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CA surprises Amazon merchants with state tax bills

The state of California just sent a Pennsylvania man a notice that he could owe over a million dollars in California state taxes. The tax bill is the result of a recent change in tax law that allows states to collect sales tax from those who sell goods to residents within their state even if they do not have operations in the state.

It is unlikely this man is alone. The state of California likely sent similar tax notifications to other Amazon merchants located throughout the country. Other states may follow the move and send retailers similar notifications.

Why the sudden tax bills?

In the past, state taxing authorities could generally only tax businesses who had a physical presence in the state. Essentially this meant the business had to have some connection to the state aside from the presence of the buyer. A headquarters or manufacturing plant could suffice.

The Supreme Court recently ruled a business no longer need a physical connection with a state to be subject to state tax obligations. The court stated our marketplace has changed. More and more Americans rely on online retailers for their purchases. As a result, the Supreme Court Justices reasoned that in certain situations it was reasonable for the state taxing authority to expect to collect sales taxes on merchandise.

Why is the bill so big?

In this case, it appears the state is attempting to collect taxes retroactively. Although the move may be allowed, it raises questions the state may be in violation of the recipient's due process rights. The recipient could potentially argue that due process requires notice. Without proper notice, the recipient cannot prepare for the bill. Amazon merchants may support this argument with the fact there was no expectation to collect taxes previous years. This is just one potential defense against the tax bill merchants will want to explore.

We will provide updates on this and similar moves to collect state sales taxes as they become available.

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