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The Flipper Brief: Amazon Seller Briefs Supreme Court on Sales Tax

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TaxAn Amazon seller told the Supreme Court that current and proposed state tax laws are unfair and explained how they burden small business owners like himself. He made the argument in an amicus brief as the High Court prepares to hear South Dakota v Wayfair to decide whether it should overturn its previous ruling, known as “Quill” (short for Quill v North Dakota).

Daniel Pitkow invented a television remote control called the Flipper specifically designed for people with Alzheimer’s and other challenges, such as low vision, blindness or physical dexterity issues. “I got the idea because my father developed Alzheimer’s disease. He was an attorney, and lifelong golfer. He couldn’t turn on the TV let alone navigate the Comcast remote to turn on the Golf Channel, his favorite.”

Flipper LLC is a one-product, one-employee ecommerce business with some wholesale sales. Pitkow says he sells in the US, Canada, and UK via Amazon and his own website, with Amazon accounting for approximately 80% of his gross sales. “I sell six figures, one of the 100,000 Amazon sellers with over $100,000 in sales,” he said.

“I don’t mind collecting and paying (out-of-state sales tax) if there was a uniform law and mechanism. But that’s not the case currently,” he said. An attorney himself, he also noted there were legal reasons why Quill’s physical presence is the rule, “including due process rights in a national economy.”

Some argue that sellers who use Fulfillment by Amazon (FBA) are creating nexus in various states since they store inventory in Amazon’s Fulfillment Centers around the country. Pitkow told us he disagrees.

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“I do not own Amazon fulfillment houses,” he said. “Amazon controls all aspects of the sales process. They decide where to locate inventory. We are subject to their terms and conditions.” He also said no court has adopted that position – “it hasn’t been litigated.”

He also claims states are unfairly targeting small businesses like his. “Amazon’s own sales use the same exact logistics. Other common carriers like UPS and FedEx fulfill orders for third parties. No state is going after their client list. The modern tax collector only challenges small businesses. Rarely do they go after billion-dollar businesses.”

In all the arguments for and against states’ right to compel out-of-state merchants to collect sales taxes on purchases made by their residents, Pitkow’s brief is compelling because he delves into the details of selling on Amazon.

For example, the brief explains Amazon’s practice of commingling inventory sent by third-party merchants to its warehouses and why that’s important in this case. It’s hard to imagine the Supreme Court Justices being familiar with the concept.

The Flipper brief also pokes holes in states’ argument that sales-tax collection is easy thanks to software available to small merchants, described in the following excerpt:

“There is no comprehensive tax software solution that works on every internet platform in real time. Many sites use custom designed platforms and carts that are not supported by any tax software. For example, Squarespace, which is used by Flipper, does not work with any software, yet Squarespace powers millions of websites.

“Other major sites are not compatible with the Certified Software Providers, including Wix. Still other sites do not have any mechanism to collect sales tax, including Indiegogo, Kickstarter, Pinterest, Upwork and an unknown number of others.

“Small business will need to use multiple administrative systems in order to comply with many different jurisdictions, costing hundreds of millions to implement and increasing the risk of inadvertent error.

“While Amazon offers a tax collection service, this involves an additional 2.9 percent fee that is significant for many third-party merchants and provides Amazon with another profit center that will result in billions of extra dollars in revenue.”

In addition, Pitkow said existing software products make mistakes. “No state will excuse a small business for relying on software and making a mistake. There needs to be a uniform and national rule.”

South Dakota says it protects small businesses through its Safe Harbor provision, but the Flipper brief contends it does not adequately protect small sellers:

“South Dakota’s statute states that it only applies if gross sales exceed $100,000 or there are 200 specific transactions in the State during the year. However, small businesses and startups cannot predict how many transactions will happen during the year in any given state or local jurisdiction.

“As a result, they have no meaningful choice but to register to collect and remit sales tax in every jurisdiction.

“The 200th sale may not occur until December 31st, and since many online products cost as little as one cent, gross sales of $2 will trigger liability on December 31st.

“Yet, because sales tax cannot be collected from buyers retroactively, small businesses must as a practical matter collect at the beginning of the year in order to avoid subsequent liability if they meet the threshold for tax collection.”

Pitkow also points out that South Dakota’s safe harbor provision is just one state’s version; multiply that by the 45 other states that have sales tax. “We either collect everywhere or roll the dice and face perpetual audits in literally thousands of jurisdictions, including foreign countries.”

Pitkow feels strongly about states requiring sellers with no physical presence to collect their sales tax. “To me this is the very essence of taxation without representation, shifting tax money from individuals and small business to billionaires. Our country was founded in a tax revolt because the Monarchy kept adding new taxes, and increasing others, all that money was taken out of the Colonies and sent to England.”

He said the same thing is happening now: “States give massive subsidies to big businesses and can’t pay for education and infrastructure. It’s not that hard to see the problem here.”

While Pitkow didn’t provide examples, newspapers have been full of reports of states promising Amazon massive tax breaks as incentives to build its second North American headquarters in their state – Business Insider cited a report that said New Jersey’s governor had approved tax breaks that would total about $7 billion if Amazon chose its state for “HQ2.”

The Flipper brief refers to a “patchwork of discriminatory and unworkable state laws.” Pitkow said the simplest way to solve the state sales tax issue is to institute a uniform national ecommerce sales tax with one rate, and have platforms like Amazon collect the sales tax and distribute based on state and zip code.

Last week, South Dakota called small sellers “pint sized” and was dismissive of their concerns in its recent reply to Wayfair’s brief – read more and let us know what you think in this AuctionBytes Blog post.

The Supreme Court will hear the case on Tuesday; a decision is likely by June.

Ina Steiner on EmailIna Steiner on LinkedinIna Steiner on Twitter
Ina Steiner
Ina Steiner
Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.

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