In April 2019, California’s legislature passed the Marketplace Facilitator Act (MFA), a law that took advantage of the United States Supreme Court’s 2018 opinion in South Dakota v. Wayfair. The Wayfair decision made it possible for states to require out-of-state sellers to collect and pay local sales taxes, even if the seller had no physical location within the taxing state. The MFA specifically addressed the sale of tangible property through online marketplaces.
The MFA took effect on October 1, 2019, and required “marketplace facilitators” to register with the California Department of Tax and Fee Administration (DTFA) and collect any remit any sales taxes due on purchases made through said facilitator. In simple terms, an online marketplace was now responsible for complying with California’s sales tax, as opposed to individual sellers who used the marketplace.
But what about sales conducted through marketplace facilitators prior to the MFA taking effect in October 2019? A recent decision by a California appellate court addressed a novel legal challenge to the DTFA’s authority to decide whether a marketplace facilitator or an individual merchant was liable for paying those taxes. This particular lawsuit never proceeded to the merits, however, as the courts determined the plaintiff who brought the case lacked legal standing to proceed.
The case, Grosz v. California Department of Tax and Fee Administration, centered on online giant Amazon’s “Fulfillment by Amazon” (FBA) program. As you probably know if you are a frequent Amazon customer, many of the products sold on Amazon are actually from third-party sellers. Amazon provides advertising, warehousing, and shipping services for these sellers. The FBA program has given rise to a number of sales-tax related lawsuits, such as a Pennsylvania appellate court decision issued last June, rejecting that state’s attempts to tax individual FBA sellers merely because Amazon chose to warehouse their goods within the state.
In the Grosz case, the owner of a California-based camera store, Stanley Grosz, sued the DTFA, alleging the agency failed to classify Amazon as the “retailer” for FBA sales made prior to October 2019. The core of Grosz’s argument was that Amazon met the definition of a “consignment seller” under state regulations. And consignment sellers are traditionally responsible for collecting and paying sales tax.
But as previously noted, the courts held that Grosz lacked standing to bring this argument in the first place. The reasons for this have to do with a California law, Section 526a of the Code of Civil Procedure. Under 526a, any individual California taxpayer–a resident or a corporation–has standing to sue a state agency in order to restrain or prevent “any illegal expenditure” of public funds or public property. Basically, if the government is spending taxpayer dollars in an illegal way, any taxpayer can sue to put a stop to it, even if that taxpayer is not directly affected by the challenged action.
Grosz maintained that Section 526a allowed him to maintain a taxpayer lawsuit to force the DTFA to require Amazon to pay California sales taxes on pre-MFA sales made through the FBA program. The DTFA–and Amazon–objected to this argument. The DTFA moved to dismiss Grosz’s lawsuit, arguing that 526a did not allow a taxpayer to challenge its discretion in whether to classify Amazon or an individual FBA merchant as the “seller” for purposes of assessing sales tax.
The courts agreed with the DTFA. In a January 9, 2023, decision, the California Second District Court of Appeal upheld a trial judge’s earlier ruling dismissing Grosz’s lawsuit. Justice Victoria Gerrard Chaney, writing for the Second District panel, explained that taxpayers had “no authority to enjoin discretionary government activity under 526a.” These kinds of taxpayer lawsuits could only be used to require a government agency to perform a “ministerial” duty, i.e., one where the agency has no legal discretion. Here, determining whether Amazon or an FBA merchant was a “retailer” under the pre-MFA sales tax laws by definition required the exercise of such discretion.
Chaney added, however, that if the DTFA’s decision was incorrect, there were possibly two other legal means for seeking judicial review. The first was that if the DTFA assessed a specific FBA seller for delinquent sales taxes, the seller could challenge that decision in court. The second was that a seller who previously paid taxes on FBA sales could file a lawsuit to seek a refund.
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