For the E-Commerce industry, staying informed about sales tax policies for relevant states is crucial. Online retailers would prefer to avoid any legal issues arising from mistakes or forgetfulness. E-commerce businesses that sell products in California have been dealing with a big change this year. The state has become the latest to require online retailers, even if they have no physical presence in the state, to collect sales tax if they meet certain criteria: that is, if they generate more than $100,000 of gross sales or services and have at least 200 transactions annually in the state. This law was originally thought to be non-retroactive according to the guidelines set forth by the California Department of Tax and Fee Administration (CDTFA) in December of 2018. However, California is notifying retailers who use Fulfillment by Amazon that they are responsible for sales tax dating back to 2012. One such retailer, Brian Freifelder, found that he would be responsible for $1.6 million.
Caught In “An Interstate Commerce Speed Trap”
Brian Freifelder is the owner of Philadelphia Media Exchange, an e-commerce business that sells clothing, shoes, and groceries on Amazon.com in Bensalem, PA. He began his career when he was just 16 years old. His business model? Buying and selling hip-hop CDs on eBay. He later started selling on the giant e-commerce business website, Amazon, and at flea markets. He expanded to video games, consoles, clothing, and grocery items and made $3 million in revenue last year. But his business has stopped growing, thanks to the surprise notice from the state of California.
California gave Freifelder a surprise, specifically a $1.6 million sales tax collection surprise. And that is only for the first six months of the year. The state says Freifelder failed to collect sales tax from consumers who bought his products from Amazon since 2012.
This move by California is just an example of how states are playing catch up with e-commerce stores and other online businesses. Some e-commerce platforms seem to allow corporations to evade tax obligations under older laws. One example is Uber claiming that to hire contractors rather than employees, and of course, Amazon convincing state officials that the obligation to collect sales tax falls to the third-party merchants (Freifelder), rather than the retailer (Amazon), even though these third-party merchants are sometimes unaware of where Amazon is storing the goods.
Of course, many issues about this move have sprung up from lawyers and politicians alike. Some have pointed out that Amazon is entirely silent to these merchants regarding tax collection, and that the burden of collecting sales tax should be Amazon’s. As of now, that burden is on the small business. That burden came about due to two major Supreme Court decisions
Court Rulings and The E-Commerce Business Impacts
On June 21, 2018, the Court voted 5-4 to overturn the 1992 ruling Quill v. North Dakota. The ruling initially stated that if an internet-based business lacked a physical presence in a state, that business was exempt from that state’s sales taxes. But thanks to this ruling, online retailers can be required to collect sales taxes even if businesses lack a physical presence in many states.
The other major Court decision came when the Court overruled the Franchise Tax Board of California v. Hyatt case in May 2019. This decision makes shielding an in-state business from an obligation to collect sales tax from another state more difficult. These decisions can have an impact on the growth of online start-ups and small businesses, but the major hurdle seems to be a “compliance challenge,” with the thousands of local and state taxing districts.
We have yet to see what the final impact of Brian’s story will be. What does Brian’s story tell us right now? The critical takeaway is that staying informed of sales tax laws and regulations states are passing, or even just considering, is vital. This case is an extreme example, but that just makes the lesson clearer. Just like brick and mortars, online e-commerce businesses need to be aware of new obligations to collect sales tax, and any updates in the laws that can affect business, especially third-party merchants.
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