Online Merchants Guild

Introduction & Tax Strategy


Section 1

Online Merchants Guild:  Overview

Q. What is the Online Merchants Guild (“OMG”)?

A. OMG is a trade association that will be operating under 501(c)6 of the Internal Revenue Code.  501(c)(6) of the internal revenue code.  We are currently applying for this status, and see no reason that it would not be granted, as trade associations like OMG are common.  It is normal that this process can take 6-12 months.  

Q. What is a Trade Association?

A. A trade association, also known as an industry trade group, business association, sector association or industry body, is an organization founded and funded by businesses that operate in a specific industry. An industry trade association participates in public relations activities such as advertising, education, political donations, lobbying and publishing, but its focus is collaboration between companies.  For a list of trade associations see:

Q. What can a trade association, like OMG, do for its members?

A.  As a trade association for online merchants we can advocate for fair law and policy towards online merchants.  We can also lobby if necessary.  Essentially, we give the online merchants a political voice, something they’ve lacked since the dawn of ecommerce.

Recall Mark Zuckerberg on Capitol Hill?  For those of you who don’t remember, the questions he was being asked by Congress were shocking, demonstrating a complete lack of understanding of all things tech and ecommerce.  For example, when Senator Hatch of Utah asked Zuck how Facebook can make money if it doesn’t charge for its service, Zuckerberg had to try hard to hold back his smirk and say, “Senator, We sell ads.” 

The businesses that OMG represents are not fortune 500 companies; most are usually owner-run. These businesses don’t have the scale to lobby, advocate or take legal action to protect their interests.  Unlike Amazon, they don’t have negotiating leverage with the states. It’s scary for them to stick their necks out on controversial issues, because their business could be threatened by any number of states or Amazon. They need an organization to speak for them and act on their behalf. 

Without our a common voice, the people who will determine the fate of eCommerce will be those who have no clue how it works, and that makes them more susceptible to lobbyists whose interests are squarely at odds with ours.  Also, this isn’t just true for tax issues. OMG aims to be the sellers’ voice for all matters that are important to our members, such as intellectual property laws and trade.  As issues come up our organization will be there to fight to ensure our members are protected from politicians making bad laws.

Of course ,this assumes that a substantial number of merchants join the organization.  This is why we must band together and generate that voice that will fight for us and make sure that the people who must live with the consequences of e-commerce laws actually have a say in their creation.    

Q. What’s the most important issue OMG is tackling for me?

A. Most importantly for online merchants right now, we can take appropriate legal action to defend you from state tax authorities that claim you owe years of back taxes, interest and penalties. We are fighting in every state and local jurisdiction to stop them from imposing undue burdens on your business by imposing a Walmart-sized sales tax, income tax, franchise tax, or property tax burden. After Wayfair, the cost of such compliance could easily exceed $100,000 annually for most US-based small businesses selling products or services online. Our strategies will be discussed in more detail in the litigation section of this FAQ.

Q. Is that it?

A. We’d like to think giving every merchant of all sizes the best possible legal defense with respect to taxes is a pretty substantial benefit, but over time we intend to offer more to our members.  As we build up our membership base we can expand into providing membership benefits for our members.  This may include meaningful group discounts on services and products that are most important to online merchants (e.g. packaging and shipping), and even offering group insurance for life, long-term care, health,etc.  The sky’s the limit in terms of how we can leverage our collective strength to improve the quality of life for all members.  We hope to bring this on soon, but with the tax crisis and a volunteer staff of three, we are simply not resourced enough to do all of this at once.  We must prioritize what’s important first: the immediate crisis for most merchants is state taxes.

Q. How can our advocacy efforts be effective, especially at times when our interests conflict with large companies with large advocacy and lobbying budgets?

A. One of the largest and most influential lobbies in the U.S. is the American Association of Retired People (“AARP”). Their power and influence is derived from one thing, the size of their member base. With over 2,000,000 merchants out there on Amazon and millions more now affected after Wayfair, we have the potential to be extremely powerful and influential as well. Now, let’s be realistic. We don’t expect millions of merchants to join. However, even if we get to 100,000 members over the next few years, this will give us a significant power base to draw from to ensure politicians will listen when we want our voices heard.

Q. How many members do you have? What if not enough people join, how will you fund our lawsuit, and what happens to our money?

A. For a variety of reasons we are not disclosing our members’ identities (unless they explicitly allow it and there is a reason to). Nor are we disclosing our membership numbers. We have a healthy join rate, but we still have a ways to go before we can be comfortable that we have the funds necessary to take legal action to protect the merchant community. At the same time, we are making tremendous progress.

We recognize that the number one reason people are afraid to join is that they will contribute and nothing will happen; their money will go to waste. As you’ll see below in our financials section, we’ve sustained our organization thus far using only the seed money contributed by other board members. We will continue to operate our organization solely from that money, so that every dollar contributed by members like you will go to funding our legal defense.

Q. Is my membership anonymous?

A. Yes, we do not disclose member information to anyone, including other members. The only members who will be publicly known are those that serve as board members, and therefore are required to disclose their involvement in the organization per IRS non-profit public disclosure rules. Also, to be absolutely clear about your anonymity, by simply joining OMG you cannot be made a board member automatically. You would have to agree to and go through the nomination and election process.

Section 2

Online Merchants Guild:  Financials

Q. How do we know how our money is going to be spent?

A. As a 501(c)6 organization we will be required to disclose our financials publicly via certain tax filings. Any organization operating as a non-profit in the U.S. is required to do this by law. Therefore, you will be able to see what our annual spend is, as reported to the federal government. That said, even prior to that filing, we will be disclosing our financials so that everyone can see what we are spending money on.

Q. What is the current salary of the OMG employees, officers and board members?

A. ZERO! We are a volunteer organization with no employees. Officers and Board Members are not receiving any form of compensation for their time spent running the organization.

Q. How have membership dues been spent so far and what will it be like going forward?

A. OMG’s run rate for first three months was approximately $14,000. This is an average run rate of approximately $4,665 per month. This includes startup costs for the non-profit entity, initial website work, and infrastructure like accounting. This time-frame also included the extraordinary item of preparing and submitting an amicus brief for Wayfair. Supreme Court briefs are expensive to prepare as they require the use of special printing and binding companies that are experts in Supreme Court mandatory filing standards. These services cost thousands of dollars.

Section 3

Sales Tax Compliance Burdens

Q. What makes the Online Merchant’s Guild qualified to lead this tax campaign, and why should we listen to anything you have to say?

A. The Online Merchants Guild has selected an experienced tax attorney and small business advocate, Paul Rafelson, as our first Executive Director. Paul has been litigating state tax cases for over 13 years.  He’s been an in-house state tax litigator for Microsoft, Walmart and GE. He has seen what the full burdens of multi-state tax look like at these large companies who have been doing multi-state tax for years. He’s a small business advocate who understands the serious threat these burdens create for anyone trying to grow an online business in America. And he’s a tough fighter who has faced state tax administrators and the Multistate Tax Commission (the amnesty organization) asserting bogus tax law interpretations in almost every state.  In addition, Paul teaches a state tax constitutional law course at Pace University School of Law in New York.  

Q. Previously, you said the cost of compliance could be up to $100,000, but this sounds like a scare tactic. Tax service providers claim my company can comply for less than $30,000 per year.

A. Many of the tax service providers that have been focused on the marketplace seller community, particularly Amazon FBA sellers, have not disclosed the full picture of what states will expect from you. In addition to filing tax returns in up to fifty states, you must also consider the 10,000 taxing jurisdictions at the local level. Hundreds of local taxing jurisdictions are separate from the state. For example, in Louisiana you can be expected to file over 70 different tax returns. But that’s not where the burden ends. Most states expect any business registered for sales tax to also file for income tax, which is a far more costly and complex burden than sales tax. In most states you’re treated like a company physically located in that state, exposed to the full burdens of state, county, and city-specific regulation, tax, and audits. You’ll get wildly different cost estimations from service providers because they differ in where you should draw the line in ignoring the laws of these states and localities. We don’t believe small businesses should have to face these impossible dilemmas. Instead, the burdens of the law should be reasonable and not impede interstate commerce.

Q. What’s the point of taking action if Amazon is ultimately going to collect these taxes on my behalf.

A. So far Amazon is actively collecting and remitting tax for Marketplace sales in two states, WA and PA, with OK and perhaps others coming shortly. After the Wayfair case, states will probably take one of two directions – passing “marketplace facilitator” laws or going after individual small merchants. And after Wayfair, they’re no longer limited to Amazon FBA sellers. Anyone with an online business, even one that just sells software or services, can now be targeted by states. Even if you sell only through “marketplace facilitators,” your sales tax burden may not be over.

For example, in Washington, the first state to impose a marketplace collection burden, you are still required to pay Business & Occupation tax (B&O) as well as report the sales tax that was collected via the various marketplaces. According to state revenue agents, the state of Washington still expects you to comply with the burden of having to report the sales tax collected in every city and calculate the sales and B&O tax due. Once this is calculated, merchants are expected to pay the B&O tax portion and show a credit for all taxes Amazon collected on your supposed behalf.

This means that you are still accountable for a full reconciliation of the tax, including each sub-jurisdiction, and could be subject to fines and penalties for not submitting the return or submitting it incorrectly. Other states may not require this, although it remains to be seen. However, it’s important to note that Washington’s B&O tax is a substitute for a corporate income tax, as income taxes are not permitted in accordance with the Washington State constitution. Most states are not prohibited from imposing income taxes, so you must now take into account the income tax burden of multi-state compliance, not just sales tax. Without a voice speaking for small business, it’s unlikely the states will choose to eliminate all of these complexities.

Section 4

Income Tax and the True Cost of Multistate Tax Compliance

Q. Does Wayfair mean I should register to pay sales tax and income tax in every state?

A. The Online Merchants Guild cannot and does not have a position on where individual small businesses should or should not register in any particular state or locality. This is a personal and legal decision for each business owner. Everyone has their own risk tolerance, as no outcome is guaranteed. As you’ll see in the litigation section, we believe there is a strong case that undue burdens are being placed on interstate commerce, and states are often trying to place those burdens on the wrong parties under the law. But no lawyer guarantees an outcome, it’s actually a violation of ethical rules to do so.

When asked that question in a non-legal advisory capacity, we typically respond by simply reciting the cost of compliance and usually that speaks for itself. As you’ll see below the income tax cost is astronomical compared to sales tax. As a result, it seems to be in the best interest of the tax service providers not to highlight that burden, as many sellers have told me that once they realized there was an income tax burden that went along with registering in all the states, they quickly realized that they couldn’t afford it. That often changes their opinion about whether it’s appropriate for them to register at all. Again, not the legal advice of OMG, but it illustrates the point that it may not be in the best interest of the tax service providers to highlight the income tax burden that follows registering with the states for sales tax purposes.

Q. That’s just made up conjecture, and I think this income tax issue is made up. After all, if it were real ,then states would have been talking about it.

A. States have talked about it. In fact, the Multistate Tax Commission’s (‘MTC”) amnesty program FAQ specifically addressed the question, and many states were not as forgiving for income tax as they were for sales tax during the amnesty program. Here is an FAQ excerpt from the MTC’s amnesty program website:

Question: Will income tax be required to be reported and paid for 2017 or starting in 2018?

Response: Under this initiative, the seller is required to start collecting sales/use tax not later than December 1, 2017, or the date not later than 30 days after MTC 00-00 has received notice from the Commission that the state has signed the agreement, if such date is after December 1, 2017, and to commence filing income tax returns for the tax year that includes the date the seller starts collecting sales/use tax (emphasis ours). So if the seller’s tax year is the same as the calendar year and registration takes place in 2017, the seller would need to timely file a 2017 income tax return when due.

Q. Ok, so maybe the states have talked about income tax, but I already pay that to my home state.

A. Most states have a corporate and personal income tax. And, while there are certain legal protections that prevent states from imposing income tax burdens on out-of-state sellers, it is pretty clear that from the states’ present view Amazon FBA sellers (among others) will not qualify for this protection, as the states perceive the placement of merchant inventory in their state as activity that would remove such protections. See Public Law 86-272 (1959); See Also Wisconsin Department of Revenue v. William Wrigley Jr. Co., 505 U.S. 214 (1992). Unless we take action to challenge the states’ view, nothing will stop the states from imposing the income tax burden on all online merchants.

Q. Are you telling me that I have to pay income tax in every state. How can I afford that? If all fifty states tax my income at their state tax rate I’d literally have no income. Q. Are you telling me that I have to pay income tax in every state. How can I afford that? If all fifty states tax my income at their state tax rate I’d literally have no income.

A. The tax that you would owe to each state would be divided (apportioned) based on various factors. If you think of your federal taxable income ( the amount of your income that is subject to the federal tax rate in order to determine your tax) as a pie, states are constitutionally prohibited from taxing the entire pie and therefore must divide your income up via constitutionally acceptable methods, such as using a ratio of your in-state sales divided by your out-of-state sales. Whatever size piece each state is allowed to tax, that piece will be subject to that state’s income tax rate. So, if the state’s tax rate is 10%, and 1% of your income is allocated to that state, you would essentially be paying tax in that state at a rate of .001% (taxable income * 1% * 10% = .001%). Because this division method varies in each state, it is possible that, even though states will only be able to apply their tax rate to a piece of the pie, collectively more than 100% of your income will be taxed (albeit at different rates) as the methods the different states use don’t necessarily equal 100% taxation.

Q. I live in California and I pay a high personal income tax rate. I’d welcome the opportunity to pay lower taxes in other states as this would reduce the amount of income subject to the high California rate.

A. Unfortunately, for most merchants who use pass-through entities like LLCs that elect S Corp status, any income taxed at a lower rate than your home state’s will likely be taxed by your residency state at their full rate. You will, however, be given a credit for taxes paid to other states. That means that very popular business structures may still pay the equivalent of the full residency rate on their income; however, it will be divided among the states. Those who live in low- or no-tax jurisdictions will find their cost of tax increasing (per above), because there won’t be enough state tax due in your residency state to offset the cost of your taxes elsewhere. That difference would be the increase in your cost. A Pennsylvania merchant who is accustomed to paying 3% personal income tax, for example, will likely see a substantial increase in their income tax cost, as will the merchants who live in income tax-free states.

Q. Ok, so even if my tax rates go up by a few percent, that still doesn’t translate to a six-figure burden.

A.  The true burden of income tax comes from the cost of compliance.   In addition to your sales tax compliance costs, you must now bear the burden of income tax, franchise tax, margins tax, business and occupation taxes, paying state minimum taxes, registration fees… or some combination thereof, depending on the individual states.   Therefore, the costs that are the biggest threat to your business isn’t the additional states’ income tax itself, but the cost of having to file these various types of tax returns in multiple states and jurisdictions. For example, if you are an Amazon FBA seller, states will expect you to file in every state where Amazon has an FBA facility.  As the number of FBA states grow, so will your income tax compliance cost. However, even based on Amazon’s current FBA footprint, it’s not unreasonable to expect that the total cost of 100% state tax compliance will exceed the $100,000 amount.

Q. That seems like a lot of work, but again, how is that realistically going to cost me over $100,000 per year?

A. With all of the various tax returns you must now file for your business entity and for yourself personally across the states, you can expect that each of these tax returns will cost $500-$1,000 per return, at the very least, but likely it will probably cost you more. However, using this low estimate, your cost of multi-state compliance at $1,000 – $2,000 per state, as you will have to file multiple tax returns for each state; business and personal.

This is how the tax filing cost for your business will exceed $100,000. Now, consider the fact that a local accountant in your state, say Massachusetts for this example, won’t likely know the nuances of Mississippi’s income tax versus franchise tax, and you’ll likely find that you’ll be billed more time for these out of region tax returns than your in-state/region returns; making the $500-$1,000 per tax return amount unrealistically low.

Also, let’s not forget that just like with sales tax, there are not just the state level income tax returns but there may also be city and county income taxes. And, to top it all off, in addition to annual returns, you will likely have to report estimated taxes on a quarterly basis to all of the income tax states as well.

And, as you know, service providers can only take off some of this burden. You still have to collect and submit the data, sign the papers, and cut the checks in many cases. When the state and local audits start coming, you will need to be involved. Upon serious evaluation, it’s very likely you’ll need an in-house professional, a CFO, who can help make these decisions, and at least a staff person or two to get data to the service providers in the various forms that they and the states and cities require. You may also need custom software development to tie together your service providers with your various ecommerce systems, if you use more than one. $100K could be a gross underestimate of full costs, depending on your circumstances.

Q. Surely the tax service providers will come out with software that will streamline this process? Could we put pressure on Amazon to pay this tax on our behalf?

A(1). Streamlining via Tax Service Providers: Compared to income tax, sales tax is a fairly streamlined tax in that it applies across the board. If 1,000 people sell the same single item, all at the same price and in the same district in the state of California, then the tax that must be collected and remitted will be the same for everyone. This is because everyone’s transaction is essentially the same. However, income tax is the opposite. With income tax, we all have our own unique federal taxable income situation, and because everyone’s situation is different, other income items have to be taken into account such as a spouse’s salary, number of dependents, and types of deductions available to each seller for their business and personally.

A(2). Multistate Income Tax Software for Businesses: There is no software that can easily streamline all of these considerations and churn out business tax and personal income tax returns at this scale. Large companies have highly sophisticated software such as CorpTax ETS and Thomson Reuters One Source. These are very expensive software packages that are meant to integrate with systems like SAP. GE designed their own state income tax software from scratch, and had a team of full-time employees maintaining it. Even with these software packages companies like Walmart and Microsoft need a substantial number of full time accountants to make sure the tax return calculations are correct. As the old adage goes “garbage in, garbage out” which is why an army of full-time accountants must be on staff in order for these companies to comply with fifty state compliance burdens. Also, for the average fifty state filer, state tax return filings tend to brush right up against the extension deadlines of 10/15, 11/15 and 12/15. It’s a substantial amount of work between the time the books close on 12/31 and the time these returns are filed.

A(3). Can’t Amazon Withhold and Pay Income Taxes on Our Behalf: Just as was the case in A(1), certain data collection can be streamlined from Amazon, but Amazon would not be able to produce tax returns and remit these types of taxes, as they would have to know every seller’s personal situation. However, there are ways states could streamline the income tax process for sellers, ensuring states would be entitled to their tax revenue, and at the same time reducing the tax burden. It’s a matter of technology and states working collectively to reduce the burden on small businesses. The fact that states are dysfunctional and cannot seem to accomplish this doesn’t give them the right to place these undue burdens on you.

Section 5

Protecting Ourselves From Undue Burdens – OMG’s Legal Action Plan

Q. What is the OMG legal strategy?

A. OMG is currently raising money to hire the best lawyers and litigators who can defend us from states seeking to place their unconstitutional sales, income and other tax burdens on us. We are formulating a strategy that is rooted in certain Constitutional protections under both the Due Process and Commerce clause(s). We will raise every issue and take every action possible, both in court and outside of court, to give every merchant the best possible chance of being free from state tax burdens going forward, as well as preventing states from going after merchants for back taxes. And as it relates to Wayfair, the Supreme Court’s decision endorsed South Dakota’s $100K/200 transaction threshold, but also recognized that threshold will have to be litigated as every state has different burdens. We believe that as the courts get more complete information about the cost of compliance and other facts — like the 200-transaction threshold meaning less than $5K revenue for the average Amazon seller — that progress will be possible in the courts.

Q. How long will this take?

A. Our first and best shot of resolving this matter quickly should be fairly quick.  From the moment we get started to the moment we have resolution at this first level will be a matter of months, not years.  This is because we will be seeking a declaratory judgement that would prevent states from continuing their efforts to pursue individual merchants for marketplace related back taxes and from imposing the undue state tax filing burdens on individual merchants.  We will be seeking this relief in a non-traditional manner, going to federal court not state, and a core component of our argument is that we don’t have time for a long drawn-out case over the course of a few years. Such a case would be futile, as even if we won the irreversible damage would already be done.  Therefore, we need The Court to act swiftly.

Q. How much is this going to cost?

A. The cost of this type of litigation is not cheap. We anticipate that it could cost $300,000 or more. It could cost less, but it will depend on how things play out. For this type of legal action $300,000 is rather cheap. This is in part due to our strategy to seek relief via the federal courts as opposed to individual state courts. Typically these types of legal defenses are for Fortune 500 companies that don’t even bat an eye towards a $1,000,000 litigation cost. That is why we are effectively seeking to crowdsource a joint legal defense. With so many of us in the same boat, why should each individual merchant pay tens of thousands of dollars to lawyers and accountants to defend themselves, when we can collectively pool our resources and fight for all merchants and a smarter, more equitable solution for everyone.

Q. I knew it! These lawyers just want to get rich off of us. Why don’t the lawyers do it for free?

A. It’s somewhat surprising how often this question gets asked. As entrepreneurs we should understand more than anyone that we all have a right to make a living, and that it’s unreasonable for customers to expect you to give away your products. This is no small undertaking and will require a substantial amount of person-hours from a lot of attorneys. When you spread the $300,000 across the amount of person-hours required, it’s really not much per attorney. Therefore, it would be as absurd for any lawyers to take on this case for free, just as it would be absurd to expect you to give your products away. Nobody is “getting rich off of you,” and we as entrepreneurs should respect the right of others to make a living just as we expect others to respect ours.

Q. I get the whole right to make a living, but we are small businesses! Surely we are a worthy cause for lawyers to take on this case “Pro Bono.”

A. We may be small businesses, but collectively we are a group of very fortunate people who have the means to pool resources without disrupting our financial situation. We all stand to save substantial amounts of money if we win this case, so it does not follow that a lawyer should choose to dedicate pro-bono time to our cause as opposed to helping the indigent.

Q. Can we even win this case?

A. The first response to that question is, why would the OMG board members volunteer substantial amounts of our time to a cause that we didn’t believe was winnable? We have a strong case to be made that states are placing undue burdens on online merchants and that such burdens are inappropriate given that less burdensome means could easily be put in place. As online merchants we may have read all there is to know about Quill, however, that is not the case that we need to be focused on. The case all merchants should read is Pike v. Bruce Church, the case that establishes what is now known as Pike balancing, whereby local state interests must be weighed against the burdens that they place on interstate commerce. As part of that consideration courts must consider the cost and whether less burdensome means exist to accomplish the same local interest.

Q. What about Wayfair and the Courts overturning Quill? Doesn’t that case mean we lost?

A. The Wayfair decision unfortunately, but not surprisingly, went in favor of the states: overturning Quill’s physical presence rule and making it easier for each state to place burdens on any business anywhere in the country that sells products or services online. While it appears the Court’s ruling was really about stopping large national and multinational companies from avoiding tax collection obligations, without our intervention to further develop what a post-Quill world will look like from a tax perspective, states will continue to operate as if they have been given some constitutional mandate to place insane tax burdens on all small businesses.

The potential of fifty states of tax forms is a chilling result for US-based businesses with customers around the country, and would surely be an undue burden, especially in light of the costs associated with it.  The Court ’s decision to remove physical presence as a component to determining whether there is substantial nexus, doesn’t address other key factors that go into determining whether a tax scheme results in an undue burden” on businesses, or constitutional on other grounds.  The Court by no means ruled with finality with respect to the South Dakota law; and repeatedly referenced the fact that there were key facts missing from the record, and that another case would have to be brought to address those issues, such as burden. In addition, the Court didn’t on the constitutionality of the entire law, they simply said the tahat law needed to be reconsidered in light of the fact that physical presence is no longer a factor.  The case was remanded to the lower courts for further constitutional analysis, which we may not even see, as the case is pretty much moot for Wayfair, a large multi billion dollar company; there really aren’t any arguments for Wayfair to bring that would result in this law being deemed unconstitutional.

Q. But what about the threshold of 200 sales or $100K of revenue. The Court didn’t the Court endorse that method?

A. At a high level, The Court endorsed South Dakota’s threshold of $100K revenue or 200 transactions, but they admittedly did so without a good accounting of the cost of compliance and said that clarifying this threshold would likely involve further litigation.

South Dakota specifically sued large businesses — Wayfair, Newegg, eBay — in the Wayfair case, rather than suing a representative set of affected marketplaces businesses. This was strategic, as the Court’s opinion and the scope of the case would be entirely different if the question was about the burden the South Dakota tax law puts on a small, kitchen-table enterprise, as opposed to Wayfair.

The court made it clear that their presumption that the South Dakota law would be constitutional, was in large part due to the fact that:

[R]espondents are large, national companies that undoubtedly maintain an extensive virtual presence. Thus, the substantial nexus requirement of Complete Auto is satisfied in this case.

In other words, what would constitute substantial nexus for smaller companies might be different, especially now that physical presence is no longer bright-line test for nexus. Further, as the Court said, this only speaks to one prong of the Complete Auto test, the test that has been the standard for determining whether a state tax scheme is constitutional. There are four of these prongs, and all four must be met in order for a tax to be considered constitutional. Of the three additional prongs, two are relevant, and analysis of the law with respect to those two prongs was not within the scope of this case. It will be within the scope of our case. Those two relevant prongs are non-discriminatory (i.e. not putting an undue burden on interstate commerce), and rationally related (due process nexus – which is particularly relevant for marketplace sellers), were not addressed.

Q. You keep saying The Court did not have a record, or the right information to decide the case. What were they missing? Couldn't they have commissioned their own study to determine the missing pieces?

In multiple instances the Court referred to the fact there was nothing on the record to appropriately address the burden question, as well as other constitutional questions. Therefore, the scope was purely limited to nexus, which in it of itself is not the be all – end all of state tax constitutional analysis..

When the Court says there is nothing on the record, it means that given the way the case was brought, the Court didn’t have key pieces of information. As we heard during oral argument the Court was frustrated because both sides were saying the opposite when it came to the cost of compliance, the states saying it’s nominal, and the Wayfair side saying it would be hundreds of thousands. Nor did the Court know that, based on recent analysis, the average sale price for a merchant on Amazon is less than $25. This means that, at 200 transactions, a business could be required to collect sales tax with just $5,000 of sales revenue, which is a lot less than the other threshold $100,000. Had this been known by the Court, it might have thought differently about whether 200 transactions is an appropriate metric. The Court also did not get expert testimony that explored the cost of compliance. This caused The Court to discuss compliance in terms like “software makes it nearly free” rather than capturing the true and often overwhelming cost of multi-state compliance to small businesses.

Ultimately, these very important points that need to be raised for purposes of merchants like us, and not necessarily Wayfair, were outside the scope of this case. It’s not the Court’s role to go on independent fact finding missions to expand the scope of a case, that’s not how this works. The Court wanted to remove physical presence from the nexus equation, and that’s really all they did. It’s now up to us to bring our case, with our record, establishing our facts so that the courts can see what’s really going on with the states and their unfair targeting of online merchants. If we fail to do that, then one thing is certain, states will continue to be an un-checked source of pain for Amazon merchants for the foreseeable future.

All of this adds up to an urgent need for small businesses to challenge the threshold of “undue burdens” to move the courts to an informed position on this standard. The Court itself called for this in the Wayfair opinion, but without an organization to represent them no one small business can afford the cost of litigation that The Court expects will clarify these issues.

Q. What does this all mean to FBA Sellers, who were already facing audits, assessments or other threats from the states before Wayfair?

A. First, every FBA seller should be reminded that in the states’ view, Wayfair wasn’t about you. To the states you already had physical presence via FBA, and therefore even if physical presence was upheld, the states would continue to aggressively pursue FBA sellers as they did prior to Wayfair. In some ways the removal of physical presence helps FBA sellers because the question of nexus has become blurred, but that works for both sides. Large companies can no longer hide behind the physical presence barrier, but at the same time having a physical presence does not necessarily mean that merchants have nexus. Therefore, this opens up the argument of whether FBA nexus is even constitutional under the commerce clause. As the Court noted, businesses may have a small presence in a state but it may still be inappropriate for a state to impose a tax burden on them. However, all of this is irrelevant if we don’t bring the case. Unless a court says differently, whatever the states say will go and we will be guaranteed to live in an ecommerce world where states can place undue burdens on small businesses.

Q. Why is your point of view so different from the tax service providers?

Many merchants believed that the sole determination of nexus was whether or not you had physical presence, at least prior to Wayfair. However, that was never the case. States were stretching Quill to its limits with economic, click, and affiliate nexus laws, even before Wayfair overturned Quill. Some tax service providers have been providing merchants an over-simplified, non-legal explanation of the tax situation leaving out important counter-arguments as to whether physical presence means that you have nexus in the context of FBA. This may be due to some service providers’ interest in creating a finite answer that steers merchants towards collecting tax, and it may also be due to the fact that tax service providers are not legal practitioners. State tax lawyers spend a substantial amount of their time addressing the constitutionality of a tax, and their conclusions are then broken down for accountants to convert that information into form-filling instructions. Accountants are not trained in the nuances of constitutional law, and therefore are not qualified to make definitive statements such as physical presence equals nexus, or nexus equals sales tax collection obligations.

Also, compared to income tax, there are very few sales tax issues that rise to the level of constitutional complexity that Quill and Wayfair did. Therefore, sales tax service providers and accountants tend to be less about lawyering and more about people who are good at organization and process management.

Q. Is there anything else besides undue burdens that would go into our case?

Very much so. Going back to the point in the previous question, tax service providers often leave out that there are two nexus standards, Commerce Clause Nexus (what you probably knew as physical presence nexus pre-Wayfair) and Due Process Clause Nexus. These two nexus standards are entirely different, and both must be met in order for a company to be subject to the tax in any state. Due Process is typically the lower threshold that is easiest to meet. However, in the context of FBA merchants, there is a serious question as to whether such nexus even exists. Typically, in order to have nexus under the Due Process Clause, one must be “purposely availing” themselves or directing activity towards the forum state (the state that is seeking to assert nexus over you). It has been well established that the broad targeting of the U.S. market as a whole, and not specifically focusing in on one market, does not create nexus under the Due Process clause. The fact that your products are placed into the stream of commerce by Amazon and end up in the state does not necessarily give that state a right to assert jurisdiction over you whether for tax or other purposes.

Recent case law supports this notion, and all of these cases stem from a line of cases that are considered the building blocks of law. There is even a recent case where a company had consigned inventory in the state of New Jersey, and the Supreme Court held that this wasn’t enough to create nexus under the Due Process clause (see J. Mcintyre Machinery). Given how FBA operates, in that you have no control over where your products end up being stored, it is essentially as if you are placing your products into the general stream of commerce once you send them to Amazon. Therefore it should be Amazon, and not you, who is directing your activity towards the forum state(s), meaning that these states should not be able to assert jurisdiction over you and therefore cannot subject you to any tax obligation, based on what Amazon does.

Q. What about who is the retailer? I don’t believe I’m a retailer; I don’t own the customer. Isn’t that a defense?

Yes, this is relevant, but for now, it’s in a different context than specifically challenging each state’s law, because we are looking for a more broader form of relief instead of going state by state. The general question of who is the retailer, the Amazon FBA merchant or Amazon, creates serious doubt as to whether nexus even matters. If you are not the retailer under state law, then even if you have nexus for sales tax purposes you can’t be the party responsible for collecting tax. That said, this is a state tax statute question, not a constitutional law question. Although a lot of these state laws are very similar, each state’s law is considered unique, so the ultimate determination would be at the state level. However, we are seeking to get resolution at a much higher level that will end this matter quickly and stop all states from going after online merchants, since going state by state and arguing that the statutory law doesn’t apply to the online merchants would be extremely time consuming and ineffective.

Q. Does that mean the who is the retailer question is no longer relevant?

A. No, it’s very relevant because it goes to the question of what alternatives are out there for the states. With over $130 billion in Amazon marketplace sales in 2017, surely it would seem unfair for states to lose out on their ability to collect that tax and it was something the Court was very concerned about in Wayfair. However, unlike Wayfair, marketplace sellers offer much more reasonable alternatives to states accomplishing their tax collection and leveling the playing field without placing massive burdens on individual merchants. The fact that the marketplaces can successfully collect, as we’ve seen in two states, proves that there is no reason to put these burdens on the merchants.

Even without new marketplace laws, states already have a responsibility to collect tax in the least burdensome way possible. Many states, like California and Massachusetts, even have laws that say the head of the tax division can alter the party responsible in order to efficiently administer the tax code. When you consider the devastating effect tax burdens will have on so many merchants, and the deterrence effect it will have on future entrepreneurs, why go after the small guy, especially when there’s a far better alternative?

Q. Aren’t the states’ interpretations of the law going to carry some weight?

A. Normally, yes. However, in this instance states have clearly been motivated by outside political interests that have caused them to act in a manner inconsistent with the expected administration of the tax code. The fact that the states had all of these obvious remedies to their sales tax problem and didn’t utilize them highlights the notion that the states may have pushed ethical boundaries in going out of their way to pursue tax collection from the individual merchants instead of the marketplaces. And, while every state’s law is considered unique when it comes to the question of who is the retailer, there is one unavoidable analogy that really brings home the absurdity of the states’ behavior. Consider the states’ insistence on placing the tax collection burden on individual merchants, in the context of a traditional brick and mortar retailer such as Walmart. States act as if you are the retailer solely because your terms and conditions with the marketplaces dictate that you are, but nothing in the way marketplaces operate coincides with any economist or law defining the individual merchants as retailers.

The use of contractual designations to avoid a tax typically violates a core tax maxim known as substance over form. In substance marketplaces are the retailer. In form, however, marketplaces specify in their contracts that the merchants are the retailers. Substance over form dictates that substance matters, not form. If it weren’t for this maxim then sales tax would be truly a matter of contractual designation and all brick and mortar retailers would be within their rights claim to be marketplaces. Every physical retailer would recreate the same contracts that online marketplaces have with the online merchants. Walmart, Best Buy, Target — all could claim that they are merely flea markets and that the supplier brands are the true sellers. The brick and mortar marketplace, therefore, do not have to collect sales tax. We know without batting an eye that none of those brick and mortar companies would ever get away with something that absurd in any state. Yet. the fact that online marketplaces have gotten away with it for years supports our position, and will also hopefully resonate with a judge and push the case further in our favor.

Q. What about income tax? Even if you fix sales tax, how is this going to solve the income tax problem that you discussed earlier?

A. Just like sales tax, income tax burdens must be weighed against their impact on interstate commerce, and that includes consideration of whether less burdensome means exist to uphold states’ interests. We strongly believe that the complexity of income tax could be avoided. States could work collectively and leverage technology to come up with a more online merchant friendly way of administering their income tax. The potential clearly exists, therefore their dysfunction is no excuse for exacting this type of a harm on interstate commerce.

In addition, Public Law 86-272 is a specific act of Congress from 1959 that specifically shields companies from income tax if their activities in a forum state are limited to the solicitation of tangible personal property. Because of that, the state’s interest in income tax and the fear of lost revenue is not as pertinent as it is with sales tax. If nothing else, Congress has shown an intent to protect businesses from overwhelming income tax burdens, and the Court is in no position to override that as this law was constitutionally enacted under Congress’ commerce clause authority, granted to it in the U.S. Constitution. Also, it is worth noting that, collectively, the amount of income tax from out of state businesses pales in comparison to the amount of tax the states collect via sales tax. Between these two points, the interest in preserving states’ rights to impose a business income tax carries little weight as compared to the significance of the sales tax, especially when you consider that in many ways the income tax burden in our case is more about redistribution of taxes currently being paid to your home state.

Further, while the storage of inventory breaks PL 86-272 protection, the nature of FBA is different from operating a warehouse in that there is a strong case to be made that the presence of FBA inventory, as applied to the individual merchant, is in fact trivial, and therefore cannot be used as a basis for imposing an income tax on merchants whose only connection to a state is income tax. This is because, under PL 86-272, even if a company engages in business activity outside the solicitation realm of protection, such activity may be considered de minimis and therefore not be sufficient to break 86-272 protection, per the law itself. That said, de minimis is an undefined term. In fact, all we know about the de minimis exception is that in 1992 Justice Scalia said it means a trivial connection; big help. The Supreme Court has not delved any further into what trivial or de minimis means in the context of PL 86-272. However, when you consider the questionable likelihood that sellers have due process nexus, this makes a stronger case for arguing that the FBA connection is nothing more than trivial or de minimis connection to a state, as it was Amazon, not the online merchant that directed the merchant supplied inventory to the forum state. For more about PL 86-272 see Section 4 Question 3.

Q What else will we argue?

A. There are plenty of strong arguments to be made that will support our challenge. To some extent, having been continuously exposed to an oversimplified explanation of physical presence by tax service providers and the media have led many of us to think we all know there is to know about state taxes.

We assure you, that’s not the case. Unless you could recite the four prongs of Complete Auto Transit v Brady, without google and before reading this article, then you haven’t even scratched the surface of what state tax law is about. And that’s not meant to be condescending, you aren’t state tax lawyers. That is why you should help us hire the best to fight on your behalf.

If you would like to know more about what was discussed in terms of strategy, much of what was discussed in this FAQ is discussed in the amicus brief we filed with SCOTUS for Wayfair.

Q. Is this legal advice, and can we rely on it in order to make decisions about our business?

A. Absolutely not. We are outlining a legal strategy that we can deploy that may benefit the community broadly. We are not providing you with any specific legal advice, nor shall any arguments raised in this FAQ be considered advice upon which any individual merchant can or may rely upon.  If you need legal advice, please retain an attorney directly.

Q. I have more questions

A. Feel free to contact

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