California hits Philly-area Amazon seller with $1.6 million sales-tax bill
California hits Philly-area Amazon seller
with $1.6 million sales-tax bill
by Harold
Brubaker, Updated: November
5, 2019- 5:00 AM
The
36-year-old Bucks County resident recently received a jaw-dropping notice from
California that he could owe as much as $1.6 million for sales tax that he
didn’t collect from consumers who bought his goods through Amazon.
That’s just for the first six months of
this year.
“It’s
absurd. I haven’t sold enough inventory over time to warrant a tax bill like
that. You could take every sale I’ve ever done. You could take the biggest
sellers on Amazon, and I don’t think they would have a bill like that. They’re
trying to scare people,” Freifelder said last week.
Freifelder,
who started as a merchant buying and selling CDs on eBay when he was 16, is
among what is believed to be hundreds of thousands of third-party merchants on
Amazon who were informed by the California Department of Tax and Fee
Administration that they should have been collecting taxes on sales to
California residents as far back as 2012.
California’s
aggressive tax-collection move against Freifelder and other third-party
merchants on Amazon is an example of government trying to catch up to new forms
of commerce that on the surface at least appear to evade obligations under old
laws, whether it’s Amazon declaring it’s not a retailer for third-party
merchants, Uber saying it’s not an employer, or Facebook denying it’s a
publisher.
When Amazon opened its first warehouse in
California in 2013, it escaped the obligation to collect the taxes on sales by
third-party merchants on the company’s site, apparently by convincing state
officials that it was not the retailer obligated to collect sales tax in those
cases — a distinction that has since been undermined by court decisions in
South Carolina, Pennsylvania, and elsewhere.
The
state says that as soon as Freifelder’s goods showed up at an Amazon warehouse
in California, he had the same obligation to collect sales tax as any retailer
with a store there — even if he had no idea where Amazon was storing his goods.
Jared
Walczak, director of state tax policy at the Tax Foundation in Washington, said
the pursuit of Amazon’s third-party merchants for back sales taxes is extreme
and violates protections under the U.S. Constitution, even though states a have
significant leeway in how they impose taxes.
“Retroactivity
is always bad policy, but in this case, it raises serious constitutional due
process concerns, because due process requires that you have notice and can
anticipate a policy. Here the retailers lacked notice to collect. No one
believed they were supposed to be collecting this tax for all of these years,”
Walczak said.
California tax officials said Monday that they could not
comment on specific tax liabilities.
A 2018 U.S. Supreme Court decision did away with the
decades-old standard that states could force retailers to collect sales tax
only if they had a physical presence in the state, making marketplace
facilitator laws possible.
California’s decision to pursue third-party merchants
preceded that Supreme Court decision, experts said.
That uncertainty caused by California’s tax strategy has
caused Freifelder to hit the brakes on the growth of his business, Philadelphia
Media Exchange Corp., which reached $3 million in revenue last year, he said.
The business had been growing steadily since 2000, when
Freifelder’s love of rap music, but distaste for the prices of compact discs at
Best Buy and Sam Goody, led the teenager to eBay, where he would buy 100 CDs
for $200, keep those he wanted, and resell the others.
In 2005 he started selling on Amazon and at flea
markets, such as the Tacony Palmyra Flea Market in New Jersey. He opened his first
store, Fivedollarcd, in the Tacony section of Northeast Philadelphia in 2010,
expanding to the sale of video games and consoles. Another store in Mayfair
followed.
But then streaming services eroded those business, so he
closed the stores and by 2015 had moved on to what is called “retail arbitrage”
of clothing, shoes, and grocery items bought on sale or clearance at Marshalls,
TJ Maxx, Ross, Burlington, and other stores, and sold for more on Amazon.
The front room of his warehouse has 14 large recycling
bins used to sort and repack Under Armor clothing, Polo shirts, Nicole Miller
lunch totes, and other goods before he ships them to Amazon, which then handles
every aspect of the sale to the consumer, he said. He controls only what he
ships and the price.
At its peak before the sales tax scare, Freifelder had
eight employees, three full-time and five part-time in the warehouse, and three
contractors who shopped for him. Now he’s down to one employee in the
warehouse. He still has the three contractors. Plus, his wife helps a couple
days a week.
“I’m drastically cutting things back until the dust
settles, just because I don’t want to find out I have a ridiculous bill a year
or two down the road,” said Freifelder, who wore a black Phillies cap and a
gray Super Mario ’85 T-shirt while showing visitors around his operation, in an
industrial park right next to I-95.
Paul Rafelson, a tax lawyer and volunteer executive
director of the Online Merchants Guild, said California is hurting not just
Freifelder, but thousands of small businesses nationwide.
“These guys are shipping goods off to Amazon. Amazon
moves them all around, doesn’t tell them, doesn’t warn them, the State of
California doesn’t even warn them, and then years later they’re stuck in this
interstate commerce speed trap,” said Rafelson, whose firm, Francissen Rafelson
Schick LLP, is based in Boca Raton, Fla.
California’s elected treasurer, Fiona Ma, in March sent
a letter to Gov. Gavin Newsom urging him to block the tax collectors from going
after third-party sellers.
“They are not the ones responsible for uncollected taxes
under state law, nor is it constitutionally permissible to impose such burdens
on these businesses,” Ma’s letter said.
Freifelder maintained a supremely calm demeanor for
someone who just received a $1.6 million tax bill, perhaps because he considers
the numbers “bonkers.”
“I would have had to have done at least $15 [million] to
$20 million in sales to get a bill like this. That would be in California
alone. I would have had to have done $150 million to $200 million in sales in
the United States.”
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