“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.
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.
The question of whether third-party merchants or Amazon should collect sales taxes has since been resolved by the passage in California and many other states of laws that require “marketplace facilitators” to collect sales taxes. In California, that law took effect Oct 1. In New Jersey and Pennsylvania, such laws took effect last year.
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.
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.
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.
“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.
“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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