Amazon gathers sales taxes on products it manufactures and sells directly, but doesn’t collect on behalf of third-party businesses that use its marketplace.

On June 21, the Supreme Court changed the face of online retail, upholding a South Dakota law requiring any business making at least 200 transactions or $100,000 in sales to collect state sales taxes, even if it has no physical presence within a state’s borders. This ends a structural pricing advantage that made the Internet the world’s largest duty-free shop, at the expense of every restaurant, clothier, hardware store and pharmacy whose e-commerce rivals could always charge less.

The decision came too late for brick-and-mortar businesses wiped off the map in the retail apocalypse. It came too late for state and local governments losing between $8 billion and $26 billion per year in never-collected sales taxes — money that could have built roads, improved schools or bolstered the safety net. But now that it’s here, states have choices to make.

Thin profit margins and cutthroat practices pit Amazon’s third-party sellers against each other.

The Supreme Court merely validated South Dakota’s law; other states must pass their own legislation to enable sales tax parity between online and offline businesses. And given the burden of complying with state tax laws, it seems at first blush tricky to design something that allows smaller retailers to still compete with the big boys.

But one California official has a solution that she’s been advocating for several years. It would maximize revenue for states, reduce the load on small sellers, and create a truly level playing field. However, Board of Equalization member Fiona Ma’s strategy requires that California join the tiny number of states willing to stand up to the 800-pound gorilla of online shopping, the source of nearly half of all e-commerce sales: Amazon.

Amazon often receives plaudits for voluntarily collecting sales tax in all 45 states that have one. But such praise ignores Amazon’s scofflaw history. “Amazon was the first major American company that built its business based on tax avoidance,” said Oren Teicher, CEO of the American Booksellers Association, referring to the company’s continuous resistance to collecting sales taxes. Contrary to popular belief, the company is still resisting today.

Jeff Bezos notes that third-party sales represent more than half of the total units sold on Amazon.

While Amazon gathers sales taxes on products it manufactures and sells directly, it doesn’t collect on behalf of third-party businesses that use its marketplace. (Technically, online shoppers are supposed to report untaxed items and pay the taxes; in reality, nobody does.) This may sound like a minor point, but in his annual letter to investors, CEO Jeff Bezos notes that third-party sales represent more than half of the total units sold on Amazon.

Amazon offers essentially no tax assistance to third-party sellers, save for a couple of dry documents on its website. Third-party Amazon merchants can theoretically sign up for tax calculation services, but they must still register with states and file taxes on their own, in potentially thousands of jurisdictions. When states tried to get third-party sellers to collect, Amazon didn’t want any involvement with the effort and refused to publicize it.

The American Booksellers Association recently described the Amazon marketplace as the “Wild West.” Third-party sales on the website doubled in volume from 2014 to 2016. The marketplace puts legitimate, authorized re-sellers and brick-and-mortar retailers alongside counterfeiters, scavengers who re-sell liquidated inventory, and Chinese and Indian importers. It’s nearly impossible for consumers to tell the difference. Thin profit margins and cutthroat practices pit sellers against each other; a merchant who decides to collect sales taxes will lose out to tax-avoiding rivals.

With Amazon reluctant to police its marketplace, such tax avoidance is rampant. A 2017 Government Accountability Office report estimated that third-party sellers collect tax on only 14 to 33 percent of all sales. Sellers have basically followed Amazon’s tax-avoidance path, determined to run afoul of the law.

There’s a simple fix to all of this, says the Board of Equalization’s Fiona Ma: ‘Whoever’s collecting the money should collect the sales tax.’

The big winner in all this is Amazon, which reaps large fees from third parties for access to its platform. Amazon typically takes 15 percent of gross third-party sales and sometimes as much as 20 percent, with fees on top of that for handling and shipping through the “Fulfillment by Amazon” network. This revenue pot has grown from $16 billion to $31 billion in just two years, according to Amazon’s financial disclosures. It’s highly likely that Amazon clears more profit than marketplace sellers on their transactions. So Amazon, by proxy, benefits financially from third-party tax avoidance, and the pricing advantage it provides. And, by not collecting tax, Amazon even avoids liability for mistakes made by third-party sellers that could trigger audits.

There’s a simple fix to all of this, as Fiona Ma stated plainly to me: “Whoever’s collecting the money should collect the sales tax.”

Ma, who is likely to become California’s next treasurer, spent years working on state tax issues as an Assemblywoman. In May 2016 she was serving on the Board of Equalization, which at the time oversaw state sales taxes. A Delaware business that used Fulfillment by Amazon (FBA) services told her it only learned it was responsible for sales tax collection after receiving a bill for three years of back taxes.

Amazon VP on the company’s duty to collect sales taxes:  ‘Well, if the state of California forces us to, I guess we can.’

“I found out that third-party sellers don’t actually know they should be collecting and remitting taxes to California,” Ma said. And while researching the matter, she learned that through its website and FBA, Amazon handled storage, packaging, payment processing, logistics, delivery, customer service and returns. That Amazon wouldn’t also collect the sales tax seemed odd.

In January 2017, Ma flew to Seattle to meet with Kurt Lamp, Amazon’s Vice President of State Tax and Tax Operations. She began by asking Lamp how third-party sellers were supposed to know about sales tax collection. “He said they sign an agreement and there’s a website,” she recalled. “I said, ‘Are you sure everyone’s doing this?’ He said, ‘We don’t know — we tell them to go to the website.’”

Ma found Amazon’s reticence alarming. “I said come on guys, that’s ridiculous, why can’t you collect the sales tax? You’re dealing with everything on the customer level. He said, ‘Well, if the state of California forces us to, I guess we can.’”

Some state officials put the annual amount of revenue lost to uncollected third-party sales taxes at $1.8 billion.

Two months later, a report from a news publication, The Capitol Forum, estimated that California loses $431 million a year on third-party seller tax avoidance. Other state officials have put the number even higher: $1.8 billion in lost revenue every year. Ma couldn’t believe that Amazon’s attitude was essentially, Who cares?

Last August, Ma wrote to state Cabinet Secretary Keely Bosler, asking that Governor Jerry Brown demand Amazon collect sales tax on all orders within the state, requiring California to audit only one company, Amazon, instead of thousands of third-party sellers. This would also pull in millions of transactions that wouldn’t otherwise be captured; just 20,000 third-party sellers generated over $1,000,000 in revenue last year, according to Amazon, and most states wouldn’t audit businesses smaller than that. Plus, taxing all sales would create more equal treatment between Amazon and the state’s local businesses, which create far more jobs and property taxes than Amazon’s handful of warehouses.

Other states have gone this route. In Washington and Pennsylvania, Amazon and other platforms are responsible for collecting all relevant taxes on third-party sales. A similar law in Minnesota kicked in July 1, after the Supreme Court decision.

Why has California been reluctant to force Amazon’s hand? “Number one,” says Fiona Ma, “the governor’s office has been trying to woo Amazon into putting a headquarters here.”

Tellingly, Amazon does not charge sellers anything for this service in Washington and Pennsylvania. The tax itself is just a pass-through to customers, and since Amazon already collects on its own purchases, collecting for third parties represents merely flipping a switch. “They have all the infrastructure, it can’t be very difficult to do,” said Darien Shanske, a law professor with the University of California, Davis.

Amazon has argued that the company is prevented from collecting on behalf of third parties unless states pass marketplace laws like Washington’s or Pennsylvania’s.

But California has not taken Ma’s advice and forced Amazon’s hand. In fact, over the past year the state has become more aggressive against third-party sellers.

Last July responsibility for sales tax oversight shifted to the California Department of Tax and Fee Administration (CDTFA). That department has been threatening third-party sellers with fines and even prison time if they didn’t start collecting sales tax. “Operating unlawfully you can be prosecuted,” reads one email to an Amazon seller, who asked that his name be withheld. The back taxes demanded would bankrupt his business, the seller claimed. “The whole thing is taking a really hard toll on me,” he said. “It’s stressful, I wake up in the night, I cannot get back to sleep.”

CDTFA spokesperson Paul Cambra would not tell Capital & Main how many threats like this have gone out, but the Sacramento Bee put the total at 2,500. Cambra admitted that the agency has not referred any Amazon sellers for criminal prosecution. But several posters on Amazon-seller message boards have complained and posted communications from the state. This January, the CDTFA sent letters to third-party sellers, citing sections of the state tax code to prove that they were liable for collection. A header in the letter, from November 2017, reads “Amazon Fulfillment Services, Inc. and Affiliates.”

Amazon has willingly handed over third-party seller data to states like Rhode Island and Massachusetts — helping them target its own marketplace partners.

Paul Rafelson, an attorney for third-party sellers, believes this indicates that Amazon drafted or supplied content for the letter. Cambra responded that the letter “was authored by CDTFA staff members” and “at no point was this letter reviewed or edited by outside individuals or entities.” That doesn’t totally answer whether Amazon had initial involvement in the drafting. Cambra added that the header “was inadvertently left from a previous document.” CDTFA denied a Freedom of Information Act request to obtain communications between its office and Amazon, terming it “confidential taxpayer information.”

Amazon spokeswoman Jill Kerr also said that the company “had nothing to do with that communication. Amazon did not play any role in that.”

In March Rafelson started the Online Merchants Guild, an association advocating for e-commerce sellers. He argues that registering with states and remitting dozens of income tax returns overly burdens small businesses, and that having Amazon collect is the simplest remedy. But he hasn’t had much luck convincing state officials. “When I go to a state like Massachusetts, Illinois, New York and say, ‘You can get Amazon to collect,’ they’re fighting me like I’m the problem,” he said. “Nobody wants to tick off Amazon.”

Amazon has even willingly handed over third-party seller data to states like Rhode Island and Massachusetts, helping them target its own marketplace partners. “It’s striking to me as a citizen that your state’s tax enforcement resources would be deployed [to] going after small fry instead of doing the obvious thing of getting Amazon to collect sales tax,” said Stacy Mitchell of the Institute for Local Self-Reliance, a frequent Amazon critic.

Ma finds the aggressive enforcement of small sellers, when Amazon controls practically every aspect of the transactions, to be unconscionable. But why has California been so reluctant to force Amazon’s hand? “Number one,” Ma explained, “the governor’s office has been trying to woo Amazon into putting a headquarters here. I’ve been pushing and they haven’t wanted to do anything up front.” Indeed, Los Angeles is on the shortlist for the massive HQ2 project.

California’s legislature must author a solution, after the Supreme Court ruling, if the state intends to collect online sales taxes. But Ma wonders whether it will melt under pressure as well. “Republicans are not going to want to do it, and Democrats would have to go against Amazon,” she said. “No one wants to do anything in an election year to stick their neck out.”

A spokesperson for Senate President pro Tem Toni Atkins said her chamber was “looking into next steps” on the issue. Assembly Speaker Anthony Rendon’s office didn’t respond to requests for comment.

This dynamic of apparent subservience to Amazon has played out throughout the country. When Amazon first agreed to collect sales tax, it cut deals with states to delay collection or forgive back taxes, dangling warehouses and jobs as incentives. Mississippi’s Department of Revenue admitted to a local TV news station last year that its agreement with Amazon to collect sales tax didn’t cover “any sales made by an independent third-party seller, even though made through the Amazon marketplace.” That enabled one Mississippian, Keith Bennett, to buy a laptop, mouse and bag worth several hundred dollars off Amazon and pay only $1.87 in sales tax; the computer sale went through a third-party business that literally named itself “Buy Tax Free.”

Sellers have been the foot soldiers for Amazon in avoiding sales taxes for years. Now Amazon has abandoned them to fend for themselves against aggressive state governments.

Backroom deals are bound to occur when a giant company with armies of lobbyists intimidates states from implementing simple solutions. Rafelson, the attorney for third-party sellers, called their plight ridiculous. “It’s like saying if you go to a Walmart in Georgia and buy a Coke, it’s not Walmart’s responsibility to collect the sales tax, it’s Coke’s!”

That’s not to say sellers are blameless. Many willingly followed Amazon’s model of avoiding sales tax to gain pricing advantage over rivals. “Sellers have been the foot soldiers for Amazon on this issue for years and years,” said Stacy Mitchell. Now Amazon has effectively abandoned them to fend for themselves against aggressive state governments. “If you sleep with thieves, they may well steal from you,” Mitchell said.

Only one state, South Carolina, has argued that existing law requires Amazon to collect sales taxes. The state filed a motion in state court, seeking as much as $500 million in uncollected taxes. Amazon is challenging the case, and a hearing is scheduled for November. “Under South Carolina law third parties are not considered sellers but suppliers or consignors; Amazon is the seller,” said Bonnie Swingle, public information director for the South Carolina Department of Revenue.

If South Carolina prevails, other states could potentially seek back taxes from Amazon, creating significant monetary risk, as Amazon has acknowledged in financial disclosures. But states focusing on third parties would relinquish a small fortune, while allowing Amazon to continue to undercut competitors.

Ma has devised an alternative strategy. She’s working with a number of attorneys, including Rafelson, who are considering filing a lawsuit against Amazon on behalf of third-party sellers. But the Supreme Court heard arguments that third-party sellers would suffer from the compliance burden, and dismissed them. Justice Elena Kagan suggested sales tax collection “would be essentially taken over by companies like Amazon… they would do it for all the retailers on their system.” Somebody might want to inform Amazon.

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