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COMPLAINT - 1
Candice L. Fields (SBN 172174) CANDICE FIELDS LAW 520 CapitolMall, Suite 750 Sacramento, California 95814 916-414-8050[emailprotected] Counsel for Online Merchants Guild
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF CALIFORNIA
SACRAMENTO DIVISION
ONLINE MERCHANTS GUILD,
Plaintiff,
vs.
NICOLAS MADUROS, DIRECTOR,
CALIFORNIA DEPARTMENT OF TAX &
FEE ADMINISTRATION,
Defendant.
Case No.: ____________________
COMPLAINT
42 U.S.C. § 1983
INTERNET TAX FREEDOM ACT
Introductory Statement
1. This is an action to challenge government conduct that iscrushing thousands of
small business owners. California’s Treasurer, Fiona Ma, haspublicly criticized the California
Department of Tax & Fee Administration’s actions as“unlawful, unconstitutional, and
impractical,” and pleaded with Governor Newsom to stop CDTFAfrom arbitrarily destroying
peoples’ livelihoods.1 But CDTFA continues to exceed its lawfulauthority—all to preserve an
economic subsidy to Amazon and political subsidy to someCalifornia politicians. The Online
1 March 8, 2019 Letter from Treasurer Fiona Ma, CPA, to GovernorGavin Newsom, Exhibit 1.
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Merchants Guild, a trade association for the affected smallbusinesses, brings this action to
challenge CDTFA’s violations of the rule of law.
2. This case arises from California’s massive subsidization ofAmazon, which
CDTFA laundered through the state sales tax system for years.The basic context is as follows.
California requires businesses to collect taxes on retail sales,through a scheme administered by
CDTFA. Amazon is such a business—Amazon operates the dominantonline store in the United
States, with over $280 billion in sales in 2019 alone.2 But fornearly all of the last decade,
Amazon refused to collect California sales taxes on the vastmajority of sales in its store. And,
because Amazon offered political benefits to CDTFA and itselected overseers, CDTFA wrongly
gave Amazon a pass. The result was billions in foregone taxrevenue.
3. CDTFA recently began looking to make someone pay the missingsales taxes. Not
Amazon, but the hundreds of thousands of U.S.-based third-partymerchants outside of
California who supply Amazon’s store. Unlike Amazon, thesemerchants are small, and have
neither economic nor political power in California. Amazon hasbeen feeding CDTFA names of
merchants, whom CDTFA has been targeting for supposed taxobligations stretching back to
2012—often in amounts that seem fictional and designed to createin terrorem negotiating
leverage. Further, CDTFA is demanding that non-residentmerchants register as tax collection
agents for the State. CDTFA has been threatening those who donot give in and pay up with
felony convictions, years in jail, and crushing fines. CDTFAcontinues to discriminate against
them in favor of the political and economic “benefits” Amazonoffers the state government.
4. CDTFA’s conduct is causing marketplace havoc and threateningthousands of
small business owners with financial ruin. Amazon did notcollect taxes on the Amazon sales at
issue, dating back nearly a decade, so the Guild’s members donot have tax revenue from those
sales. Any payment now would have to come out of the smallbusinesses themselves. The
2 Daniel Sparks, “Amazon’s Record 2019 in 7 Metrics,” The MotleyFool (February 6, 2020),https://www.fool.com/investing/2020/02/06/amazons-record-2019-in-7-metrics.aspx.
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Guild’s members generally lack such funds. CDTFA’s policy couldbankrupt them. CDTFA’s
conduct is also perversely deterring growth and diversificationaway from Amazon, in effect
locking Guild members into Amazon’s ecosystem.
5. CDTFA’s actions are unlawful for a variety of reasons. At themost basic level,
the agency does not have the power to impose registration orsales tax requirements on the Guild
members in question. CDTFA’s position is that because Amazonunilaterally decided to store
items in Amazon’s California warehouses for sale in Amazon’sstore—after Guild members
surrendered custody of those items to Amazon—Guild members aresubject to personal
jurisdiction in California. That is not the law: Guild membersdid not deliberately affiliate with
the state via Amazon’s unilateral choices.3 Accordingly, CDTFAcannot lawfully demand non-
resident Guild members register with the state, pay back taxes,and collect taxes prospectively.
Further, CDTFA’s decision to pursue those smallbusinesses—instead of Amazon—unlawfully
discriminates against non-residents and interstate commerce. Andthat is just the tip of the
iceberg.
6. CDTFA surely knows that its actions exceed the agency’slawful authority. The
dispositive constitutional principles have been settled fordecades. But the agency is undeterred
because of the economic reality that most affected smallbusiness owners cannot vindicate their
rights in California’s byzantine and oppressive system forchallenging unlawful assessments.
This case is necessary to protect the Guild members’constitutional rights.
Jurisdiction and Venue
7. This Court has subject-matter jurisdiction pursuant to 28U.S.C. § 1331 because
this case arises under the Constitution and laws of the Unitedstates, including the Due Process
3 See, e.g., Walden v. Fiore, 571 U.S. 277, 284 (2014) (“Theunilateral activity of another party or a third person is not anappropriate consideration when determining whether a defendant hassufficient contacts with a forum State to justify an assertion ofjurisdiction.”) (cleaned up).
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Clause, the Commerce Clause, the Equal Protection Clause, thePrivileges and Immunities
Clause, the Internet Tax Freedom Act, and 42 U.S.C. § 1983.
8. The Court has personal jurisdiction over defendant Madurosand the agency he
leads, CDTFA, which is headquartered in Sacramento, California.The Online Merchants Guild
submits to the personal jurisdiction of this Court for purposesof this action.
9. Venue is proper in the Court’s Sacramento Division under 28U.S.C. § 1391
because defendant Maduros and his agency reside in Sacramentoand a “substantial part of the
events or omissions giving rise to the claim occurred” withinthe Sacramento Division.
10. The Tax Injunction Act does not preclude this Court’sexercise of jurisdiction
because, inter alia, the Guild and its members lacks anymeaningful state court remedy and the
Guild challenges provisions and conduct outside the scope of theTIA’s putative jurisdiction-
stripping provisions. Comity is no basis for decliningjurisdiction, either.
Parties and Standing
11. The Online Merchants Guild is a trade association for onlinemerchants. The
Guild’s purpose is to advocate for a free and fairly regulatedonline marketplace, and for the
interests of online merchants. The Guild provides a common voicefor the diverse group of
merchants who supply Amazon’s store and other online stores. TheGuild’s membership, which
numbers in the hundreds, is almost entirely comprised of smalland micro-businesses that
members have built from scratch. Many of the Guild’s members aretrue kitchen-table
enterprises. Often, eCommerce provides the Guild’s members ameans of earning self-
sufficiency despite disadvantages and setbacks. The OnlineMerchants Guild is a resident of
Wyoming.
12. The Online Merchants Guild has standing in its own rightbecause the
organization has been forced to divert its resources to addressthe impacts of the challenged
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CDTFA conduct, as set forth in greater detail in the declarationof Paul S. Rafelson, the Guild’s
Executive Director.4
13. The Online Merchants Guild also has standing on behalf ofits members, who are
or may be affected by the CDTFA conduct challenged herein. TheGuild’s members would have
standing in their own right because they have been or may besubject to CDTFA’s challenged
conduct. The interests the Guild seeks to represent are germaneto the organization’s purpose set
forth above. This lawsuit will not necessarily require theparticipation of the Guild’s members as
plaintiffs.
14. Defendant Maduros is the Director of CDTFA, which is theCalifornia state
agency responsible for collection of sales tax. DefendantMaduros and CDTFA are residents of
California. Prior to 2017, the state Board of Equalizationimplemented the scheme addressed
herein. But after a series of scandals and state and federalcriminal investigations, those
responsibilities were transitioned to the newly-created CDTFA5.For simplicity, we generally
refer to the agency by its current name.
Factual Allegations
Amazon’s FBA Program
15. The Guild’s members include hundreds of online merchants whoparticipate in the
interstate eCommerce market. For many of the Guild’s members,Amazon’s store is the
dominant, if not exclusive, means by which they participate ininterstate eCommerce. Amazon’s
importance to eCommerce, and small business eCommerce inparticular, cannot be overstated.
4 Declaration of Paul S. Rafelson, Exhibit 2. 5 See, e.g.,Patrick McGreevy, “In Massive Shake-Up, Gov. Jerry Brown Breaks UpCalifornia’s Scandal-Plagued Tax Collection Agency,” L.A. Times(June 27, 2017),https://www.latimes.com/politics/la-pol-ca-tax-board-overhaul-20170627-story.html(describing how the BOE was “the target of an investigation by theDepartment of Justice, and its members and employees have beenaccused by auditors of mismanagement that included putting $350million in sales taxes in the wrong accounts, and improperlyinterfering with decisions to open field offices and transferstaff,” and how an audit “discovered board members were underminingthe executive director and transferring tax collections staff todirect parking and crowd control at conferences that boosted themembers’ standing in the community”).
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According to some reports, Amazon has nearly half of the entireeCommerce market in the U.S.6
Amazon’s closest “competitor,” the behemoth Walmart, has lessthan 10% of that market.7
16. This case involves the regulatory environment aroundAmazon’s Fulfilled by
Amazon or FBA program. The gist of FBA is that Amazon relies onmillions of “third-party
merchants” to source goods for Amazon’s store. Those merchantsidentify and source items that
Amazon might choose to carry in its store. The merchants conveythe goods to Amazon to
warehouse and, if purchased in Amazon’s store, to ship to theconsumer. That is, Amazon fulfills
the order, hence the name, Fulfilled by Amazon. (By contrast, asmaller fraction of sales on
Amazon are what Amazon considers “first-party” sales, in whichAmazon itself sources the
goods.) FBA has contributed to Amazon’s wild success by allowingthe company to externalize
various supply chain costs—and by allowing Amazon to offerartificially low prices by avoiding
collecting sales tax.
17. FBA generally works as follows. Third-party merchants, suchas OMG members,
source products for possible sale on Amazon. Merchants propose asale price to Amazon.8
Amazon has full discretion to approve the products for sale, andto approve or reject the price,
using an internal algorithm whose precise features are unknownto merchants. Amazon also
retains editorial control over product listings. Amazon alsocontrols where and how products are
listed on the site—i.e., the results consumers see when theysearch.
18. After Amazon approves a merchant’s proposed listing, Amazonwill direct the
merchant to ship the products to a warehouse of Amazon’schoosing. From there, Amazon may
6 See, e.g., Wayne Duggan, “Latest E-Commerce Market ShareNumbers Highlight Amazon’s Dominance,” Yahoo! Finance (Feb. 4,2020),https://finance.yahoo.com/news/latest-e-commerce-market-share-185120510.html(“Bank of America estimates Amazon currently has about 44% of U.S.e-commerce market share, up from 40% in 2018. Walmart is a distantsecond at just 7%, followed by eBay at 5% and Target at just 2%.”).7 Id. 8 See Amazon, “Business Solutions Agreement,”https://sellercentral.amazon.com/gp/help/external/G1791?language=en_US.
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COMPLAINT - 7
keep the goods in that warehouse, or ship them anywhere forpositioning, including after
breaking up the lot.
19. After a consumer purchases a product in Amazon’s store,Amazon is responsible
for selecting the warehouse from which to draw the product,packing the product, and shipping it
to the consumer. Amazon also collects payment, and—after holdingonto the funds for several
weeks—credits the merchant’s account. On FBA sales, Amazoncharges merchants a
commission that can reach 45%.
20. Amazon is in privity with consumers, whom Amazon deems thecompany’s
“customers.” By contrast, under the terms of merchants’agreement with Amazon, merchants are
not in privity with consumers. Amazon generally forbids merchantcontact with consumers.
21. For most Guild members, FBA is critical to survival onAmazon, despite the high
commission. FBA can account for over 90% of sales for manymembers.
22. To implement FBA, Amazon has a network of more than 180fulfillment and
sortation centers around North America.9 Amazon no doubt has asophisticated algorithm for
where it stores items, but that algorithm is unknown to theGuild’s members and beyond their
control. Amazon has several FBA facilities in California, whereit unilaterally chooses to store
Guild members’ goods.
23. Once Guild members transfer custody of their goods toAmazon, they have no say
in where Amazon moves the goods. Guild members have no controlover which warehouse or
warehouses Amazon chooses to use for storage. Guild memberscannot instruct Amazon to use
or not use warehouses in certain states. Nor can they orderAmazon to pull goods out of certain
states. When a consumer makes a purchase, Guild members cannottell Amazon which
warehouse to ship the item from. Nor can Guild membersrealistically “cancel” sales from
particular warehouses or to particular locations.
9 Seller Essentials, “Amazon Warehouse Locations,”https://selleressentials.com/amazon/amazon-fulfillment-center-locations/.
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24. The following FBA fact pattern is representative. Guildmember X in
Washington, DC sources a pallet of ink pens, and proposes alisting to Amazon. After Amazon
approves the listing, Amazon directs the Guild member to shipthe product to the nearest
warehouse, in Baltimore. The merchant’s role in the process isessentially over. Amazon
unilaterally decides to break up the pallet, keeping some of theinventory in the mid-Atlantic, and
positioning the rest around the country—e.g., Houston, Stockton,and Reno. Months later, an
Amazon customer in Sacramento searches for pens. Amazon decideswhich results to display.
Assume that the consumer unknowingly chooses the pen thathappens to be stored in California,
perhaps because Amazon chose to display that result first. Theconsumer places an order;
Amazon accepts, and Amazon chooses to fulfill that order fromthe Stockton warehouse rather
than the Reno location or facilities further east.
25. In the foregoing example, Amazon, not the Guild members,unilaterally decided
to store goods in California and fulfill orders from thosewarehouses to Amazon’s California
customers. Amazon is subject to CDTFA’s taxing authority for thesale, but the Guild’s members
are not. Yet CDTFA disregards the law and purports to claimpersonal jurisdiction over the
Guild’s members, as explained below.
California’s FBA Sales Tax Regime
26. First some background on California’s sales tax regime.10The basic framework of
California sales tax, which has existed for decades, is thatretailers collect sales tax from the
consumer at the point of sale, and then pass those collectedamounts on to the state. So, in the
pen example, one would expect Amazon to collect and remit thesales tax: it’s Amazon’s store;
Amazon has physical custody of the pen; Amazon chose to storethe pen in California; Amazon
approves the listing, processes the sale, transfers the pen tothe customer, and collects payment.11
10 We use the familiar term sales tax to refer to sales and usetaxes. 11 See, e.g., Cal Rev. & Tax Code § 6014-15 (providingstatutory definitions of those obligated to collect sales taxesthat match Amazon’s conduct); Cal. Reg. 1569 (“A person who haspossession of property owned by another, and also the power tocause title to that property to be transferred to a third personwithout any further action on the part
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Until very recently, however, Amazon successfully defied itscollection obligations, costing
California billions in uncollected sales tax.
27. To understand why there is a massive amount of uncollectedtax, we need to go
back in time. As The Philadelphia Inquirer reported, “[w]henAmazon opened its first
warehouse in California in 2013, it escaped the obligation tocollect the taxes on sales by third-
party merchants on the company’s site, apparently by convincingstate officials that it was not
the retailer obligated to collect sales tax in those cases—adistinction that has since been
undermined by court decisions in South Carolina, Pennsylvania,and elsewhere.”12
28. Around that time, when Amazon was building up the FBAprogram, states like
California were seeking to tax online sales and correct theadvantage that Amazon had over
brick-and-mortar retailers. Amazon fought collecting taxes,until “cut[ting] a deal” to abandon
the company’s ballot initiative to change California tax law inexchange for an additional tax-
free year.13
29. As Amazon’s tax-free year was ending, CDTFA was apparentlyplanning to treat
Amazon like any other store and require the company to collectsales tax on all of its sales. In
September 2012, CDTFA told reporters that Amazon would have tocollect taxes on FBA orders
it fulfills: “Since Amazon is handling the merchandise and allaspects of the sale, the [CDTFA]
would consider them the retailer, and Amazon would have tocollect tax on the transaction.”14
of its owner, and who exercises such power, is a retailer whenthe party to whom title is transferred is a consumer. Tax appliesto his gross receipts from such a sale.”). 12 Harold Brubaker,“California Hits Philly-Area Amazon Seller with $1.6 MillionSales-Tax Bill,” The Philadelphia Inquirer (November 5, 2019),https://www.inquirer.com/business/california-sales-tax-amazon-seller-philadelphia-business-20191105.html;see also Amazon Services, LLC v. S.C. Dep’t of Rev., No.17-ALJ-17-0238-CC (S.C. Admin. Law Ct. Sept. 10, 2019),https://src.bna.com/Leb. 13 Jay Greene, “Amazon and CaliforniaLawmakers Cut Sales Tax Deal,” CNET.com (September 8, 2011),https://www.cnet.com/news/amazon-and-california-lawmakers-cut-sales-tax-deal/.14 Declan McCullagh, “Amazon Shoppers Will Squeeze ThroughCalifornia Tax Loophole,” CNET.com (September 11, 2012),https://www.cnet.com/news/amazon-shoppers-will-squeeze-through-calif-tax-loophole/.
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30. Here is the email from CDTFA’s Deputy Director—second incommand—to the
media15:
31. But hours after the reporter asked Amazon for a quote inresponse, CDTFA issued
a late-night “updated” position: Amazon would retain its taxadvantage by refusing to collect tax
on FBA sales.16
32. The very next day, a CDTFA staffer gave Amazon’s accountantsa tax opinion
letter based on Amazon’s characterization of how it operatesFBA.17 Although the letter offered
several caveats and contained basic legal errors, Amazonapparently used it to justify the
company’s refusal to collect sales taxes.
33. Amazon’s artificially lower prices gave the company asignificant pricing
advantage over brick-and-mortar stores and online competitorswho did collect sales tax.
Consumers, predictably, shopped in the store with lower prices,which helped contribute to the
15 September 10, 2012 Email from Venus Stromberg on behalf ofDeputy Director Garza (CDTFA) to Declan McCullagh (CNET.com),Exhibit 3. 16 Id. 17 Cary C. Huxsoll (BOE) Letter to Reed Schreiter(PricewaterhouseCoopers LLP) (September 11, 2012), Exhibit 4.
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downfall of various retailers. Amazon’s artificially low pricesalso helped lure consumers to
enroll in Amazon Prime, which was key to Amazon’s growthstrategy. Essentially, Amazon
profited by creating a giant tax-free store. As Capital &Main observed, “It’s highly likely that
Amazon clears more profit than marketplace sellers on theirtransactions. So Amazon, by proxy,
benefits financially from third-party tax avoidance, and thepricing advantage it provides. And,
by not collecting tax, Amazon even avoids liability for mistakesmade by third-party sellers that
could trigger audits.”18 That is part of Amazon’s overallstrategy: “Amazon’s continuous
resistance to collecting sales taxes made it the first majorAmerican company to build its
business based on tax avoidance. Contrary to popular belief, thecompany is still resisting
today.”19
34. Why would California let Amazon escape paying billions ofdollars in sales
taxes? According to Treasurer Ma, the “[n]umber one” reason thestate refused to make Amazon
collect sales taxes was that “the governor’s office has beentrying to woo Amazon into putting a
headquarters here. I’ve been pushing and they haven’t wanted todo anything up front.”20 That
regulatory favoritism is of a piece with other giveaways toAmazon. For example, California
offered Amazon hundreds of millions in “incentives” and bespokeregulation to locate HQ2 in
the state.21
35. The sales tax piece of the giveaway scheme ended in late2019, when Amazon
agreed to begin collecting taxes pursuant to California’s new“marketplace facilitator” law. But
18 David Dayen, “The ‘Amazon Tax’ Ruling: Disrupting theDisruptors?,” Capital & Main (July 10, 2018),https://capitalandmain.com/the-amazon-tax-ruling-disrupting-the-disruptors-0710.19 Id. 20 Id. 21 Jeff Collins, “Gov. Brown Pledges Hundreds ofMillions in Incentives for Amazon HQ2 in California,” The OrangeCounty Register (October 18, 2017),https://www.ocregister.com/2017/10/18/brown-pledges-hundreds-of-millions-in-tax-incentives-for-amazon-hq2/(documenting hundreds of millions in tax credits, “employmenttraining funds,” property tax abatement, a “‘strike team’ toexpedite all permits and approvals,” promised legislation to“streamlin[e]” the CEQA approval process, etc.).
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what about the taxes Amazon refused to collect for the priordecade? That’s where CDTFA’s
challenged conduct comes in.
CDTFA’s Registration and Collection Position
36. CDTFA is now apparently trying to clean up for Amazon’sdecade of tax
avoidance. But rather than looking to Amazon, CDTFA has actuallypartnered with Amazon to
go after non-resident small businesses that lack Amazon’spolitical and economic power in the
state.
37. The challenged CDTFA policy works as follows. According toCDTFA, non-
resident Guild members are “required to collect and pay salesand/or use tax” if, inter alia, they
“use, directly or indirectly, or through a subsidiary or agent,a . . . . place of distribution, . . .
warehouse or storage place, or other physical place of businessin California.”22 CDTFA
publications elaborate: “If you use a California fulfillmentcenter to store your inventory, you are
required to register with the CDTFA and file sales and use taxreturns.”23 Similarly, “[i]f you are
an out-of-state seller that uses a California fulfillment centerto store your inventory for delivery
to consumers in California, you are also required to registerwith the CDTFA and file sales and
use tax returns. You are responsible for reporting and payingthe tax to the CDTFA on your retail
sales to California consumers. You may also be responsible forother fees; your online
application will determine what licenses or permits with theCDTFA may be required.”24
38. CDTFA’s definition of “fulfillment center” tracks and ismodeled on Amazon’s
FBA program: “A fulfillment center is a location, generally awarehouse facility, where orders
22 CDTFA, “Do You Need to Register with California?,”https://www.cdtfa.ca.gov/industry/out-of-state-retailers.htm#Registration(first emphasis in original; second added). 23 CDTFA, “Publication77, Out-of-State Sellers: Do You Need to Register with California?,Examples,” https://www.cdtfa.ca.gov/formspubs/pub77/#examples. 24CDTFA, “Fulfillment Centers,”https://www.cdtfa.ca.gov/industry/fulfillment-centers.htm; see alsoCDTFA, “Form 38-A (7-19),” https://cdtfa.ca.gov/formspubs/forms.htm(claiming nexus over non-residents who “were engaged in business inthis state solely because you used a marketplace facilitator . . .to facilitate sales for delivery in this state and the marketplacefacilitator stored your inventory in this state”).
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COMPLAINT - 13
for tangible merchandise are received, packaged, and picked upby a common carrier for
shipment to the customer.”25
39. As applied to Amazon’s FBA program, then, CDTFA purports torequire foreign
citizens whose goods Amazon unilaterally chooses to store inCalifornia to register with the
agency and collect state and district sales tax on Amazon’ssales of those goods. The Due
Process Clause commands otherwise,26 but that has not deterredCDTFA.
40. CDTFA’s claims to jurisdiction go even further. Amazon usesa process called
“commingling,” in which the company fulfills orders from adifferent merchant’s goods if it
saves Amazon money.27 In a typical fact pattern, a customerplaces an order from merchant 1’s
listing. But if merchant 2’s identical item is located closer tothe customer, Amazon will fulfill
the order from merchant 2’s supply and credit the sale tomerchant 1. In that event, merchant 1’s
item would never even enter the state in question—yet CDTFA willstill claim personal
jurisdiction over merchant 1 for the sale (and then CDTFA willclaim jurisdiction over merchant
1’s business in general).
41. CDTFA goes even further still. According to CDTFA, a singleitem stored by
Amazon in California gives the agency personal jurisdiction overthe rest of the non-resident
merchant’s business. Not only does that violate the Due ProcessClause,28 it deprives Guild
members of the benefit of California’s supposed online taxthreshold and violates the Internet
Tax Freedom Act.
25 CDTFA, “Publication 109, Internet Sales, Online Marketplacesand Fulfillment Centers,”https://www.cdtfa.ca.gov/formspubs/pub109/#online. 26 See, e.g.,Holland Am. Line, Inc. v. Wartsila N. Am., Inc., 485 F.3d 450 (9thCir. 2007) (“The placement of a product into the stream ofcommerce, without more, is not an act purposefully directed towarda forum state. Even a defendant’s awareness that the stream ofcommerce may or will sweep the product into the forum state doesnot convert the mere act of placing the product into the stream ofcommerce into an act purposefully directed toward the forum state.”(citing Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 112(1987))); accord J. McIntyre Machinery, Ltd. v. Nicastro, 564 U.S.873 (2011). 27 Rafelson Dec. ¶ 11, Exhibit 2; Freifelder Dec. ¶ 8,Exhibit 11. 28 See, e.g., Bristol-Myers Squibb Co. v. SuperiorCourt, 137 S. Ct. 1773 (2017).
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42. In addition to demanding taxes, CDTFA insists onregistration.29 Registration
triggers more registration. For example, “[i]f you are requiredto register in California for a
Seller’s Permit or a Certificate of Registration – Use Tax, youmay have other registration and
fee requirements” such as those relating to “covered electronicdevices,” certain batteries, tires,
lumber, and building products containing at least 10% wood.30California also imposes
recordkeeping requirements: “When you hold a California seller’spermit or other CDTFA
license or permit, you are required to maintain your businessrecords to verify that you have
properly paid the fee.”31 Such “[r]ecords must be kept for atleast four years,” and longer in the
case of an audit (which can stretch for years).32
43. And on top of that, after ensnaring non-residents Californiamay seek income tax
or other revenue streams.33
CDTFA’s Injuries to the Guild and its Members
44. CDTFA is seeking to enforce the above registration andcollection policies
against hundreds of Guild members and thousands ofsimilarly-situated businesses. Using names
and email addresses supplied by Amazon, CDTFA has targeted theonline merchants who supply
goods to Amazon for Amazon’s store.34 CDTFA’s tactics go beyondwhat even the most brazen
private debt collector, mindful of the Fair Debt CollectionPractices Act, would attempt.
29 E.g., CDTFA, “Publication 77, Out-of-State Sellers: Do YouNeed to Register with California?, Examples,”https://www.cdtfa.ca.gov/formspubs/pub77/#examples; 30 CDTFA,“Publication 77, Out-of-State Sellers: Do You Need to Register withCalifornia?, Additional Accounts, Licenses and Permits,”https://www.cdtfa.ca.gov/formspubs/pub77/#additionalAcccounts. 31CDTFA, “Doing Daily Business,”https://www.cdtfa.ca.gov/industry/out-of-state-retailers.htm#DoingDailyBusiness.32 CDTFA, “Tax Guide for Out-of-State Retailers, Doing DailyBusiness,”https://www.cdtfa.ca.gov/industry/out-of-state-retailers.htm#DoingDailyBusiness.33 See Multistate Tax Commission, Nexus FAQs,http://www.mtc.gov/Nexus-Program/Online-Marketplace-Seller-Initiative/FAQ.34 See, e.g., Amazon Email to Sellers, Exhibit 5 (Amazonmass-emailing suppliers regarding disclosure of their contactinformation and federal taxpayer identification numbers to CDTFA);Gail Cole, “Not All States Want Marketplace Facilitators to CollectTax. Some Just Want Information.,” Alvara (Dec. 7, 2018),https://www.avalara.com/us/en/blog/2018/12/not-all-states-want-marketplace-facilitators-to-collect-tax-some-just-want-information.html(describing how Amazon shared supplier information with Californiaand other states).
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45. CDTFA agents have been demanding that non-residents registerwith the state to
collect sales tax on pain of jail time. For example, CDTFApersonnel have unilaterally concluded
that Guild members must register with the state, and then warnedGuild members that if they
“choose not to voluntarily [sic] comply to obtain a sellerspermit,” they could be “guilty of a
felony,” fined thousands of dollars, and “imprison[ed] for 16months, two years, or three
years.”35
46. Similarly, CDTFA agents have written to Guild members to“set up an
appointment with you for registration,” while simultaneouslywarning that that if the member
declines, “you can be prosecuted and billed, [and] become unableto receive penalty relief.”36
47. When merchants register, CDTFA then goes after the merchantsfor retrospective
taxes back to 2012.37
48. Because Amazon did not collect sales tax on its sales duringthat period,
Amazon’s merchants do not have the tax receipts to turn over toCDTFA. Payments would have
to come out of revenue or other sources—money that Guild membersin general do not have.
49. CDTFA has also been unliterally deciding how muchnon-resident merchants
“owe” and sending demand letters for payment. Guild members havereceived seven-figure
“assessments” backed up by threats of criminal prosecution. Onetarget was Guild member Brian
Freifelder from Pennsylvania, who was the subject of widespreadmedia coverage.38 Brian
received a CDTFA demand for $1.6 million for just a six-monthperiod in California, which
35 March 2018 Email from CDTFA to Guild member (emphasis added),Exhibit 6; see also various correspondence from CDTFA to Guildmembers, Exhibit 7. 36 March 2018 Email from CDTFA to Guild member,Exhibit 8 (emphasis in original). 37 February 2018 Email from CDTFAto Guild member (“Your company is required to file Sales and UseTax returns on a Quarterly basis with a start date of 9/5/2012. Allsales of tangible personal property are retail sales and subject totax, unless supported by documentation as being exempt.”), Exhibit9; see also, e.g., January 24, 2019 Email from CDTFA to Guildmember (demanding tax returns “from 2Q14 through 2Q17”), Exhibit10. 38 Declaration of Brian Freifelder, Exhibit 11.
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exceeded the plausible taxes on “every sale [he has] everdone.”39 After Brian pointed out the
obvious error, CDTFA cut the assessment to approximately$30,000—raising serious questions
about the good-faith basis for the original demand. The Guildhas observed a similar pattern in
which CDTFA will make large demands on other merchants, untiedto the sales at issue,
apparently to gain negotiating leverage through fear.
50. Brian was only one of many CDTFA targets. According to thePhiladelphia
Inquirer, there are “hundreds of thousands of third-partymerchants on Amazon who were
informed by [CDTFA] that they should have been collecting taxeson sales to California
residents as far back as 2012.”40
51. Guild member Denise Rasbid is another target whom CDTFA hasdriven nearly to
the end of her business. Denise started her Illinois-basedeCommerce clothing boutique after
auto-immune disease and small children took her out of thecorporate world. Her business is
successful by third-party merchant standards, but still modest:for 2019, she paid herself “just
under $11,000 for 40-60 hours per week” of work.41 Denise’sworld was turned upside down
when, in 2019, CDTFA emailed her demanding that—because of herFBA participation—she
must register with the agency, pay years of back taxes, andcollect California sales tax
prospectively. CDTFA also threatened her with penalties andinterest. CDTFA’s demands have
contributed to the looming bankruptcy of Denise’s business,because she cannot pay the
allegedly due past amounts and the compliance burdens ofprospective tax collection are
significant for a small enterprise like hers. CDTFA’s conducthas also made it essentially
prohibitive for Denise to diversify her business away fromAmazon.
39 Harold Brubaker, “California Hits Philly-Area Amazon Sellerwith $1.6 Million Sales-Tax Bill,” The Philadelphia Inquirer(November 5, 2019),https://www.inquirer.com/business/california-sales-tax-amazon-seller-philadelphia-business-20191105.html.40 Id. 41 Declaration of Denise Rasbid, Exhibit 12.
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52. Another example is Alice Kim, Guild member and founder ofHanalei Beauty
Company in Hawaii.42 Hanalei is female- and minority-owned, andemploys 25 people. In 2019,
CDTFA called Alice and demanded more than $10,000 in taxes onprior Amazon sales. After
Alice’s attempt to explain that Amazon, not she, controlledwhether her products were stored in
California “fell on deaf ears” and led to “threat[s]” fromCDTFA, Alice simply paid the taxes.
Giving in to CFTA’s demands was economically rational—it wouldhave cost far more than
$10,000 to litigate for years against the agency. Alice’s is aclassic example of a negative value
claim, and there are thousands more merchants in her shoes.
53. Yet another example is Guild member Mindy Wright, who ownsand operates a
small eCommerce business based in Washington.43 In late 2018,CDTFA demanded that Mindy
register to collect taxes for California; after she began doingso and collecting sales tax
prospectively, CDFTA then pursued her for up to 8 years ofsupposedly-due retrospective taxes.
Mindy faces tens of thousands of dollars in back taxes,penalties, and interest, which is beyond
her means. She may be forced to close her business and seekbankruptcy protection.
54. Arnold Norman is another Guild member.44 After he and hiswife were laid off in
their mid-50s during the Great Recession, they founded aneCommerce business focused on
products for people suffering from Alzheimer’s, dementia, andsimilar maladies—conditions
Arnold and his wife had seen loved ones suffer and die from.Being New Yorkers, they set up to
collect New York taxes and file quarterly sales taxes with thatstate. But in late 2018, CDTFA
demanded that they register with California. Fearful, theydid—then the agency demanded
California sales taxes back to at least 2015. Arnold and hiswife have spent thousands in
professional fees dealing with those demands, and paid thousandsin back taxes out of pocket.
Now CDTFA is demanding tens of thousands more—money Arnold andhis wife do not have.
42 Declaration of Alice Kim, Exhibit 13. 43 Declaration of MindyWright, Exhibit 14. 44 Declaration of Arnold Norman, Exhibit15.
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But, as he explains, “we cannot afford to challenge CDTFA inCalifornia state court”; it would
“make more sense for us just to ‘give in,’” because “we justcannot afford to fight CDTFA.”45
55. Tax collectors like CDTFA don’t just threaten jail time.They seize funds from
Amazon accounts. They seize funds from accounts in nationalbanks. They may seize funds from
IRS refund accounts. They are relentless.
56. Guild members face serious financial hardship, ranging frombankruptcy to job
cuts, to say nothing of loss of expansion, as a result ofCDTFA’s demands for money that Guild
members do not have. Further, CDTFA’s aggressive practices arechilling participation in the
interstate marketplace and investment in American jobs. Theregistration and reporting
requirements impose substantial costs on non-resident smallbusinesses. For many members, the
cost of multi-state or nationwide compliance alone could exceedtheir profit margin.
57. As referenced above, California’s elected Treasurer, FionaMa, has publicly
criticized CDTFA’s actions as “unlawful, unconstitutional, andimpractical.”46 Treasurer Ma, a
former Chair of the State Board of Equalization (which housedwhat became CDTFA), urged
Governor Newsom to intervene and stop CDTFA’s injurious conduct.As Treasurer Ma
explained to Governor Newsom, “the real travesty is that theseactions by CDTFA . . . are also
causing many of the third-party sellers to go out of businessand into bankruptcy.”47
58. CDTFA is the most aggressive state revenue agency but is notalone among them
in pursuing FBA merchants for Amazon’s sales, giving theseissues an additional interstate
element. As an illustration of what other states are doing toGuild members, Wisconsin’s tax
agency has been posting individuals names online and threateningto seize IRS tax refunds
before they are distributed to the taxpayer.48 Washington Statetax collectors have demanded
45 Id. at ¶ 10. 46 March 8, 2019 Letter from Treasurer Fiona Ma,CPA, to Governor Gavin Newsom, Exhibit 1; see also March 3, 2020Written Testimony of Fiona Ma to Congress, Exhibit 16. 47 Id. at 4.48 Wisconsin Department of Revenue Correspondence to Guild Member,Exhibit 17.
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nearly $200,000 from Guild member Jennifer Jenson, who runs aNative American-owned
eCommerce business from Utah.49 Washington claims to be able totax her entire business back
to 2010 because a single customer returned a single book toAmazon—at Amazon’s direction—
to an Amazon warehouse in Washington state. Jenson is facingthree or four more years of
administrative process while making payments on an installmentplan due to financial hardship.
He cannot get into Washington state court and challenge theassessment until after the
administrative process concludes. And now CDTFA is after her aswell. As she explains, her
business cannot withstand the administrative costs—to saynothing of the surprise penalties—
and her business is “probably one tax judgment away fromcollapsing.”50 Because it “doesn’t
really make economic sense for us to fight,” they may just“‘give in’ and start over with a
different business.”51 Multiply these problems by 50 states, andthe result is chaos in the
marketplace. The combined effect of these demands on Guildmembers is chilling their
participation in the interstate marketplace, while illustratingwhy challenging individual
assessments in individual state actions is not viable.
59. Many affected merchants have contacted the Guild for helpand guidance.52 The
Guild has spent thousands of hours assisting its membership andworking on their behalf with
respect to CDTFA’s challenged conduct. In addition to educatingmembers and assisting affected
and concerned individuals, the Guild has engaged in publicadvocacy work, including organizing
and submitting information to regulators and legislators. TheGuild now turns to the courts for
protection of the Guild’s members’ constitutional rights.
This Court is a Proper Forum for This Controversy
60. Although CDTFA will likely try to hide behind the TaxInjunction Act, 28 U.S.C.
§ 1341, the TIA does not strip this Court of jurisdiction for avariety of reasons. In the first
49 Declaration of Jennifer Jenson, Exhibit 18. 50 Id. at ¶ 8. 51Id. 52 Rafelson Dec. ¶ 28, Exhibit 2.
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instance, the Guild has no “plain, speedy and efficient remedy”for vindicating its interests or its
members’ interests in state court.53 As a matter of Californialaw, only the taxpayer who pays the
tax has standing to challenge an assessment, which limits theGuild’s standing on behalf of its
members in state court, since the Guild is not the taxpayer.54Further, California law places
severe limits on the availability of injunctive relief in taxmatters.55
61. The Guild also challenges various provisions and policiesthat are not acts of
“assessment, levy or collection” and are therefore outside thescope of the TIA.56
62. For their part, the Guild’s members also lack an effectivemeans of vindicating
their federal constitutional rights in California state court.The state procedural framework
precludes meaningful scrutiny of CDTFA’s compliance with basicconstitutional guarantees, and
effectively immunizes constitutional violations at massscale.
63. California is a pay-to-play state: litigants first have topay a tax before challenging
whether the tax is lawful in the first place.57 That process islengthy and expensive. When
CDTFA issues a tax assessment against a Guild member, the matteris first handled in a layered
administrative scheme. Guild members cannot raise constitutionalissues in that process. Instead,
Guild members who want to raise even threshold questions likepersonal jurisdiction must wait
out the administrative process, pay any amount theadministrators demand, and then file a refund
action in California state court. The “price” of entering thecourtroom is years of administrative
delay, thousands (or more) in surrendered assets, and thousandsin legal fees. Very few of the
Guild’s members have the financial resources to vindicate theirrights in that manner. Instead, the
economically rational response for a small business—and theresponse CDTFA counts on—is to
53 28 U.S.C. § 1341. 54 See Cal Rev. & Tax Code § 6391; IBMPersonal Pension Plan v. San Francisco, 131 Cal. App. 4th 1291(2005) (non-taxpayers lack standing to challenge assessed taxesunder California law). 55 See Cal. Const., Art. XIII § 32 (“Nolegal or equitable process shall issue in any proceeding in anycourt against this State or any officer thereof to prevent orenjoin the collection of any tax.”). 56 Direct Mktg. Ass’n v.Brohl, 575 U.S. 1, 8 (2015). 57 Cal. Const., Art. XIII § 32; CalRev. & Tax Code § 6931.
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surrender. CDTFA is thus able to capitalize on the negativevalue element of the claims at issue
here. That is what happened to Guild member Alice Kim. Asanother example, Guild member
Denise Rasbid is unable to reasonably afford challenging thebasic lawfulness of CDTFA’s
demand. She is already stretched to the end financially, andcannot afford to pay to access
California’s state court system.
64. Individual litigation is also completely inefficient at thejudicial system level
because CDTFA has targeted thousands of businesses, leading tothe possibility of thousands of
individual challenges. California law also imposes the sameeconomically irrational barrier on
class actions as it does on individual actions: “there is no barto certification of a class action for
refund of unconstitutional taxes so long as all class membershave filed their own individual
claims and thereby exhausted their remedies.”58 In other words,the state court limits on taxpayer
class actions enforce the very negative-value problem classactions are otherwise intended to
remedy.
65. Guild members who are not yet in CDTFA’s sights, but fearbecoming so, appear
to have no ex ante means of challenging the assessment regime instate court, since paying an
assessment is the price of access to the state court system. Asfor Guild members whose products
Amazon stored in California, they face uncertainty about whetherand when and in what amount
CDTFA will assess them, and further uncertainty and delayregarding any challenge to the
lawfulness of that assessment. This includes Guild membersreferenced herein, because it is
unclear whether CDTFA has completed targeting their prior FBAsales.
66. There are also multi-state aspects to the problems at issuehere, which further
remove this case from the TIA. California is the mostaggressive, but not the only, state to pursue
non-residents in the manner described herein. Dozens of stateshave attempted to use the
58 Franchise Tax Bd. Limited Liab. Corp. Tax Refund Cases, 25Cal. App. 5th 369, 386 (2018) (emphasis added).
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Multistate Tax Commission to pressure third-party merchants topay sales tax revenues Amazon
should have but did not collect.59
67. Further removing this case from the TIA, the remedies soughtherein will not
deprive California of revenue, much less of revenue to which thestate is lawfully entitled. As
Treasurer Ma has explained (writing then as a Member of theBoard of Equalization), it is
“inefficient, if not impossible for [CDTFA] to properly auditthousands of FBA retailers around
the U.S. who are having orders fulfilled through Amazonfulfillment centers in the State of
California”; but by collecting taxes from Amazon, “CDTFA wouldonly have to audit one
company and compliance would significantly improve. The State ofCalifornia would also see
billions of dollars of additional revenue that could fund vitalprograms and services.”60 CDTFA’s
targeting of thousands of Amazon’s suppliers rather than Amazonitself is even more impractical
and suspect when one considers the problem of overseassuppliers. Hundreds of thousands of
Amazon’s suppliers are based in China, where they arepractically if not legally beyond
CDTFA’s reach.
68. Moreover, CDTFA’s conduct is effectively a tax credit orsubsidy to Amazon,
challenges to which are generally outside the scope of theTIA.
69. Additionally, the Internet Tax Freedom Act reflectsCongressional intent to limit
jurisdiction-stripping where the TIA might otherwise beapplicable.
70. CDTFA cannot invoke the comity doctrine (to the extent itremains a basis for
declining jurisdiction61) for various reasons. For one thing,“comity is a two-way street, requiring
59 See Eugene Kim, “Some Amazon Sellers Can Avoid Paying BackSales Taxes through a Temporary Amnesty Program,” CNBC (August 3,2017),https://www.cnbc.com/2017/08/03/some-amazon-sellers-can-avoid-paying-back-sales-taxes-through-a-temporary-amnesty-program.html(describing the multi-state nature of the issue); Matt Day, “AmazonPulled Into Another Sales-Tax Fight as States Go After Third-PartySellers on Its Marketplace,” The Seattle Times (November 8, 2017),https://www.seattletimes.com/business/amazon/amazon-pulled-into-another-sales-tax-fight-as-states-go-after-third-party-sellers/(similar). 60 August 31, 2017 Letter from Fiona Ma, CPA to KeelyMartin Bosler, Cabinet Secretary, Office of Governor Edmund G.Brown Jr., Exhibit 19. 61 See, e.g., Sprint Comms. v. Jacobs, 571U.S. 69, 77 (2013) (“Jurisdiction existing, this Court hascautioned, a federal court’s obligation to hear and decide a caseis virtually unflagging.”) (cleaned up).
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a delicate balancing of sometimes-competing state and federalconcerns.”62 CDTFA cannot
violate multiple federal interests (e.g., constitutional rights,the interstate economy) and the
interests of other states (e.g., the due process rights of theirown citizens63) and then invoke
comity as a shield. Further, the Levin “considerations” do notapply.64 Comity is no basis for
declining jurisdiction.
Causes of Action
Count 1
CDTFA’s demand for and seizure of money belonging tonon-resident Guild members
violates the Due Process Clause.
71. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
72. By demanding and seizing under threat of criminal and civilpunishment money
from Guild members over whom CDTFA lacks personal jurisdiction,CDTFA is violating the
Fourteenth Amendment’s Due Process Clause in multiple ways.
73. CDTFA lacks personal jurisdiction over the affected Guildmembers for purposes
of tax assessment. In the tax context, a state must have “nexus”to exercise power over a non-
resident. The Supreme Court has long recognized two independentaspects of “nexus” that a state
must satisfy to regulate a non-resident. One aspect arises fromthe Due Process Clause; the other
from the Commerce Clause. Although they are “closely related,”the Due Process Clause and the
Commerce Clause “pose distinct limits on the taxing powers ofthe States. Accordingly, while a
State may, consistent with the Due Process Clause, have theauthority to tax a particular
62 Trump v. Vance, 941 F.3d 631, 638 (2d Cir. 2019), aff’d, 140S. Ct. 2412 (2020). 63 See, e.g., Bristol Myers-Squibb, 137 S. Ct.at 1780 (“restrictions on personal jurisdiction . . . are aconsequence of territorial limitations on the power of therespective States. . . . The sovereignty of each State implies alimitation on the sovereignty of all its sister States.”) (cleanedup). 64 See Levin v. Commerce Energy, Inc., 560 U.S. 413, 431-32(2010).
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taxpayer, imposition of the tax may nonetheless violate theCommerce Clause”—or vice versa.65
The two clauses “reflect different constitutional concerns” andare “analytically distinct.”66 And
“while Congress has plenary power to regulate commerce among theStates and thus may
authorize state actions that burden interstate commerce, it doesnot similarly have the power to
authorize violations of the Due Process Clause.”67
74. Among other aspects, the Due Process Clause imposes personaljurisdiction-based
limits on state authority to regulate non-residents. Thefamiliar personal jurisdiction rules from
the litigation context have long applied in the taxcontext.68
75. CDTFA is purporting to regulate Guild members over whomCalifornia lacks
personal jurisdiction. The Guild members at issue arenon-Californians, over whom CDTFA
purports to base jurisdiction not on the members’ actions, buton Amazon’s unilateral decision to
store items in Amazon’s possession in Amazon’s Californiawarehouses and ship orders to
Amazon’s California customers from those warehouses. The Guildmembers at issue did not
thereby deliberately affiliate with California, lack sufficientcontacts with the state, and are not
subject to personal jurisdiction in the state.
76. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
77. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
65 Quill Corp. v. N.D, 504 U.S. 298, 305 (1992) (quoting BellaHess v. Dep’t of Rev. of Ill., 386 U.S. 743, 756 (1967); citingTyler Pipe Indus., v. Wash. State Dep’t of Rev., 483 U.S. 232(1987)). Wayfair overruled a discrete and different aspect of Quilland Bella Hess. See Wayfair, 138 S. Ct. at 2099. 66 Quill Corp.,504 U.S. at 305. 67 Id. 68 See, e.g., South Dakota v. Wayfair,Inc., 138 S. Ct. 2080, 2091 (2018) (tracing the “minimum contacts”requirement).
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Count 2
CDTFA’s registration demands violate the Due Process Clause.
78. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
79. For reasons similar to those in Count 1, California lackspersonal jurisdiction over
the Guild members at issue and CDTFA cannot require them toregister as tax collection agents
for the state. Yet CDTFA has threatened Guild members withfelony jail time if they refuse to
register.
80. CDTFA’s conduct has caused and will continue to causeirreparable injury to the
Online Merchants Guild and its members.
81. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Count 3
CDTFA is violating the Commerce Clause by imposingdiscriminatory and burdensome
restrictions on interstate commerce.
82. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
83. By pursuing the Guild’s members instead of Amazon for thesales taxes at issue,
CDTFA is discriminating against out-of-state merchants in favorof Amazon because Amazon
offers state politicians substantial in-state “benefits” thatGuild members cannot offer. That
discrimination is a per se violation of the dormant CommerceClause.69
84. CDTFA’s demand for back taxes also fails the Complete Autotest because the
demand does not apply to an activity through which Guild memberscreate a substantial nexus to
69 Granholm v. Heald, 544 U.S. 460, 476 (2005) (“State laws thatdiscriminate against interstate commerce face a virtually per serule of invalidity.”)
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California; the demand is not fairly apportioned as betweenAmazon and the Guild’s members;
the demand discriminates against interstate commerce,particularly by favoring Amazon’s in-
state conduct over the interests of non-resident smallbusinesses and by interfering with Guild
members’ participation in the interstate eCommerce market; andthe demand is not fairly related
to the services California provides, since the Guild’s membersdid not seek out any such
services.70
85. CDTFA’s demand for taxes stretching back nearly a decadeimposes an undue
burden on the Guild’s members, contrary to Wayfair and otherprecedents.71
86. CDTFA’s conduct also fails the Pike standard because theregulation imposes
burdens on interstate commerce that clearly exceed anylegitimate local interest.72 Among other
things, CDTFA’s conduct severely burdens the ability of Guildmembers to participate in the
interstate economy (and in some cases even to exist as goingconcerns). By contrast, the main
local “benefit” is the continuation of an illegitimate subsidyto Amazon. CDTFA’s conduct
cannot provide a material local benefit in the sense ofincreased tax revenue, because CDTFA is
unlikely to obtain significant revenue by pursuing thousands oflow-income businesses, in
comparison to the revenue CDTFA could obtain by pursuing Amazon.And CDTFA’s conduct, if
and when replicated by other states, poses additional harms tothe interstate marketplace.
87. CDTFA’s application of the small-business threshold imposesan undue burden
on interstate commerce. The Wayfair Court pointed to dollarthresholds designed to limit the tax
burden on non-resident small businesses as a means of limitingCommerce Clause problems.73
Dollar thresholds operate such that only companies who dosignificant business in a state, and
70 Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279(1977). 71 Wayfair, Inc., 138 S. Ct. at 2098 (“In this case,however, South Dakota affords merchants a reasonable degree ofprotection. . . . [T]he law is not retroactive.”); United States v.Carlton, 512 U.S. 26, 38 (1994) (O’Connor, J., concurring)(explaining that periods of retroactivity longer than a year arerarely attempted, have not been sustained, and would likely raise“serious constitutional questions”). 72 Pike v. Bruce Church, Inc.,397 U.S. 137 (1970). 73 Wayfair, 138 S. Ct. at 2099.
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 26 of 33
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COMPLAINT - 27
are thus presumably large enough to shoulder the complianceburdens, can be made responsible
for collecting sales tax. California’s new MarketplaceFacilitator Act contains a threshold: non-
residents who sell less than $500,000 are supposed to be exemptfrom sales tax collection
obligations.74 But CDTFA disregards that threshold. According tothe agency, any merchant
whose goods Amazon stores in a California warehouse is notreally a non-resident merchant at
all; instead, the presence of “inventory” in California meansthey are resident and are ineligible
for the threshold.75 Essentially, according to CDTFA, one dollarof merchandise stored and
sold—by Amazon—in California will grant CDTFA taxing authorityover the rest of the
merchant’s business. Not only is that unlawful, it detersmerchants from using the threshold to
grow a business line outside Amazon. CDTFA’s policy has theintent and effect of precluding
merchants from diversifying away from Amazon.
88. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
89. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Count 4
CDTFA’s registration requirements violate the CommerceClause.
90. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
91. CDTFA’s demand that non-resident small businesses registerwith the agency
(and become tax collectors for the agency) imposes a substantialburden on interstate commerce.
74 Cal. RTC § 6203(c)(4) (excluding from the definition ofretailers obligated to collect tax those who have sales fordelivery in California that do not exceed $500,000 per year);CDTFA, Use Tax Collection Requirements Based on Sales intoCalifornia Due to the Wayfair Decision, Overview,https://www.cdtfa.ca.gov/industry/wayfair.htm (explaining that“remote sellers” who sell more than $500,000 are responsible forcollecting sales tax). 75 CDTFA, “Tax Guide for MarketplaceFacilitator Act, FAQs,”https://cdtfa.ca.gov/industry/MPFAct.htm#note3.
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 27 of 33
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The compliance costs are significant, and given CDTFA’spractices challenged herein,
understandably lead Guild members to fear that they will becomesubject to additional burdens
by the agency. That has the effect of chilling Guild members’participation in the interstate
marketplace.
92. There is no lawful local benefit that outweighs thoseinjuries, because CDTFA
cannot lawfully regulate the Guild’s non-resident members, andany information the agency
needs for a lawful local purpose can be derived directly andmore efficiently from Amazon.
93. Insofar as CDTFA places the burden on non-residentmerchants, while refusing to
place the burden on Amazon (despite Amazon’s in-state presenceand benefits to the state),
CDTFA is directly discriminating against foreign residents inper se violation of the Commerce
Clause.
94. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
95. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Count 5
CDTFA is violating the Equal Protection Clause by preferentiallybenefiting Amazon and
burdening the Guild’s members.
96. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
97. There is one sale—in Amazon’s store—to tax. As betweenAmazon or the Guild’s
members, CDTFA chose to impose burdens on the politically weakGuild members instead of
the politically powerful Amazon. CDTFA made that decision on thebasis of political favoritism,
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 28 of 33
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regulatory capture, economic protectionism, and bureaucraticself-interest, which violates the
Equal Protection Clause.76
98. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
99. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Count 6
CDTFA is violating the Privileges and Immunities Clause bytreating non-resident Guild
members differently than Amazon.
100. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
101. The Privileges and Immunities Clause prohibits CDTFA fromtreating non-
resident Guild members substantially differently than Amazon(which has a large in-state
presence) absent a substantial and legitimate justification.
102. As to the same alleged tax collection obligation, CDTFApursues non-resident
Guild members while continuing Amazon’s subsidies, in the hopesthat Amazon will increase its
in-state presence and in-state political benefits, which doesnot further any substantial and
legitimate justification.
103. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
104. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the equal protection rights of the Guildand its members.
76 See, e.g., Merrifield v. Lockyer, 547 F.3d 978, 991-92 (9thCir. 2008) (regulation “designed to favor economically certainconstituents at the expense of others similarly situated” isunconstitutional).
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 29 of 33
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Count 7
CDTFA’s discrimination violates the Internet Tax FreedomAct.
105. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
106. The Internet Tax Freedom Act (ITFA) prohibits Californiafrom, inter alia,
imposing “discriminatory taxes on electronic commerce,” whichare defined as taxes that are
“not generally imposed and legally collectible . . . ontransactions involving similar property,
goods, services or information accomplished through othermeans.”77 The ITFA further prohibits
California from imposing on electronic commerce “an obligationto collect or pay the tax on a
different person or entity than in the case of transactionsinvolving similar property, goods,
services, or information accomplished through othermeans.”78
107. Congress intended for the ITFA to provide a private rightof enforcement for
damages and other appropriate relief.
108. For purposes of the ITFA, Amazon has a brick-and-mortarcomponent to its
business in California, including multiple FBA warehouses andother physical sites (existing and
hoped-for) that provide political benefits to the state. Byimposing the tax and registration
requirements challenged herein on the out-of-state Guild memberswho participate in protected
eCommerce, but not on Amazon’s de facto brick-and-mortaroperations, CDTFA is
discriminating against eCommerce in violation of the ITFA.
109. CDTFA further discriminates against eCommerce by imposingthe tax and
registration requirements challenged herein on Guild members whosupply Amazon’s
eCommerce store, while CDTFA would not impose the samerequirements on out-of-state
suppliers who supply goods housed for sale by traditionalbrick-and-mortar retailers in their
warehouses.
77 Internet Tax Freedom Act Section 1101(a); Section 1105(2),codified at 47 U.S.C. § 151, Note. 78 Id.
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 30 of 33
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110. CDTFA’s past, present, and future violations of the ITFAhave caused the Guild
and its members damages and irreparable injury.
111. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Count 8
CDTFA is violating the Due Process Clause by imposingretroactive taxes far in excess of
those that might be constitutionally permissible.
112. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
113. CDTFA is attempting to impose massive retroactive taxeswithout adequate
contemporaneous notice. Many merchants have received demands fortaxes stretching back
nearly a decade.
114. Those massive retroactive liabilities violate the limits onretroactive legislation in
general and retroactive tax regulation in particular.
115. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
116. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Count 9
California’s pay-to-play system for vindicating constitutionalrights violates the Due
Process Clause.
117. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
118. The operative California process for challenging theconstitutionality of state tax
assessments fails to provide due process before Guild membersare deprived of their property
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 31 of 33
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COMPLAINT - 32
and before they can challenge the lawfulness of other regulatoryrequirements. As set forth
herein, at least as applied, CDTFA is able to capitalize on thenature and negative-value aspects
of the sums at issue to effectively preclude constitutionalscrutiny of how the agency seizes
money belonging to private citizens.
119. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
120. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Count 10
CDTFA is violating the Due Process Clause by imposing tax andregistration obligations on
the basis of unconstitutionally vague language and policies.
121. The Online Merchants Guild incorporates the foregoingparagraphs as if set forth
herein.
122. CDTFA is attempting to impose taxation and registrationrequirements on the
basis of statutory and regulatory language and policies that didnot and do not give sufficient
notice to the Guild’s members of what was necessary to complywith the law.
123. Yet, despite the impermissibly vague language, CDTFAcontinues to seek to
enforce those provisions against the Guild’s members.
124. CDTFA’s conduct has caused and will continue to causedamages and irreparable
injury to the Online Merchants Guild and its members.
125. Injunctive and declaratory relief is necessary to remedyCDTFA’s violations of
law and to vindicate the constitutional rights of the Guild andits members and to prevent further
irreparable injury to the interstate economy.
Prayer for Relief
126. The Online Merchants Guild respectfully requests, on behalfof itself and its
members, the following relief:
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 32 of 33
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a. A declaration pursuant to 28 U.S.C. § 2201 that CDTFA’sconduct and
application of California law to the Online Merchants Guild’smembers as set forth herein is
unconstitutional;
b. An order and judgment enjoining CDTFA from further suchconstitutional
violations;
c. Costs and attorney’s fees pursuant to 42 US.C. § 1988;
d. Damages for CDTFA’s violation of the U.S. Constitution andthe Internet Tax
Freedom Act;
e. A jury trial on all issues so triable; and
f. All other appropriate relief.
Dated this 29th day of September, 2020.
s/ Candice L. Fields Candice L. Fields CANDICE FIELDS LAWCounsel for Online Merchants Guild
Case 2:20-at-00954 Document 1 Filed 09/29/20 Page 33 of 33
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