Common Misconceptions Among Amazon Sellers

Good Morning of my name is Sam Brockman I am a sales and use tax attorney with Brotman law here in San Diego and I wanted to do a short video this morning to clear up a lot of common misconceptions among Amazon sellers so I've been talking with a lot of people who received notices from California and December and they're the January 15th deadline to become registered has now passed and in a lot of the conversations with Amazon sellers that I'm having there are some common misconceptions in those conversations as well as some things that I've seen that are posted online that are not exactly true or that are misleading, so I wanted to post a quick video to get the right information out there and in helping you guys to make some informed decisions with respect to this so first of all I would just want to give you an idea of where we're coming from as a law firm with respect to this issue so even though this is a legal issue what is of most importance to most people is the business ramifications of this decision so and really our job as a law firm is to help our clients identify manage and mitigate risk so to the extent that we can't mitigate a risk we need to manage it in.

The best way possible and what that means for a lot of Amazon sellers is bringing them into compliance as quickly as possible and as cost-effective as possible so it's this is really not engaging in a broad lengthy legal argument about the constitutionality or you know going down a path that's going to lead to a multi-year litigation what this is about is helping people get their businesses in compliance protecting the owners of the business and protecting the revenue stream that's generated from the business so that the owners and employees can continue to feed their families and do all the things that they do in their business so let's start with a common misconception that Amazon is a consignor so in a consignment transaction there are usually two separate sales there is a sale to the consignment house and then there is a sale from the consign that can from the consign II to the person who is purchasing the product so with Amazon there's not these two separate sales that are involved what Amazon is doing is Amazon is holding inventory on behalf of sellers to facilitate shipping and it's doing that through the FBA platform and that's what's creating Nexus in California under revenue and Taxation code 60 203 so this isn't a consignment transaction it's not like you are selling products to.

Amazon who is then reselling them and taking a fee even if that were case you as sellers are not collecting resale certificates from Amazon which would alleviate you from tax in those transactions whereas Amazon going to provide you with resale certificates because if you read the language of your agreement to participate in the FBA program it will clearly identify you the seller as the retailer and not Amazon as the retailer so it's very clear in the language of that agreement and in the interpretation of the revenue and Taxation code that if the sellers that are responsible ultimately for the tax that's collected and not Amazon Amazon is simply a marketplace for connecting buyers and sellers of products so it's like eBay in that's in the sense if eBay was storing inventory it's like StubHub for tickets but it is Amazon is not involved in the sale process between the seller you and between your buyer it is simply facilitating that sale and then taking various fees associated with the facilitation of that sale and that interpretation is consistent with a lot of the state laws that you're past so if you look at like state like Washington that has a marketplace sellers law it's designed to put the burden of tax collection on the marketplace but it doesn't interfere with the concept of where the taxable sale is occurring so for people who are trying to make.

The argument that Amazon is a consignor unfortunately under California law that's not going to work for the variety of reasons I just explained the second misconception that I want to clear up is that a legislative or judicial solution will take care of this problem so as far as on the legislative end our current federal government is on an extended holiday and they're not taking up any current legislation that would alleviate this issue so if there's a hope in the seller community that the federal government is somehow going to intervene in this process then unfortunately I think you are sorely mistaken there with respect to California there's also nothing in the California Legislature that is being advanced to either a shift the burden of tax collections on to Amazon or be to eliminate the CD TFA's policy of enforcing this retroactive Lee so as far as a legislative solution goes there is nothing that is currently pending that would alleviate this problem with respect to judicial solutions there's nothing pending in the California State courts that is in advanced stages that would overturn the CDT FAs policy to go after sellers so from a state issue I'm not aware of anything particular this could have an immediate impact on sellers here in California there are some federal challenges to Amazon's ability to collect tax most notably the case in South Carolina or South Carolina is trying to put the burden on.

Amazon but this relying on this is problematic for two reasons number one the litigation has been delayed and there's no definitive answer on when we're going to get a district court ruling in this case it could take years district court litigation often takes years and be even if there is a outcome in district court it will go presumably to the appeals court and maybe even to the Supreme Court so this whole process could take a number of years to resolve itself litigation is generally a multi-year process and in the interim there's nothing preventing California from enforcing the law that's on its books keep in mind that the district court challenge in South Carolina is only limited to South Carolina law there's no broad applicability of the law in California so assuming you get a favorable decision in cap in South Carolina somebody's going to have to take that and go in and force that in California and California and South Carolina are on opposite sides of the country and they're in two separate federal circuits so even if there is a successful challenge in Catalan in South Carolina.

That's upheld by the district court but it's upheld by the appeals court someone would have to bring a similar challenge in California win in district court in California and then prevail in the ninth circuit here so there is a very real possibility number one that you could have a circuit split between the two circuits and number two that could be a multi multi year process it's not like South Carolina is going to win its challenge and there's gonna be amnesty for Amazon sellers so I want to be very clear and how that works there have been some other people online who are advancing the concept of pursuing a class action against the Amazon number one you would need a solid legal basis to enforce a collection challenge against Amazon which a lot of people are going to rely on the Constitution and the Commerce Clause but secondly any concept of a class action against Amazon would most likely be litigated and defended by Amazon Amazon is a multi-billion dollar corporation and has a variety of legal resources so a challenge from a legal perspective would be a tall order against Amazon not to say that it couldn't ultimately prevail but it's very time-consuming and expensive process and is going to consume a lot of resources on one side not to mention the fact that with any sort of litigation either the South Carolina litigation or any proposed class action there exists the possibility for settlement so it's not like a class-action lawsuit is necessarily going to make it all the way through and there's going to be a magic decision that's going to alleviate the retroactivity of these sales and use tax laws so from a risk mitigation perspective.

I don't think it is a particularly good idea to hold your breath on a legislative or a judicial challenge because of the timing and the difficulties involved and keep in mind even if there's a challenge in another state that doesn't have any bearing on the California Department taxes the administration to go pursue this against the sellers the last misconception I want to clear up is this concept of a wait-and-see approach there's a number of practitioners out there who frankly are unfamiliar with the way the Department of tax and fee Administration works in California but who are advocating this well let's wait till they come after you approach if you look at the history of California's out of state compliance efforts and California is one of the more robust if not the most robust states in terms of pursuing people outside its borders who owe potential sales and use taxes and state income taxes California actually has three branch offices that are set up outside of California one in Houston one in Chicago and one New York City but he uses regional jumping-off points and California has really developed a very efficient way to go after out-of-state sellers so to give you an idea we do mostly California based sales and use tax controversies as well as state income tax controversies we're really known as a california tax controversy firm and my no practice had if you'd asked me in 2014.

I would have told you that I'm gonna represent a 100 percent California clients and you know that's all I'm gonna do but really in reality our practice has shifted, so about 40 to probably even 50 percent of our practice now is representing people who are outside of California that have stepped into California so those are not all Amazon sellers but it should give you an idea just on the frequency that we're experiencing it as a firm on how active California has been in pursuing out of state collections California is not going to go away the statutes here are written unfortunately not in the favor of people who are out of state and owe money and they're written in a way to facilitate the department tax and fee Administration in their assessment and collection efforts so a lot of people are ignoring the January 15 notice and hoping that California is going to go away and unfortunately that's probably not going to be the case what happens when you receive a notice like that is there's the opportunity to come forward and to get into compliance and if you don't come into compliance you go down another path you can assign to a tax collection tetra tax compliance officer and then if you don't respond on that tax compliance officer you either potentially will subject yourself to an audit or California will just just you an assessment and make you fight the assessment, so there's nothing preventing from California absent a filed sales tax return from issuing an assessment for that same quarter and when you don't file a sales tax return in California there's an unlimited statute of limitations and on.

The collection set of things California has a 20-year collection statute and sometimes up to 30 years to enforce collection efforts against sellers so even though you say well I'm in New York I don't have any property or anything that California can touch number one you do business on amazon amazon has Nexus in California so Amma's so Amazon can easily be levied at California can without leaving the state California can go in and levy Emma your Amazon merchant account and take all the proceeds out of there number two if you use any sort of national banking or credit card processing or things like that most notably those those entities will have some sort of Nexus with California and California can do the same thing so just don't think that because there's a distance between you and California that California can't enforce collection actions and those actions aren't authorized by our state statutes here so I realize the unfairness of this I realize that a bunch of people on in the Amazon seller community have inadvertently triggered Nexus in California and the concept of that.

That you guys should be aware of the laws in California or in any other state or there's economic Nexus or some other Nexus is patently unfair but the problem is is that this is representative of a change and you can't think of yourself as just a corporation in your home state you have to start thinking about yourself as a multi-state corporation which is essentially what you guys are you guys unknowingly or not have triggered Nexus in a variety of states and you're gonna have to come into compliance so by delaying the decision to come into compliance you're really prolonging the agony that you potentially may go through as more states get more sophisticated and start assessing and moving towards collection efforts this is going to be a multi-front problem so I really want to encourage you to get some help to get some good guidance talk to people or either in California or who have a real knowledge of the revenue and Taxation code here in California and how the CDT FA procedure really works and how they're structured because really as I said earlier this is ultimately a business decision is you guys are being forced into compliance and the idea is to get into compliance to amount of cost and with the least amount of hassle possible and that's the approach that we've been taking with a number of our clients and that's the approach that I've encouraged you to take in trying to deal with this problem so if you have any questions you're more than welcome to reach out to us our website is


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law