E170: Wayfair Case Aftermath and What It Means for Online SellersAugust 9, 2018 in Ecom-Crew-Podcast
If you’re that person who listens to one podcast a year, this is definitely the episode you should listen to. Together with me are Bernie Thompson and Paul Rafelson, members of the Online Merchants Guild (OMG), a non-profit organization that is working to change the law governing online sales tax collection.
This podcast episode focuses on the aftermath of the South Dakota vs Wayfair case and how it has invariably created the so-called economic nexus. This essentially means that the state can now require online sellers to collect state sales tax for online purchases, even if the seller doesn’t have a physical presence (e.g. an office or a warehouse) in that state. In South Dakota, the economic nexus threshold has been placed at 200 online purchases or $100k in revenue.
We believe, that while the ruling can affect all online retailers, it will hit small ecommerce businesses the hardest. This is why we are campaigning to raise funds so we can fight this thing in court. Our plan is to sue all state tax commissioners and seek a declaratory judgment on this issue that will relieve small ecommerce businesses of this undue burden. We plan to steer the conversation towards viable alternatives, specifically compelling marketplaces like Amazon to collect online state sales tax for online purchases on behalf of third-party sellers.
Help us fight this cause and move the needle towards creating a more sustainable industry for everyone selling online. Please sign up using the link below.
Hopefully, together we can make some real progress on this issue.
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If you have any questions or comments, feel free to leave them below. Happy selling!
Full Audio Transcript
Mike: This is Mike and welcome to episode number 170 of the EcomCrew Podcast. For today’s episode, I’m going to jump right into it because this is one of the most important episodes of the EcomCrew Podcast we’ve ever recorded. It’s about the Online Merchants Guild. And it’s something that I talked about a few podcasts ago, a couple months ago. But things have really kind of hit a critical spot for this now.
And if you’re an e-commerce seller, regardless if you want to support Online Merchants Guild or not, I highly recommend listening to this episode, really understanding the dynamics of where sales tax lies today in the e-commerce landscape and why the Online Merchants Guild is so important. So with that, I just want to remind you if you want to go the show notes and leave a comment about this episode, you can go to EcomCrew.com/170. And besides that, let’s jump right into this talk with Bernie and Paul on the other side of the intro.
Mike: Paul and Bernie, welcome back to the EcomCrew Podcast guys.
Paul: Hey, how’s it going Mike?
Mike: Pretty good, can’t complain or I guess I can, that’s what we’re going to be here talking about. But otherwise, things are good. But yeah, we had you guys on the podcast a couple of months ago, and we’ll put that in the show notes. It was episode number 136. And we were discussing a new trade organization we have put together called Online Merchants Guild, and we’ve been getting some decent traction, some support to this point. But we have a pretty big ambitious thing we want to tackle here we’re going to be talking about today.
And if you’re listening to this podcast and sell anything online, like if you listen to one podcast all year, I think this is the one you probably want to listen to because the implications of what’s going on are pretty dramatic. And that’s what we’re going to be talking about today. So, without sounding secretive or whatever, let’s talk about exactly what we’re talking about, which is the sales tax rolling that came down the Wayfair case.
Obviously, probably a lot of people that listen to this podcast have heard about that. But Paul, if you could just interject real quick and kind of summarize what that case was about and what happened there, and then we’ll kind of continue from there.
Paul: Sure. Well Mike, thanks for having us on. Again, this is as a huge, huge issue right now and one that is sort of a monumental task for a young trade association have to take on right out the gate, but that’s kind of what inspired us to do it right. That’s what kind of we all got together and decided this is what we want to do because this is needed in the community. So Wayfair, there’s a case that I sort of separated from the Amazon world in that if you really look at the legal of it, you’re talking about a situation where a multibillion dollar company is avoiding sales tax collection by claiming it’s too much of a burden and relying on — how many years old, but the Quill case goes back to 1992.
And then there was a 1959 Bell’s Huss case before that, this whole physical presence concept. And so, this camp, Wayfair and other companies are basically saying without physical presence, we’re constitutionally protected from having to collect sales tax, that’s the way it should be. And the Supreme Court is just looking at this and shaking their heads and saying, I can’t believe that you’re actually with a straight face telling us this Wayfair. And so, in some ways that’s a good thing because I do think big companies that are multibillion dollar companies should probably collect sales tax on things that they sell.
I think it’s fair and it’s good for the states that need the money. But where this is really bad, is that the state governments really in my opinion weren’t like going after Wayfair, they’re really kind of just trying to get a mandate to go after us, the Amazon sellers. And that to me is a little disingenuous because obviously they’re not going to bring an Amazon seller before the Supreme Court.
And so, with this decision is removal of physical presence, the states are basically going to operate under mandate that all Amazon sellers are tax dodgers and they all need to get into compliance and file state tax returns. And every state whether it’s sales tax, or income tax, and you’re all going to have to spend $100,000 more in compliance costs. Hey, God knows how much in back taxes to states like California. I mean, it’s an absolute nightmare.
Mike: Yeah. So let’s kind of break down these things piece by piece. I think that it’s important for people who aren’t up on the legal side of things. So let’s talk about the way things kind of were before which is that you would have to have a physical presence in a state to create what’s called Nexus. So like you’d have to have – you’re the lawyer, so I’ll let you explain it better than me. But what would — not getting into like what’s the new kind of – what would physical presence mean by the old definition?
Paul: Yeah, sure. So typically, like you have an employee, you have a warehouse, which sounds like FBA but it’s not really, but you’re storing inventory there, you’re making regular sales calls there. There’s actually two types of Nexus, which is Nexus under the due process clause and Nexus in the e- commerce clause. I will say that most of the Nexus we talk about, especially physical presence really relates to the commerce clause and rarely, certainly, the text service providers don’t address the Nexus under the due process clause, which is a big deal for Amazon sellers because we don’t direct our activities towards the state.
Like I don’t say, hey, I want this to go to the California Amazon fulfillment center and only the Amazon fulfillment center in California, and I only want this inventory to be shipped to California customers. We don’t do those things or work specifically targeting or what we call purposely availing ourselves of those states. So, there’s a big question even with Wayfair as to whether there’s Nexus under the due process clause for Amazon sellers. It’s sort of like I ship a bunch of stuff via FedEx and it ends up in Tennessee, do I have Nexus in Tennessee because that’s where the FedEx control happens.
Paul: It’s kind of ridiculous.
Mike: And it over and above that, I mean Amazon controls the customer and we really don’t. But we’ll get into that a little bit more as this call goes on. So like I mean, the bottom line is the way that all of us are kind of been operating was that let’s say like we’re in California, we have physical presence here, like no question about it. I live in California, I have a warehouse in California, I have employees in California, but that’s the only state that I had any of those check the box things done. And so far we had been advised and way that we kind of always been operating is that we have Nexus in California and don’t in a state let’s say like neighboring Nevada because we don’t have any employees or products there.
But now the Wayfair case basically is open up the door for a new type of Nexus test, which is this economic Nexus, instead of having a physical presence, just having an economic presence in that state, by interacting with enough people, or shipping enough products and goods into a particular state. This is all in massive flux right now, because there was only I guess a few states that had these laws on the books previously. And now a bunch of states are kind of rushing to do this. Let’s talk about how that from a legal perspective, let’s not get into the opinion part of it, but like what is economic Nexus and what states is that triggered in that in right now?
Paul: Sure. So it’s actually still an unknown. I mean, the court sort of intimated that the economic Nexus rule of South Dakota seemed reasonable and they actually said it’s particularly because Wayfair is a big company. They actually made that point and they left open a door that this could be challenged by a small business for other reasons, which is I don’t want to get into all the legal mumbo jumbo. But there’s a lot of other legal reasons we can challenge this.
Mike: So what is that “reasonable” — I’m using air quotes here through the podcast, what’s the reasonable limits there in South Dakota?
Paul: Right. So right now the South Dakota rule for economic Nexus is 200 transactions or $100,000 in sales, which I’m sure Bernie can attest to — Bernie you may want to tackle this, what do the numbers really say about the $100,000 threshold? Most tax professionals and I’ve spoken to are pretty much ignoring the $100,000 number, just sticking with 200 transactions because there really is no proportional relationship between the two.
Bernie: Yeah, the average e-commerce transaction on Amazon is under $25. So, what’s weird about that Supreme Court threshold is you hit the 200 transactions at about 5,000 in revenue for a typical e-commerce transaction on Amazon. And then even – I mean we will talk a little bit more about non Amazon type scenarios. But if you’re doing basically digital goods, you could hit that 200 transaction threshold even way before that very easily.
So yeah that’s one of the odd things about that Supreme Court ruling and the states are really aligning with that. I’m looking at a table here where I have just in October. So this is basically a month and a half from now, there’s at least five or six states whose economic Nexus threshold has been either created or readjusted after Wayfair to this $100,000, 200 transactions threshold, and they’re expecting compliance as of October 1 of this year 2018.
Paul: And that’s why we got to get to work. But I will mention too and there’s an unknown question here too which is listen, prior to Wayfair, states thought you had Nexus if you’re an FBA seller right? So in other words, had Wayfair won, they still would be going after FBA sellers unless there was some really sweeping language coming from the court. So, I’m not sure economic Nexus even applies to Amazon sellers because I’ve seen, I believe I’ve seen states make comments like your FBA presence is basically your Nexus, so you don’t have to worry about 200 transactions, you’re here with 10 transactions.
Mike: Right, so you immediately like by that definition if a state so chooses to say that — because there’s two sides of the fence. Some states say that Amazon is the one that should be collecting it, and they’re the one that made the Nexus. But the ones that don’t, that go the other way, they’re basically saying it from the very first thing you sell into our state, you’ve already tripped that Nexus law because you have inventory in our state.
Paul: Right. And again, I don’t think that’s true. And the other thing to remember is that there’s still an underlying question with Amazon selling anybody to and probably Etsy, but I know Amazon very well. I just had a hearing in Washington State about this, and basically, who’s the retailer Mike? I mean, who owns the customer? Who has the right to control the return policy? Who has the right to piss off the customer? Pardon my language, but I always kind of say like it’s almost like a sense of like I think therefore I am or I’m a free will to go the freewill concept if what makes me a retailer and therefore responsible for collecting the taxes, that I have the right to be mean and terrible to my customer.
I may not be in business for very long. It may not be a sound business decision, but that’s sort of my right as a true retailer to do that. And with Amazon we know that that’s impossible, that we’re really, we don’t even have a customer. And I put this really cool slide deck together for these two hearings I had for specific taxpayers that were assessed in Washington State, and we had all these pictures of here’s Amazon, here’s somebody buying from the marketplace and having it delivered to the whole foods in Darien Connecticut and still no sales tax being charged. Even though I’m walking into an Amazon branded store or Whole Foods, I’m picking it up from an Amazon branded locker. It’s like that seems ridiculous to me that you won’t be collecting sales tax in any of these transactions.
So, that’s still a big question and it’s really a little bit problematic that the states haven’t seen that. And I will say for my hearing in Washington, the two hearing officers I spoke to were both completely like surprised. They had no idea what it was like to sell. I was the first person to come to them and say, my clients aren’t retailers.
Mike: It’s not atypical for a government official to not fully understand what it’s like for the loss that they’re creating or I mean they’re not in the trenches day in and day out and don’t fully understand. They just look at the numbers and don’t fully understand the process. So I mean there’s basically there’s two things at play here then. There’s the economic Nexus portion that’s kind of newly been created out of all of this, and there’s also the physical Nexus presence test which could potentially be argued by a state that you have by FBA by having inventory in FBA warehouse. But there’s two sides of the coin because we also have people that that listen to this podcast that don’t even sell on Amazon.
So my point is this affects everybody. Let’s just use the economic Nexus test. It’s crazy. I mean, you’re looking at you take 200 orders in the South Dakota, and when ends up happening is you think, well like, I probably don’t ship anything in the South Dakota, it’s such a small state. But the reality is, it’s 1% of the population. So, if you’re doing something like 300 orders a month or 400 orders a month, that’s somewhere in that range, you’re probably shipping 16 orders, I guess it would actually have to be 1600 orders a month, you’re shipping the 16 orders a month in South Dakota just by law of averages.
And that’s not a lot of orders. I mean, you don’t have to be a massive e-commerce company to kind of hit 1600 orders a month or in dollar volume a million dollars a year especially, I mean, it’s a thin margin business, you’re not making a million dollars, right? So what it ends up triggering is the cost of compliance for a company that’s not the size of Wayfair, that’s the size of me or Bernie. And that’s one of the things that we bring out and talk about on this call. But it’s so easy to like to surpass these limits no matter who you are in e-commerce. You can — whether you’re someone that just sells online only, like someone that’s a drop shipper, someone that sells on Amazon FBA or someone who’s a hybrid. I mean, everyone is affected here.
And even if you’re even still a smaller seller than that where you’re not tripping the economic Nexus in South Dakota, it is true that that’s still one of the smallest states, you’re probably still tripping economic Nexus in at least 10 states or whatever it might be. And the compliance costs of dealing with this stuff is not as simple as a TaxJar or somebody might make it how to be because there’s quite a bit to it. And maybe Bernie that’s something that you can speak to because I know you’ve been going through some planning here, and you and I have talked offline, but we both figured that this is a six figure cost to us that will reduce our net profit next year by a significant amount if we have to comply with this.
Bernie: Yeah, I mean it’s one of the reasons why the work of OMG is so important to hear is first of all challenging some of these things that we’ve talked about where there’s uncertainty, but actually it’s getting word out about what the actual cost of compliance is. One of the good things about having Paul here on the team is Paul’s worked at tax departments at companies that actually do deal with all these states. And every one of those companies has a what they call assault department, a state and local tax department, and it’s a department, it’s a group of people.
So you get some entities and I’m not going to knock TaxJar, they’re a good company, there’s good people there who understand what they’re doing, and I’d recommend them to somebody who was looking for some automation. But that only covers unfortunately, a portion of the problem. It basically covers your regular filings and often not your remittance on those. But what it doesn’t cover is all the analysis of business specific issues that you’re doing and kind of changing around your entity type sometimes to be the right entity type.
For example, a lot of Amazon sellers are single member LLCs. And if you just go kind of blindly registering in California as a single member LLC, that’ll pull your whole individual tax return into the state so that you might have done it for your Amazon business. But if you have other things going on in terms of personal income, that gets dragged into the state. TaxJar will have no idea how to advise you or steer you, or adjust your entity structure to deal with issues and there’s issues at every single state and then there’s audits and then there’s all the exceptional things that happen.
If you’re even a day late on a payment, states will start sending letters and have penalties which are often kind of, it’s not a normal business relationship where people just say, oh you paid me a day late, okay, you’ll catch up. The states are kind of they’re all a bunch of mini IRSs that operate in that fashion where they’re not very communicative but when they are they’re making demands on you and your time and your business and your judgment.
So, and when I’ve looked at this for my business, basically I’m having to almost double my bookkeeping staff in order to now go from federal and a few states to federal and all of these states. And worse, it’s now so complicated and I’ve got a bigger team and I’ve got all these hard decisions to make, I’m getting dragged away from the business to make all these decisions, it’s crazy. I should be focused on my products and my customers; instead I’m spending a bunch of time kind of analyzing tax issues, so I got to hire a CFO. And guess what, a CFO at least in the area I’m in, that alone is a six figure investment.
And then there’s all the — there’s the automation firms like TaxJar, Avalara which you’re talking — TaxJar is probably only in the thousands of years, you pay thousands of dollars a year; Avalara is in the tens of thousands. And then there’s the professional help to deal with all of the exceptions, all the audits, all the weird stuff that invariably happens when you’re interacting with governments that have kind of unbending demands for you. So, there’s this really weird moment Paul and I were looking through the transcripts of the Supreme Court with the Wayfair case and the justice says they have no idea about this.
I mean even in the highest court of the land, this information out there about what’s the reality of multi state tax compliance in terms of what businesses have to do to comply, the word is not on the street about this and legislators don’t know and the courts don’t know. And so, that’s why what OMG is doing here in terms of taking this from the court angle and getting information on the public record about this is really important because once people understand this bit better, they’ll actually understand what a mess we’re headed towards here with the way things are trending after Wayfair.
Mike: Yeah, I just want to say just real quick Paul and then you can add on to what I’m going to say here. But I think that it gets even worse from here Bernie because there are states, and I don’t fully understand this myself because I haven’t been educated in every other state. But there’s a significant number of states who I understand that over and above the sales tax also claim that you have an income tax obligation or a business tax obligation. And I think that — and we’re in California so I already filled this $800 BOE fee, but I believe that you’re also like obligated to pay that as well and some percentage of revenue and taxes, and Washington State is a good example of that as well.
All of these rules which are very fluid and I mean, I have — listen, I do everything I possibly can, I can look anybody in the eye and say like I do everything I possibly can to pay all my taxes. I’ve always been that way. I don’t even have a problem as much as some people do about paying taxes. And I try to do everything by the book as much as I possibly can because I just don’t want the headache of having an organization marking me, and I still can’t get it right. And I just try to figure it out only in California, because like these rules — it isn’t like they send you a pamphlet or tap you on the shoulder and say, hey, you’re doing something wrong, like we’re here to help you.
It’s the opposite, they wait two years or three years and then they come knocking your door and tell you that you didn’t check this box in this form and now you have a $10,000 penalty for doing something as simple as that and not give us that. You multiply that by 45 and it’s just like holy crap I mean. So it’s over and above what you were talking about Bernie, but those things and Paul you’re about to say something, maybe you can kind of hit on some of those issues real quick and then make your other point.
Paul: Yeah. So no, I mean, it’s actually very much kind of what you said. I mean, what you guys are basically describing the last 5, 10 minutes, we just heard from both of you is called an undue burden on interstate commerce. And those facts like how much does it cost to comply? And what’s it like to be a small business? And what do you now have to do just to start as a small business in this country? These are important points that the court made very clear we’re not on the record in Wayfair, and are going to be crucial to the case that we bring to the court.
And we go after the states and say, listen, this needs to stop, and we tell the court basically, tell the states listen to stop because this violates our constitutional rights under the commerce clause, which is basically exists so that states can’t just make it impossible to gauge interstate-commerce in this country, because that’s a bad thing. We want to encourage that. That goes to the root of our Constitution. And so that’s our lawsuit in many ways. I mean, there’s other components to it, but there is this undue burden here.
And I think your point about the income tax is the one that I do the sack of it. I don’t single out any one tax service provider; I just say in general, the tax service providers that people tend to know in our space do not mention income tax. And that’s so important because that cost even if TaxJar is in the thousands, it depends on what you’re doing, what you’re needing, I’ve heard $40 return. But none of those firms are helping you with income tax. And income tax is, if you can get an income tax return filed for your LLC for under 1,000 bucks, I’m not sure I would, but possibly, and then if you can get another one filed for you personally, I’m not sure I would, but then now you got to do this in like every state.
So, now all of a sudden your local CPA needs to know the difference between how to apportion franchise tax versus income tax. In Mississippi you do pay both, one’s a network tax, one is an income based tax, and indeed there’s differences or nuances to that. And is your local CPA in California supposed to know that or are you going to now have to go to — yeah, and that’s a burden. So what are you supposed to do? So that goes to the burden. I don’t know if you know this, but I actually just had somebody reach out to me the other day, not an Amazon seller, just somebody who had no idea that the California LLC is actually an $800 minimum fee. And then there’s the gross receipts tax on LLC, which is up to I think it’s $12,000, it’s in space on your gross revenue and there’s a portion to the state.
So California sales relative to other states, basically, if you would take a fraction of your California sales overall sales and multiply by gross receipts, if it’s $5 million or more, you’re paying 12,000, if it’s less than 5 million, you’re paying 6,000, it’s a scary thing. So yeah, I mean, having an LLC and registering in California has a ton of problems, and most people who register now who just kind of register the entity that they’ve been doing business with the last five years are getting hit with the back tax problem too. They want us to go back eight years.
Mike: And we had that problem quite frankly. I mean, this is before we moved to California, before we were doing anything in e-commerce, they’re incredibly aggressive. And the way we found out about it was they took money out of our bank accounts. We didn’t even know this was going on because they were mailing stuff to an address that didn’t even exist anymore. And we finally got in touch with them. And they agreed that we didn’t owe them the money, that it was a mistake. But their position was we’ve already taken the money and according to California law, if you don’t appeal it by a certain point in that process, then they’re not giving you the money back. So that’s the kind of stuff if you work with these states, I mean, it’s just crazy.
But I digress like I’ll get myself back on track. This is a great segue because you mentioned this lawsuit probably. We hadn’t really kind of set up the stage of like what we’re trying to do here. So, let’s talk about that, and why Online Merchants Guild is so important for everyone listening to like help contribute to this thing. The first thing I do want to say like right off, first off out of the gates, this is a true nonprofit. But the only reason I agreed to even be a part of it like I mean I know I’m not looking to make anything out of it, Bernie is not, Paul is not even getting paid for crying out loud at least at this stage. He’s doing it kind of pro bono to start with here because we don’t have the funds to do it otherwise.
Completely transparent set of books and records will be published every year. No salaries of any kind or benefits of any kind to us. I mean, my thought for this is we have a platform, we have a voice, and I feel like an ability to spread this message and help the overall community. And I guess my own personal view on it and greed, looking at it from my own personal benefit, this is still going to be a cheaper endeavor than if a state or a group of states came after us. Because I put five figures into this thing to help contribute to get this thing off the ground and so did Bernie, but that’s a drop in the bucket compared to what it would cost to — even if you’re right you’re wrong, because just to hire counsel and fight a state, the starting point for that is much higher.
So our goal here is to raise mid six figures over the next few months, and we’re in the process right now, and by we I mean Paul has been the one spearheading this. I’ll give you a chance to talk about here in a second Paul, but is to is to file lawsuits on behalf of Online Merchants Guild and all of the people that are a part of it, basically all e-commerce sellers, to say that this is truly an undue burden. I mean, it’s at a point where I mean, to me it’s incredibly depressing. I mean I don’t talk about this stuff on the podcast a whole lot, because I’m a pretty positive person.
And I don’t really get bummed much, but I realized that what we’re up against as a small business, if something doesn’t change is basically impossible. And all the effort I put into this business over the last many years is going to be for not if we have to comply with 45 states rules and regulations, sales tax, franchise tax, income tax, etc. I mean, it is ridiculous because we truly especially this is mostly an Amazon seller and that’s another whole side story like shouldn’t even be caught up in the crossfire of this at all. So Paul in your words as talking more in legal ease and what we’re trying to accomplish here what you’re trying to do over the next four to six weeks, eight weeks, what you hope is a best case outcome and what it’s going to cost and why we need people’s support to be able to do this.
Paul: Sure. So you’re right, I mean our organization exists to take action. I mean that’s what people have to understand first and foremost. And that’s pretty much where every dollar we’re raising right now, I mean our operating expense like you said, I mean, this is an important case to me as a state tax professional, as a law professor who teaches constitutional law and state taxation. This is a really important case and I want to be a part of it. That’s all I care about. I don’t need to be paid for this. This is my monumental, this is a huge issue. And so we need to take action now and that’s it.
And state tax case as you mentioned, Bernie mentioned before my background, I was state tax litigation for Microsoft, Wal-Mart, GE, state tax cases are winnable. I mean, obviously I can’t guarantee we’re going to win, but state tax cases are very winnable. States make really stupid cases and they do very stupid things, and it’s just up to the taxpayer to call them out on it. And that’s no issue when the taxpayer is a multibillion dollar company, and that’s typically where most state and the whole tax cases lie is in that space. But here we have this issue. The big companies really don’t care because they’re not selling on Amazon, and if they are they’re probably collecting the sales tax anyway.
So, it really kind of bypass where the lobbies of pro tax, pro taxpayer lobbies of the big corporations in the state tax world really just kind of ducked on this one because they didn’t really need to address it and that came hitting us head on, and we have no lobby looking out for us, no advocacy looking out for us. And so that’s where this comes in. So, how are we going to look out for you? We’re going to file a lawsuit; we’re going to seek a declaratory judgment. Basically what we’re trying to do is we’re going to tell the states, they just need to stop, sort of like an injunction. I guess you might have people who know that word, and we’re going to file it hopefully in federal court. There’s some challenges there, but I think we can get around it.
I’d like to see all the states. I think we’re going to see a lot of states at once and enjoined to the complaint. And I think the plan is basically is we’re just going to basically bring that constitutional argument that the Supreme Court Wayfair said we could bring, right? Taking a step back to Wayfair, the court was very clear at the end of the decision, this was a substantial Nexus case rule. To determine the validity, the constitutionality of the state tax is another court case most people don’t know, which is complete out of [inaudible 00:29:47] which is sort of the whole world of state tax rests on [inaudible 00:29:53] which is a four part test. Substantial Nexus fairly apportion non discriminatory and rational related.
And Wayfair just deals with the first part of that tax. So, we saw a lot of statements we get to argue and bring in and need to bring forward. And I guess I can’t guarantee results, but I’m optimistic. We wouldn’t be doing this if we weren’t optimistic that we have a really good fight here that needs to be brought. And so, that’s what we need people to do it. And the cost, lawyers aren’t cheap. I mean, I have my own reasons for wanting to do this. I just think it’s an important case. But to hire a team of litigators and lawyers and spend all that time to prep, to research, to write briefs, to sue a lot of states at once, I mean, that’s not cheap.
And so, we could be talking in the hundreds of thousands of dollars probably two to three in this case because of the federal court aspect. Normally a case like this and like the cases I would bring when I was in Microsoft in California, it’s a million dollar lawsuit easily won. So, we are kind of getting a deal in a sense that I think our federal courts could pan out, or you might have a way to shortcut things just through the way that our case is different than other typical state tax cases. But it’s still a lot of money and it’s we need to raise that money.
And we’re not going to be able to do it unless people join and unless people really look at their own situation and say, do I want to spend 100,000 of my own dollars to defend myself against one state like California, or do I contribute at the appropriate level to Online Merchant Gild and join and collectively have the best legal defense I probably couldn’t afford on my own?
Mike: Yeah, well said. So, I want to use the last couple of minutes as we’re running short on time, we try to keep these at 30 minutes. So I want to spend the last couple of minutes walking through at least at a high level, we’re going to sue some states, and it’s it sounds crazy, right? I mean, I remember like I was talking to you about this. I’m like, come on, man. Like we’re going to sue a state and actually get them to change this. And you definitely convinced me like over time talking to you about it.
So, again and it is just a super high level like what is the lawsuit? We’re obviously going to — we’re picking at least 30 states, we’re going to try to get to 45 just to get all the named. This is Online Merchants Guild versus the state of California and Nevada, Utah, whatever blah, blah, blah. What is the synopsis of the brief, like what is it that we’re suing for there?
Paul: Sure. So we’re actually going to sue. When you sue a state in the tax case, you actually sue the commissioner or director or whatever they call it in the state. So, thinking of the Supreme Court case actually about tax lawsuits in federal court called the Direct Marketing Association to be Brawl which actually is the reason you have the WayFair case. It’s actually an interesting case to read because it’s Judge Justice Kennedy’s components that led to Wayfair. And so Brawl being the last Name of the director of the Colorado Department of Revenue.
So, we’re going to be suing the commissioners in their official capacity as the head of these organizations, and basically we’re going to sue them for declaratory judgment relief, which basically means that they have to stop what they’re doing. And we’re going to say, the reason why they have to stop what they’re doing is because the burden they’re placing on you, that feeling of depression and sadness we’re all feeling because we don’t even know what to do about our business.
That burden on interstate commerce is too much. And that there’s serious alternatives the states have to administer the tax code such as making Amazon collect, right? I mean, Amazon, we’ve already had two states enact and actually are actively collecting on behalf of Amazon sellers, Washington and Pennsylvania. That was done without Wayfair. They didn’t need Wayfair. So, there’s a remedy out there where the states could basically substantially reduce the burden on Amazon sellers, on eBay sellers, and any other platform sellers by basically putting the burden on the marketplaces.
And it seems like under our commerce clause cases, which really aren’t past cases, Pike versus Bruce Church being kind of the leading case that comes to mind, that it really isn’t appropriate for the states to put this massive burden that’s going to crush small businesses, that’s going to destroy the Amazon or online merchant community, not just Amazon as a whole, and when they have this sort of really obvious alternative, which is much more efficient way to administer the tax code. Oh, and it happens to be the state laws written by the way, so we’re actually also telling them this is actually what the state law says.
Mike: They’re supposed to do, right?
Paul: Because Amazon is actually a retailer. And so that’s kind of the point of it just to kind of, it’s going to be — a lot of it is going to be a shame on you for the states really. I mean, we’re pointing out really their inconsistent behavior and their just hostility towards — we’re an industry, we’re a community of people that are — entrepreneurs are the future of this country, and this is what we want our country to be. We want people to learn how to fend for themselves and how to become successful. And why would you want to deter that? And it seems the only people in the world that want to like put a stop to that are the states for their tax administration purposes, they can get the tax other ways.
So, that’s sort of the nature of what this is about. We’re just saying this is shame on you states. You have a remedy, go collect from Amazon. I don’t care what politics you have with Amazon, I don’t care what Amazon, and you agreed to in determining where the warehouse is going to go. It’s irrelevant. That doesn’t give you the excuse to go after all of us as individual sellers and make it impossible for us to be small businesses, right? You can’t do that.
Mike: Yeah. I think one of the biggest ironies here, you mentioned politics I mean, the clear and political [inaudible 00:35:41] is to make things more equal and fair for American businesses. But this whole Wayfair case and some of the stuff we’re talking about today is even a bigger undue burden for businesses because Chinese sellers or international sellers can give too. I’ll throw in a swear word there; imagine what that word is about these laws. So, they’re not having to worry about collecting sales tax. And if other sellers within the US are having to worry about that, that’s even more unfair a bigger unfair burden as well if it doesn’t get done at the platform level.
Paul: Right exactly. If every American in the world is collecting sales tax, you just opened the door for Chinese sellers or other foreign country sellers to basically sell products tax free. So, I mean you really just shift the focus to the next level which is the international sellers, so you’ve accomplished nothing by doing — so the states yeah I mean, it’s another example of how this burden is unreasonable. It doesn’t even accomplish the mission where door number two is instantaneous leveling of the playing field. You seem reluctant to do that every time which is a little concerning and shady, but I won’t go there, but it’s what you have to do if you want to collect the tax. You can’t destroy industry, you can’t destroy an economy.
Bernie: Yeah, one of the reasons I feel so strongly about this, I’ve contributed financially, tried to contribute time without compensation back is because this is kind of we’re making an argument that actually in the end is in everybody’s interest. The states in their narrow kind of tax revenue interest and out of political expediency of not wanting to take on big players have made this decision to really kind of go after millions of small businesses with their tax policy. But if the United States becomes a place where starting a business requires 45 states worth of tax complexity, tax forms, tax audits, it’s going to kill entrepreneurship in America.
And interestingly, it’s going to kill it for all the entrepreneurs in all those states. Basically, the states are going to kill each other in terms of the entrepreneurs in their states by acting in their kind of narrow, parochial interest. So, we’re really helping these states. We’re really helping them to make sure that their small business community is vibrant and that other states will not be killing off the small businesses in their states. And then, interestingly, the same thing with Amazon, Amazon and these marketplaces, collecting and remitting sales tax is complicated. It is inherently complicated. The rules are constantly changing, there’s a lot of work involved.
And if from a tax collection point of view, that burden is placed on the marketplaces and small businesses in a sense have to work through marketplaces in order to sell, in order to stay tax compliant, that’s a huge competitive mode for those marketplaces. If the states basically say, well, Amazon sales tax must be collected and if you’re selling on a platform like Amazon, Amazon has to collect it. But if you kind of go on your own and sell then maybe the burden is on you well heck, that would be a world where that’s hugely beneficial to Amazon because basically now Amazon will have locked out all the small players who can’t afford to put in place systems to deal with 50 states, and all the small guys have to work through the marketplaces.
So, and then that level playing field issue that if you have kind of leaky laws and you have states trying to enforce things at the state level, well guess what, just like Mike said, this is global commerce, you’re just going to have Chinese sellers, you’re going to have people from other countries who are selling and shipping into the US. And without federal help the states are have no way to reach these companies and they don’t today, there’s no federal help today. So you basically you’re saying, well, let’s put all the honest American businesses out of business, and hand this handy commerce to people forward sellers outside the US.
So, there’s a — from every perspective you look at this, we have enormous good that we can do together but the crazy thing is no one else is actually getting the word out here and is making these legal arguments that need to be made to kind of make the right thing happen through the court system. And that’s why what OMG is doing is so important and needs more resources and more help than it currently has. Even though we have huge momentum, we actually need about 10X the momentum to really kind of take this the whole way to the end game.
Mike: Yeah, well said my friend. And that’s probably a great place to end it because we’re way behind. I will mention just kind of my pitch; I’m bad at this because I’m not a fundraiser kind of guy. But go to OnlineMerchantsGuild.org. We have all the different misspellings, onlinemerchantsguild.org and onlinemerchantsguild.com, but the official website is OnlineMerchantsGuild.org. Make a contribution and sign up there. We have different levels based on your revenue.
I think that again, it’s a small fraction to pay versus what it would cost if you were trying to do this on your own as Paul mentioned. And we can definitely use your support. The money will all go towards fighting this cause. There will be no company sponsored or organization sponsored golf trips or first class tickets or…
Mike: Lambos or any of those kinds of crazy things you hear about on the new. This is one of these rare organizations where 100% of the proceeds will be used to hire lawyers and fight this cause. We have our own businesses that can support our lambo habits for other things, but and it’s all going to be like I said, it’s all public. We used — I forgot the classification, I’m not a tax guy. I believe I got the class was a 5013B or C or…
Paul: We applied for C six status which will get — which means our records will be public. We will have to file a public record. And check out our FAQ too on our front page, all the tax stuff, a lot more details on the FAQ on the front page of OMG.
Mike: Even if you just send us an email and let us know you support us in some other way. Anything you could do to help is definitely appreciated, so OnlineMerchantsGuild.org. Bernie and Paul, thank you guys so much for your time as always, for coming on here and doing your best to explain all this stuff, and in a short amount of time, and taking time away from your business and your lives.
Bernie: Awesome, thanks Mike.
Paul: Absolutely thank you.
Mike: Thanks guys.
And that’s a wrap folks. I hope you guys enjoyed the 178th episode of the EcomCrew Podcast even though it’s kind of a heavy topic, something that we don’t enjoy talking about or thinking about. But nonetheless, this is not something we can just go bury our head in the sand about and hope it gets better. There are 45 jurisdictions out there all figuring out how things are going to be going moving forward. They are all doing things in different ways and different regulations, and very difficult for us small businesses to comply or even know what the heck is going on until you get a knock on the door, or a letter in the mail that something is not going right.
So, as another reminder, you can go to EcomCrew.com/170 to get to the show notes for this episode. But what I really hope you guys go do is go to www.OnlineMerchantsGuild.org and pledge your support for our organization and hopefully, together we can make some real progress with this issue. And until the next episode everybody, happy selling, and we’ll talk to you then.
Michael started his first business when he was 18 and is a serial entrepreneur. He got his start in the online world way back in 2004 as an affiliate marketer. From there he grew as an SEO expert and has transitioned into ecommerce, running several sites that bring in a total of 7-figures of revenue each year.