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California May Be Coming for You

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.

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.

“It makes no sense to expose these small businesses to the risk of actions by CDTFA, as they are not the ones responsible for uncollected sales tax under state law, nor is it constitutionally permissible to impose such burdens on these businesses,” she wrote. “Putting an unbearable tax burden on many small kitchen-table enterprises trying to make a living on these online retail platforms simply does not make sense, and it is not consistent with our state laws, public policies, or our values.” She worried about the impact on women- and minority-owned businesses.

Bravo to Ma, although I’d argue that California tax authorities’ behavior seems right in keeping with California’s “values,” as the state always seems oblivious to the harm its tax and regulatory policies cause businesses in its quest to build bigger bureaucracies.

The Wayfair ruling has created a confused mess because, as TechRepublic explained, “it opened the floodgates and provided no practical guidance for compliance, with Chief Justice Roberts stating in his dissent that the ruling ‘breezily disregards the costs that its decision will impose on retailers.’” Ma’s argument — bolstered by the fact that overseas sellers easily avoid paying sales taxes — is that the big fulfillment operations ought to collect the taxes.

Until that broader national issue is resolved, though, the most aggressive tax collectors are going to torment mom-and-pop businesses. The California Legislature could rein in CDTFA’s power, but don’t count on it. As I reported last year for The American Spectator, lawmakers gladly used some scandals to gut the Board of Equalization — the nation’s only tax-collection body governed by elected officials. They replaced it with CDTFA and its companion Office of Tax Appeals.

It’s easy to understand the Legislature’s motivation. BOE was a surprisingly taxpayer-friendly because career-minded politicians were elected to these posts. They often sympathized with businesses that were being unfairly treated by the state given that they had to be sensitive to voters. Whereas the BOE often ruled on behalf of taxpayers in tax appeals, the new agencies rarely do so. The new, less accountable revenuers seem focused entirely on grabbing more money.

It’s one thing for Californians to be “crushed by a wrong-headed and retroactive administration of the state’s tax law,” as Ma put it. We choose to live and vote here, so we deal with the consequences. But the online economy recognizes no state boundaries. As a result, you might have to deal with these tax authorities, too.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Steven Greenhut
Steven Greenhut
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Steven Greenhut is a senior fellow and Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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