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Unlawfully Collecting CA Sales Tax on Prime Membership


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Initial post: Oct 11, 2012 12:49:06 PM PDT
Last edited by the author on Oct 11, 2012 1:15:20 PM PDT
So Amazon added CA sales tax (after I approved only the $79) to the Prime Membership fee. After inquiring with cust service I got a very general answer that 'Prime Membership is considered a taxable service in CA'. So I called the CA FTB and explained all the benefits of Prime and the tax specialist could NOT find it taxable (ref Regulation 1584. MEMBERSHIP FEES. Sec 6011.1, 6012, and 6012.1, Revenue and Taxation Code.) She said I would have to make a claim with Amazon. I see a class action lawsuit...do you?!?

UPDATE: Amazon's Tax Department is going to call me in 1 to 2 days...will let you know the result.

In reply to an earlier post on Oct 12, 2012 10:06:42 AM PDT
King Al says:
Why bother with the lawsuit unless Amazon fails to offer refunds? Lawyers will just get 80% of the cut.

In reply to an earlier post on Oct 12, 2012 10:45:54 AM PDT
Yeah, I hate the whole class-action mechanism for that reason also-- the people get a coupon, the attorney's millions and the company writes a check as just another cost of doing business. I asked for a refund and the CS agent said he couldn't do it. The back story here is how amazon cut a deal with CA for a cut of the taxes at the expense of their customers. Not exactly building "Earth's Most Customer-Centric Company". I can make the $6 back in a lot less time it takes to fight this--- the point of shining a bigger light on the problem is to let company's know they can't say one thing and do the opposite. What would be worse is for Amazon to take the blood money and only have to refund (pay off) those that call them on it rather than make a global fix.

In reply to an earlier post on Oct 12, 2012 10:50:01 AM PDT
King Al says:
Not quite. Amazon is planning on building many distribution centers in order to speed delivery. Since that would definitely constitute a physical presence in the state, Amazon would then be required to collect the sales tax.

In any case, it is fairly likely that ALL online retailers in this country will be required to start collecting sales tax within the next several years.

In reply to an earlier post on Oct 12, 2012 11:11:08 AM PDT
Last edited by the author on Oct 12, 2012 11:18:30 AM PDT
"Not quite" is right... collect the tax BEFORE the nexus? Is that how the tax law is written...has a nexus or will some day?. To be clear, my argument has nothing to do with a tax on tangible goods, They taxed a membership fee that the tax specialist AT THE BOARD OF EQUALIZATION could not find a basis for. Apparently Amazon is so giddy over the idea of tax as a new source of revenue everything is now taxable.

In reply to an earlier post on Oct 12, 2012 11:33:42 AM PDT
King Al says:
If you meant non-tangible services, then you are correct.

However, you also referred to tangible goods when you stated "The back story here is how amazon cut a deal with CA for a cut of the taxes at the expense of their customers". That is not "at the expense of their customers" because you were already legally required to pay the sales tax when you filed your state income tax return.

Posted on Oct 12, 2012 2:10:10 PM PDT
There are many exclusions to having to file state income tax returns (not everyone has to) so it is false to say that 100% of the tax collected by Amazon = the amount the state would be entitled to collect via the sales and use tax code provisions.

Just got the same form letter back from customer service 'tax dept' I got the first time: They didn't even read my inquiry requesting the basis... i.e. what is the tax code regulation that makes it taxable.

In reply to an earlier post on Oct 12, 2012 10:31:10 PM PDT
You might want to read this:
http://www.boe.ca.gov/pdf/pub100.pdf

>>>>
So I called the CA FTB and explained all the benefits of Prime and the tax specialist could NOT find it taxable (ref Regulation 1584. MEMBERSHIP FEES. Sec 6011.1, 6012, and 6012.1, Revenue and Taxation Code.)
<<<<

You see, this is where syntax becomes very, very important.

You described it in a way that makes it sound like it is something different than it is. The entry-level worker who answers the public contact line is, 1) Not empowered to make a ruling, and 2) Only knows what you told them. And they don't know what further questions to ask to clarify what you told them. (Plus, I'll bet you were describing Prime based on how it is marketed, not by the terms of the Prime contract.)

Prime is a lot of things, but it is primarily a pre-paid handling charge. And it only has to be partially a pre-paid handling charge for the whole price to be taxable. To be non-taxable it has to be ENTIRELY non-taxable, not just partially non-taxable.

So Amazon's tax department gets your opinion that it is non-taxable based on you relaying a casual conversation with a front-line public contact agent at the FTB. They weigh that against what their inquiry to the FTB that was answered by their attorneys. Which opinion do you think carries more weight?

Do I see a class action suit? No. I don't. Not unless you find some bottom of his class attorney who barely passed the bar on his fifth try who's got a financial backer so he could go into private practice instead of being closely supervised at a larger law firm who thinks that getting his name in the paper is worth it even if he gets shot-down, and rebuked very early in the process. Good luck finding that doofus. But it won't change a thing.

You're going to have to face that your idea that the price of Prime is non-taxable in California has about as much to it as the idea that Federal income tax is void because of a technical issue with Ohio's statehood. File it away with all the other goofy stuff people conjure-up in a vain attempt to avoid taxes.

>>>>
"Not quite" is right... collect the tax BEFORE the nexus?
<<<<

Amazon has had a nexus in California for years. They have offices for their Kindle group in the Silicone Valley, and they have offices for IMdB in the Los Angeles area.

Amazon wanted to claim that because those business units were separate companies, that they didn't count as a nexus. But if it were that simple, WalMart, Target and the rest would have simply re-organized their business units to make walmart.com and target.com separate companies from the B&M stores. Of course that wouldn't work.

So Amazon and the State of California were about to engage in a court case that the State couldn't afford to bankroll even though they'd win, and Amazon, while they had the money to delay the outcome, wouldn't be able to avoid the inevitable outcome -- or the possibility of not just having to pay back-taxes, but a possible penalty for willful misconduct.

Thus the State and Amazon came to an agreement that Amazon would start doing their duty, not admit to any wrong-doing, and not have to pay back taxes or penalties, and the State saved the cost of the prosecution.

Posted on Oct 13, 2012 11:47:22 AM PDT
Nice summary. Doesn't address Sec 6011 in the tax code regarding membership fees though. Here is the reg: http://www.boe.ca.gov/lawguides/business/current/btlg/vol1/sutr/1584.html

In reply to an earlier post on Oct 13, 2012 12:13:59 PM PDT
>>>>
Doesn't address Sec 6011 in the tax code regarding membership fees though.
<<<<

I'll call your attention to the following:

==========
(A) the retailer sells its products only to members and the membership fee exceeds a nominal amount,
or
(B) regardless of the amount of the membership fee, the retailer sells its products for a lower price to a person who has paid the membership fee than to a person who has not paid the fee.
==========

Anyone can shop at Amazon. You don't need Prime. And people with Prime do not pay a lower price. It primarily is one of a number of choices for shipping and handling fees. And while shipping is non-taxable in California, a shipping and handling fee IS taxable, even if it is pre-paid in anticipation of future orders.

The price of Prime is NOT a membership fee.

Don't mistake the marketing of Prime for what it really is. American Express used to market their credit cards as if having one made you a member of an elite group. "Membership has its privilege." But rest assured, their annual fee is a credit card fee, not a "membership" fee.

The bottom line is that Prime is not a membership as described in the regulation.

Posted on Oct 13, 2012 5:21:49 PM PDT
Which is exactly what the auditor at CA BOE said yet Amazon keeps spouting this un-cited inaccurate crap that it is taxable in CA. What bugs me is how people say "Oh, it's taxable now" without wanting anymore proof. So my question is..how do I get in on this and create my own 'Jeff tax" since people apparently just roll over as long as you call it a tax and say they have to pay it.

In reply to an earlier post on Oct 14, 2012 12:11:56 PM PDT
I'll try this one more time: Prime is primarily a choice for shipping and handling. The only component that could, under any conditions, be non-taxable is the shipping component. But since the shipping component is not stated separately in the price of Prime, and even if it was, could not be directly related to the amount actually invoiced to Amazon by the carriers, it is taxable.

We're not talking about membership fees. We're not talking about shipping charges that are non-taxable. We're talking about a fee that is taxable.

You can leave out details, or misrepresent the entire program based on how it's marketed, or how you happen to use it or view it. But the bottom line is it is taxable in California.

In reply to an earlier post on Nov 27, 2012 2:57:59 PM PST
J. Lew says:
Did Amazon ever contact you back? I'm curious to know what Amazon's Tax Dept has to say about what you found out from CA Franchise Tax Board.

In reply to an earlier post on Nov 27, 2012 3:23:09 PM PST
I got stuck in a loop with each request and escalation. Always the same canned email statement that 'The State of CA has determined it is taxable'... no one ever called as requested by me and noted in the account nor would I get an email address that was a person (not a no-reply).

Posted on Nov 27, 2012 3:26:59 PM PST
J. Lew says:
I wonder if a news agency would pick up on this. I always thought that membership fees or services were not taxable. I don't recall Costco charging tax on their membership fees.

In reply to an earlier post on Nov 27, 2012 4:31:19 PM PST
Although there are numerous issues this raises no one really passes the sound bite test and the combination is too long a walk. I was fascinated to find out the Board of Equalization has no provision to refund tax improperly collected by one of their agents (eg: Amazon, the local hardware store, etc) directly to the offended party . I had a battle with Oracle Corp years ago collecting tax on service contracts-- After verifying with BofEq this was invalid I short paid the Oracle invoice the $10k tax on $120k contract. Eventually they stopped trying to collect it AND fixed their invoicing each year thereafter so as not to charge tax but I had a big lever.

Posted on Nov 27, 2012 8:21:55 PM PST
Once again, try reading the laws.

*We* may call Prime a "membership". *We* may consider it shipping. Amazon may even use those terms, too.

But when you look at what Prime really is under the definitions of the State of California, you will see that Prime is taxable.

Posted on Jan 17, 2013 9:04:13 AM PST
guccilizzy says:
I used to work in Sales Tax. Regulation 1584 is pretty clear. It states:

Membership fees related to the anticipated retail sale of tangible personal property are includible in taxable gross receipts when either

(A) the retailer sells its products only to members and the membership fee exceeds a nominal amount,

The nominal amount is below the membership fee amount. Therefore, it is taxable now that Amazon is subject to collecting CA sales tax.

You will not win a lawsuit for this.

In reply to an earlier post on Jan 17, 2013 10:39:07 AM PST
Two be comprehensive, lets put both tests up on the board:
(A) the retailer sells its products only to members and the membership fee exceeds a nominal amount,
or
(B) regardless of the amount of the membership fee, the retailer sells its products for a lower price to a person who has paid the membership fee than to a person who has not paid the fee.

Which products does Amazon sell either only to Prime Members or at a lower price to Prime members?

In reply to an earlier post on Jan 17, 2013 12:15:17 PM PST
King Al says:
The free/discounted shipping?

In reply to an earlier post on Jan 17, 2013 12:43:59 PM PST
>>>>
Regulation 1584 is pretty clear.
<<<<

I agree. It is very clear.

But it apparently isn't clear to people who had a false preconception about membership fees, and are hoping that it says something different.

The idea that Amazon unilaterally decided to collect sales tax if it wasn't clear that they had to is pretty far-fetched. Amazon has made it clear that they don't want to have to collect sales tax if they don't have to, so if there was any question at all, they certainly would have had it answered by a state official. And considering their size, not just an entry-level person answering the phone in the call center.

The law is pretty darn clear, even if some folks don't want to believe it.

In reply to an earlier post on Jan 17, 2013 1:33:22 PM PST
Shipping is a Service, Not a product. And certainly not a taxable product so quite a stretch to say a Membership Fee which entitles the member to discounted non-taxable services would meet the test of 1584. (1584 doesn't say 'sells its products and/or services'...just products).

In reply to an earlier post on Jan 17, 2013 1:41:16 PM PST
Remind me again which test (A or B) you believe the Prime Membership Fee meets? You stated that it meets the second half of A: ' membership fee exceeds a nominal amount'. You didn't say how it met the first part about selling products only to members. You say it is clear-- then clearly state which products are only sold to prime members?

In reply to an earlier post on Jan 17, 2013 1:43:02 PM PST
I've bought nothing but products from Amazon. I haven't bought any services.

They give me service to deliver products, but they don't sell services.

Prime is also much more than shipping. It is not simply a pass-through of the shipping charges that the carrier charges Amazon. It involves handling. It sometimes involves mailing instead of shipping, too.

There really is no question under California law that Prime is taxable. In other states, it may not be. But in California, there is no gray area. It is undeniably taxable.

In reply to an earlier post on Jan 17, 2013 2:02:16 PM PST
Warren, your post reminded me of an experience I had with my attorney years ago. He opened a document from opposing counsel and immediately started scanning thru and highlighting sections. I asked what he was highlighting and he said "I don't know yet-- right now I'm highlighting all the sentences with 'Clearly' and 'Obviously' and 'Certainly' and 'No Question' because those are where their weakest, most unsupported arguments will be.

So finish these statements with your own experience: Just the other day I received (Product A) from Amazon. I could not have purchased (Product A) from Amazon unless I was a Prime Member. Since I am a Amazon Prime Member, the purchase price for (Product A) was less than if I was not a Prime Member.
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