all, as California courts will only hear tax cases seeking refunds. This puts these sellers in a situation where they have to pay years of back taxes and interest that they may not be able to pay before they can even begin to have their claims heard.
There remain many unresolved questions from the Wayfair decision, and small sellers continue to face many issues and complications. If the Court won’t put out the fires it lit, then Congress must.