California Court of Appeal, Grosz v. California Dept. of Tax and Fee Administration, Docket No. B309418

Sales and Use Taxes

 

Amazon

 

Taxpayer Action Under Code of Civil Procedure Section 526a

 

Tax Law

 

Standing

 

California Law

 

 

 

 

In addition to its own products, Amazon fulfills orders for products sold by third-party merchants through a program it calls “Fulfillment by Amazon” (FBA). The trial court in this action described the program as alleged in the First Amended Complaint (FAC): “To support this program, Amazon contracts with merchants (‘FBA Merchants’) who supply the products ordered by consumers through Amazon’s website. Amazon provides advertising, packaging, and delivery of the products supplied by the FBA Merchants. [Citation.] Amazon also processes payments for sales on behalf of the FBA Merchants.” According to the FAC, the state agency responsible for collecting sales and use tax (currently the California Department of Tax and Fee Administration (DTFA)) has historically not collected from Amazon sales and use taxes for products sold through the FBA program. Stanley Grosz filed a taxpayer actionunder Code of Civil Procedure section 526a (Section 526a) seeking a declaration that the DTFA “has a mandatory duty to assess and collect” sales and use tax specifically from Amazon for products sold through the FBA program, and an injunction requiring the DTFAto do so. The DTFA and its Director, Nicolas Maduro, and the Amazon entities that Grosz named in his FAC as Real Parties in Interest all demurred to the FAC. The trial court sustained the respondents’ demurrers without leave to amend. The trial court reasoned that the Revenue and Taxation Code vests the DTFA with discretion to determine whether the FBA Merchant or Amazon is the “retailer” in any given FBA transaction for purposes of collecting sales and use tax. Because the determination is discretionary and not ministerial, the trial court reasoned that Grosz had no standing to pursue his action. (See Silver v. Watson (1972) 26 Cal.App.3d 905, 909 (Silver).) We agree with the trial court, and will affirm the trial court’s order sustaining the respondents’ demurrers without leave to amend.

 

 

(Before July 1, 2017, the agency responsible for collecting sales and use taxes was the State Board of Equalization. The Taxpayer Transparency and Fairness Act of 2017 created the DTFA and transferred the Board of Equalization’s authority and responsibility for sales and use taxes (among other things) to the DTFA. (Stats. 2017, ch. 16, §§ 5, 14, 15; Gov. Code, §§ 15570, 15570.20, 15570.22; Rev. & Tax. Code, § 20.) (Fn. 3).

 

 

In his opening brief, Stanley Grosz—the taxpayer who filed suit against the DTFA—explains that this appeal is limited to DTFA’s “failure to collect tax from Amazon on FBA sales transacted prior to October 1, 2019. . . .” In 2019, the Legislature passed and the Governor signed Assembly Bill No. 147, which the Legislature called the Marketplace Facilitator Act (MFA). (Stats. 2019, ch. 5, § 2.) The bill made the MFA operative on October 1, 2019. (Stats. 2019, ch. 5, § 2; Rev. & Tax. Code, § 6049.5, subd. (a).) The MFA appears on its face to relate to transactions like the FBA transactions alleged in the FAC. We do not construe any part of the MFA here, but note only that it appears that Grosz has attempted to expressly exclude from his lawsuit any transactions occurring after the MFA’s operative date. (Fn. 4).

 

 

(…) The trial court (…) explaining: “The determination of which party—FBA Merchants or Amazon—was the retailer necessarily entailed consideration of all sections of the vast statutory scheme and required discretion especially considering ‘the “highly technical,” “intensely detailed and fact-specific sales tax system governing an enormous universe of transactions.”’”

 

 

Code of Civil Procedure Section 526a: “The purpose of Section 526a, ‘which applies to citizen and corporate taxpayers alike, is to permit a large body of persons to challenge wasteful government action that otherwise would go unchallenged because of the standing requirement. [Citation.]  . . . Although by its terms the statute applies to local governments, it has been judicially extended to all state and local agencies and officials. [Citations.]’ [Citation.] ‘ “The individual citizen must be able to take the initiative through taxpayers’ suits to keep government accountable on the state as well as on the local level.” ’ ” (Vasquez v. State of California (2003) 105 Cal.App.4th 849, 854, fn. omitted.) “It is established that an action lies under Section 526a not only to enjoin wasteful expenditures, but also to enforce the government’s duty to collect funds due the State. ‘ “A taxpayer may sue a governmental body in a representative capacity in cases involving its . . . failure . . . to perform a duty specifically enjoined.” [Citation.] This well-established rule ensures that the California courts, by entertaining only those taxpayers’ suits that seek to measure governmental performance against a legal standard, do not trespass into the domain of legislative or executive discretion. [Citations.] This rule similarly serves to prevent the courts from hearing complaints which seek relief that the courts cannot effectively render; the courts cannot formulate decrees that involve the exercise of indefinable discretion; their decrees can only restrict conduct that can be tested against legal standards. [Citations.]’ ” (Vasquez v. State of California, supra, 105 Cal.App.4th at pp. 854-855, italics added.) “The cases have . . . been careful to note that Section 526a has its limits. In particular, the courts have stressed that the statute should not be applied to principally ‘political’ issues or issues involving the exercise of the discretion of either the legislative or executive branches of government.” (Humane Society of the United States v. State Bd. of Equalization (2007) 152 Cal.App.4th 349, 356, italics added; see Silver, supra, 26 Cal.App.3d at p. 909 [“if the governing body has discretion in the matter, the taxpayer may not interfere”].)

 

 

Sales and Use Tax “Retailer”: “The California Sales and Use Tax Law (Rev. & Tax. Code, § 6001 et seq.) embodies a comprehensive tax system created to impose an excise tax, for the support of state and local government, on the sale, use, storage or consumption of tangible personal property within the state. [Citation.] The two taxes, sales and use, are mutually exclusive but complementary, and are designed to exact an equal tax based on a percentage of the purchase price of the property in question. In essence ‘ “a sales tax is a tax on the freedom of purchase. . . a use tax is a tax on the enjoyment of that which was purchased.’ ” Citations. The use tax supplements the sales tax by imposing on those subject to it the same tax burden as would otherwise be assessed under the sales tax.” (Wallace Berrie & Co. v. State Bd. of Equalization (1985) 40 Cal.3d 60, 66-67, fns. omitted.) Specifically, California law imposes a tax on “the gross receipts of any retailer from the sale of all tangible personal property sold at retail in this state. . . .” (Rev. & Tax. Code, § 6051.) The sales tax is imposed on and collected from “retailers.” (Ibid.) California law also imposes a tax on the “storage, use, or other consumption in this state of tangible personal property purchased from any retailer. . . .” (Rev. & Tax. Code, § 6201.) This tax is imposed on the retail purchaser, but is collected from the purchaser by the “retailer” and remitted to the state. (Rev. & Tax. Code, §§ 6202, 6203.) Pertinent to this appeal, the Sales and Use Tax Law states that “ ‘retailer’ includes,” among other things, “every seller who makes any retail sale or sales of tangible personal property . . .” and “every person engaged in the business of making sales for storage, use, or other consumption . . . .” (Rev. & Tax. Code, § 6015, subd. (a)(1) & (2).) A “ ‘seller’ includes every person engaged in the business of selling tangible personal property of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax.” (Rev. & Tax. Code, § 6014.) “A ‘retail sale’ . . . means a sale for a purpose other than resale in the regular course of business in the form of tangible personal property.” (Rev. & Tax. Code, § 6007.) And a “ ‘sale’ ” means, among other things, “any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration. ‘Transfer of possession’ includes only transactions found by the DTFA to be in lieu of a transfer of title, exchange, or barter.” (Rev. & Tax. Code, § 6006, subd. (a).)

 

 

(…) Pawnbrokers, storage men, mechanics, artisans, or others selling the property to enforce a lien thereon, are retailers with respect to sales of the property to consumers and tax applies to the receipts from such sales.

 

 

(…) Grosz concedes that a sales or use tax can only be applied once to a retail transaction—that Amazon and any particular FBA Merchant “cannot both be held liable for tax on the same . . . sale.” (Fn. 8).

 

 

(…) On the statutory interpretation question, we conclude, as did the trial court, that the determination of who is a “retailer” under the Sales and Use Tax Law and relevant regulations is one that invokes the discretion of the DTFA; making that designation is not a ministerial task (…) as opposed to a discretionary action.

 

 

(…) Here, by contrast, the question is not whether the law imposes a tax, but rather on whom, based on language in several interrelated statutes. The question here, as the trial court pointed out, is not whether the DTFA has discretion, but rather how it must exercise that discretion. That is the critical distinction between this case and Sonoma (195 Cal.App.3d 982).

 

 

(…) In addition to expressly giving the DTFA discretion to determine who “may be regarded . . . as retailers” for purposes of the Sales and Use Tax Law under the circumstances outlined in Revenue and Taxation Code section 6015, subdivision (b), we note the broad discretion the Legislature has given the DTFA generally. (Gov. Code, §§ 15570 et seq.).

 

 

The statutory framework of the Sales and Use Tax Law and the statutes vesting the DTFA with authority to administer that statutory framework also generally lead us to conclude that whether a taxpayer is a retailer for purposes of the Sales and Use Tax Law is a discretionary determination and not a ministerial task. Consistent with those conclusions, we agree with the trial court that Grosz’s lawsuit may not proceed under Section 526a.

 

 

We affirm the trial court’s order sustaining the DTFA’s and Amazon’s demurrers and dismissing the lawsuit.

 

 

 

 

(California Court of Appeal, Jan. 9, 2023, Grosz v. California Dept. of Tax and Fee Administration, Docket No. B309418, Certified for Publication)

Sales Tax, Remote Seller & E-Commerce

Tax: Sales Tax: E-commerce: Remote seller:

For Streamlined member states and other states:

https://www.streamlinedsalestax.org/index.php?page=Wayfair

State Website and Contact Information:

https://www.streamlinedsalestax.org/index.php?page=State-Websites

California Revenue Page:

https://www.taxes.ca.gov/

California Sales Tax Page:

https://www.taxes.ca.gov/Sales_and_Use_Tax/Forms.shtml

South Dakota v. Wayfair, Inc., Docket No. 17-494

Sales of goods: Tax: Sales tax: Use tax: Commerce clause: Interstate commerce: E-commerce: Streamlined Sales and Use Tax Agreement: Stare decisis: Fortas, J.: Gorsuch, J.:

When a consumer purchases goods or services, the consumer’s State often imposes a sales tax. This case requires the Court to determine when an out-of-state seller can be required to collect and remit that tax. All concede that taxing the sales in question here is lawful. The question is whether the out-of-state seller can be held responsible for its payment, and this turns on a proper interpretation of the Commerce Clause, U. S. Const., Art. I, §8, cl. 3.

In two earlier cases the Court held that an out-of-state seller’s liability to collect and remit the tax to the consumer’s State depended on whether the seller had a physical presence in that State, but that mere shipment of goods into the consumer’s State, following an order from a catalog, did not satisfy the physical presence requirement. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967); Quill Corp. v. North Dakota, 504 U. S. 298 (1992). The Court granted certiorari here to reconsider the scope and validity of the physical presence rule mandated by those cases.

Under this Court’s decisions in Bellas Hess and Quill, South Dakota may not require a business to collect its sales tax if the business lacks a physical presence in the State. Without that physical presence, South Dakota instead must rely on its residents to pay the use tax owed on their purchases from out-of-state sellers. “The impracticability of this collection from the multitude of individual purchasers is obvious.” National Geographic Soc. v. California Bd. of Equalization, 430 U. S. 551, 555 (1977). And consumer compliance rates are notoriously low.

(…) This Court’s doctrine has developed further with time. Modern precedents rest upon two primary principles that mark the boundaries of a State’s authority to regulate interstate commerce. First, state regulations may not discriminate against interstate commerce; and second, States may not impose undue burdens on interstate commerce. State laws that discriminate against interstate commerce face “a virtually per se rule of invalidity.” Granholm v. Heald, 544 U. S. 460, 476 (2005). State laws that “regulate even-handedly to effectuate a legitimate local public interest . . . will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970). Although subject to exceptions and variations, see, e.g., Hughes v. Alexandria Scrap Corp., 426 U. S. 794 (1976); Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U. S. 573 (1986), these two principles guide the courts in adjudicating cases challenging state laws under the Commerce Clause.

These principles also animate the Court’s Commerce Clause precedents addressing the validity of state taxes. The Court explained the now-accepted framework for state taxation in Complete Auto Transit, Inc. v. Brady, 430 U. S. 274 (1977). The Court held that a State “may tax exclusively interstate commerce so long as the tax does not create any effect forbidden by the Commerce Clause.” Id., at 285. After all, “interstate commerce may be required to pay its fair share of state taxes.” D. H. Holmes Co. v. McNamara, 486 U. S. 24, 31 (1988). The Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides. See Complete Auto, supra, at 279.

Before Complete Auto, the Court had addressed a challenge to an Illinois tax that required out-of-state retailers to collect and remit taxes on sales made to consumers who purchased goods for use within Illinois. Bellas Hess, 386 U. S., at 754–755. The Court held that a mail-order company “whose only connection with customers in the State is by common carrier or the United States mail” lacked the requisite minimum contacts with the State required by both the Due Process Clause and the Commerce Clause. Id., at 758. Unless the retailer maintained a physical presence such as “retail outlets, solicitors, or property within a State,” the State lacked the power to require that retailer to collect a local use tax. Ibid. The dissent disagreed: “There should be no doubt that this large-scale, systematic, continuous solicitation and exploitation of the Illinois consumer market is a sufficient ‘nexus’ to require Bellas Hess to collect from Illinois customers and to remit the use tax.” Id., at 761–762 (opinion of Fortas, J., joined by Black and Douglas, JJ.).

In 1992, the Court reexamined the physical presence rule in Quill. That case presented a challenge to North Dakota’s “attempt to require an out-of-state mail-order house that has neither outlets nor sales representatives in the State to collect and pay a use tax on goods purchased for use within the State.” 504 U. S., at 301. Despite the fact that Bellas Hess linked due process and the Commerce Clause together, the Court in Quill overruled the due process holding, but not the Commerce Clause holding; and it thus reaffirmed the physical presence rule. 504 U. S., at 307–308, 317–318.

The physical presence rule has “been the target of criticism over many years from many quarters.” Direct Mar­keting Assn. v. Brohl, 814 F. 3d 1129, 1148, 1150–1151 (CA10 2016) (Gorsuch, J., concurring). Quill, it has been said, was “premised on assumptions that are unfounded” and “riddled with internal inconsistencies.” Rothfeld, Quill: Confusing the Commerce Clause, 56 Tax Notes 487, 488 (1992). Quill created an inefficient “online sales tax loophole” that gives out-of-state businesses an advantage. A. Laffer & D. Arduin, Pro-Growth Tax Reform and E-Fairness 1, 4 (July 2013). And “while nexus rules are clearly necessary,” the Court “should focus on rules that are appropriate to the twenty-first century, not the nineteenth.” Hellerstein, Deconstructing the Debate Over State Taxation of Electronic Commerce, 13 Harv. J. L. & Tech. 549, 553 (2000). Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.

Quill is flawed on its own terms. First, the physical presence rule is not a necessary interpretation of the requirement that a state tax must be “applied to an activity with a substantial nexus with the taxing State.” Com­plete Auto, 430 U. S., at 279. Second, Quill creates rather than resolves market distortions. And third, Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow.

(…) For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers’ computers. A website may leave cookies saved to the customers’ hard drives, or customers may download the company’s app onto their phones. Or a company may lease data storage that is permanently, or even occasionally, located in South Dakota. Cf. United States v. Microsoft Corp., 584 U. S. ___ (2018) (per curiam).

(…) The physical presence rule as defined and enforced in Bellas Hess and Quill is not just a technical legal problem—it is an extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions. Forty-one States, two Territories, and the District of Columbia now ask this Court to reject the test formulated in Quill.

(…) Yet the physical presence rule undermines that necessary confidence by giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes.

(…) “Although we approach the reconsideration of our decisions with the utmost caution, stare decisis is not an inexorable command.” Pearson v. Callahan, 555 U. S. 223, 233 (2009) (quoting State Oil Co. v. Khan, 522 U. S. 3, 20 (1997)). Here, stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.

(…) Further, the real world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the “far-reaching systemic and structural changes in the economy” and “many other societal dimensions” caused by the Cyber Age. Direct Marketing, 575 U. S., at ___ (KENNEDY, J., concurring) (slip op., at 3). Though Quill was wrong on its own terms when it was decided in 1992, since then the Internet revolution has made its earlier error all the more egregious and harmful.

(…) For these reasons, the Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decisions in Quill Corp. v. North Dakota, 504 U. S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), should be, and now are, overruled.

In the absence of Quill and Bellas Hess, the first prong of the Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus with the taxing State. 430 U. S., at 279. “Such a nexus is established when the taxpayer [or collector] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” Polar Tankers, Inc. v. City of Valdez, 557 U. S. 1, 11 (2009). Here, the nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the State. The Act applies only to sellers that deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods and services into the State on an annual basis. S. B. 106, §1. This quantity of business could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota. And respondents are large, national companies that undoubtedly maintain an extensive virtual presence. Thus, the substantial nexus requirement of Complete Auto is satisfied in this case.

The question remains whether some other principle in the Court’s Commerce Clause doctrine might invalidate the Act. Because the Quill physical presence rule was an obvious barrier to the Act’s validity, these issues have not yet been litigated or briefed, and so the Court need not resolve them here. That said, South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively. S. B. 106, §5. Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability. Any remaining claims regarding the application of the Commerce Clause in the absence of Quill and Bellas Hess may be addressed in the first instance on remand.

(U.S.S.C., June 21, 2018, South Dakota v. Wayfair, Inc., Docket No. 17-494, J. Kennedy)

A la lumière de la « Commerce Clause », U. S. Const., Art. I, §8, cl. 3, un état, domicile de l’acheteur, peut-il exiger d’un vendeur sis en un autre état de percevoir et de régler la taxe de vente ?

Dans deux décisions précédentes (Bellas Hess et Quill), la Cour a répondu par l’affirmative, mais à la condition que le vendeur dispose d’une présence physique dans l’état de l’acheteur. La simple expédition des biens, après un achat sur catalogue, ne satisfaisait pas à la condition de la présence physique.

Sans présence physique du vendeur sur son sol, l’état de l’acheteur devait récupérer la « sales tax » auprès de chaque acheteur individuel, un système qualifié d’impraticable.

Dans sa décision « Complete Auto » rendue en 1977, la Cour a jugé qu’un état était compétent pour taxer le commerce entre états (et lui seul), à condition de ne pas créer d’effets interdits par la « Commerce Clause ». De la sorte, une telle taxe doit s’appliquer à une activité en lien substantiel avec l’état de perception, doit être répartie équitablement entre les débiteurs, ne doit pas discriminer le commerce entre états à l’avantage du commerce local, et doit être équitablement liée aux services apportés par l’état de perception.

La jurisprudence Bellas Hess et Quill a fait l’objet de nombreuses critiques, auxquelles se sont joints les Juges Fortas et Gorsuch dans diverses opinions. Elle a été vue comme créant un avantage concurrentiel en faveur du commerce électronique provenant d’un autre état que celui de l’acheteur. Ces critiques soutiennent que la règle de la présence physique résulte d’une interprétation incorrecte de la Commerce Clause.

Par exemple, une entreprise qui maintient un site Internet peut être qualifiée d’entreprise avec présence physique dans un autre état que celui de son siège, par le biais des ordinateurs des clients.

En conséquence, Bellas Hess et Quill sont ici reconsidérés, et « overruled », ce que n’empêche pas le principe « stare decisis ». Reste donc essentiellement applicable le premier élément du test posé par la décision Complete Auto, à savoir la condition que la taxe soit imposée à une activité présentant un lien substantiel avec l’état qui taxe. Un tel lien est établi quand le débiteur de la taxe profite des conditions que l’état met à sa disposition pour permettre son activité commerciale. En l’espèce, ce lien est clairement suffisant considérant les contacts économiques et virtuels avec l’état de l’acheteur : la loi qui prévoit la taxe ne s’applique qu’aux vendeurs qui délivrent plus de 100'000 dollars dans l’état de l’acheteur, ou qui participent à plus de 200 transactions individuelles par année dans dit état.

(L’espèce mentionne encore le « Streamlined Sales and Use Tax Agreement », adopté par plus de 20 états. Ce système standardise les taxes pour réduire les coûts administratifs. Il ne requiert au niveau de l’état qu’une seule administration fiscale, prévoit des définitions uniformes de produits et services, et prévoit d’autres règles de simplification).

L’affaire est renvoyée à l’autorité inférieure pour déterminer si d’autres principes découlant de la Commerce Clause sont susceptibles d’annuler la loi qui prévoit la taxe litigieuse.