ONLINE MERCHANTS GUILD V. NICOLAS MADUROS

• Court: Court of Appeals for the Ninth Circuit
• Decided: November 9, 2022
• Docket: 21-16911
• Status: Published

Opinion

FILED FOR PUBLICATION NOV 9 2022 UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS

FOR THE NINTH CIRCUIT

ONLINE MERCHANTS GUILD, No. 21-16911

Plaintiff-Appellant, D.C. No. 2:20-cv-01952-MCE-DB v.

NICOLAS MADUROS, Director, OPINION California Dept. of Tax & Fee Administration,

Defendant-Appellee.

Appeal from the United States District Court for the Eastern District of California Morrison C. England, Jr., District Judge, Presiding

Argued and Submitted October 20, 2022 San Francisco, California

Before: S. R. THOMAS and M. SMITH, Circuit Judges, and MCSHANE,* District Judge.

Opinion by Judge Sidney R. Thomas

* The Honorable Michael J. McShane, United States District Judge for the District of Oregon, sitting by designation. SUMMARY **

Tax Injunction Act

The panel affirmed the district court’s dismissal of a federal lawsuit in which the Online Merchants Guild, a trade association for e-commerce merchants, sought to enjoin California’s requirement that its members obtain seller’s permits from the state to facilitate sales tax collection.

Guild members sell products as third-party merchants through Amazon’s “Fulfilled by Amazon” (“FBA”) program. Before October 2019, California required FBA merchants to collect and pay sales tax on sales to California residents. California’s Marketplace Facilitator Act altered that requirement. Since October 2019, “marketplace facilitators” like Amazon have had the burden of collecting and remitting the sales and use taxes on sales facilitated through programs like FBA. However, the Marketplace Facilitator Act is not retroactive and the Department continued to seek sales tax remittances from third-party FBA merchants for pre-October 2019 sales.

The Guild’s lawsuit claimed that the California Department of Tax and Fee Administration’s tax collection efforts against Guild members violated the Due Process, Equal Protection, Privileges and Immunities, and Commerce Clauses of the United States Constitution, as well as the Internet Tax Freedom Act, 47 U.S.C. § 151. The district court granted the Department’s motion to dismiss, holding that the Guild’s claims were barred by the Tax Injunction Act (“TIA”), 28 U.S.C. § 1341. The district court also noted that it should abstain from addressing the Guild’s claims under comity.

The panel held that the district court properly dismissed the action pursuant to the TIA, which bars federal jurisdiction over the Guild’s claims because the Guild seeks an injunction that would to some degree stop the assessment or collection of a state tax and an adequate state law remedy exists.

** This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader. COUNSEL

Aaron K. Block (argued) and Max P. Marks, The Block Firm LLC, Atlanta, Georgia, for Plaintiff-Appellant.

Michael Sapoznikow (argued), Deputy Attorney General; Molly K. Mosley, Supervising Deputy Attorney General; Tamar Pachter, Senior Assistant Attorney General; Rob Bonta, Attorney General of California; Office of the Attorney General, Sacramento, California; for Defendant-Appellee. S. R. THOMAS, Circuit Judge:

In this appeal, we consider whether an association of e-commerce merchants

may sue in federal court to enjoin California’s requirement that its members obtain

seller’s permits from the state to facilitate sales tax collection. We conclude that

the Tax Injunction Act (“TIA”), 28 U.S.C. § 1341, precludes the exercise of federal

jurisdiction, and we affirm the district court.

I

The Online Merchants Guild (“Guild”) is a trade association for e-commerce

merchants. Hundreds of Guild members sell products as third-party merchants

through the e-commerce company Amazon’s “Fulfilled by Amazon” (“FBA”)

program. When a customer purchases a product on Amazon provided by an FBA

merchant, Amazon collects payment, and after charging a commission for the sale,

credits the payment to the merchant’s account. The goods are therefore ostensibly

sold by the third-party merchant, but “fulfilled by” Amazon.

Appellee Maduros is the Director of the California Department of Tax and

Fee Administration (“Department”), which, among other responsibilities, enforces

California’s sales and use taxes. Cal. Rev. & Tax. Code §§ 20, 6003, 6004, 7051.

Before October 2019, California required FBA merchants to collect and pay sales

tax on sales to California residents. California’s Marketplace Facilitator Act, 2019

3 Cal. Stat. ch. 5, § 1 (A.B. 147), altered that requirement. Since October 2019,

“marketplace facilitators” like Amazon have had the burden of collecting and

remitting the sales and use taxes on sales facilitated through programs like FBA.

Cal. Rev. & Tax Code §§ 6042, 6043. However, the Marketplace Facilitator Act is

not retroactive and the Department continued to seek sales tax remittances from

third-party FBA merchants for pre-October 2019 sales. Id. § 6049.5(a).

Anyone selling goods in California must pay sales tax. Id. §§ 6014, 6051,

6066. The taxpayer for the sales tax is the seller themselves, who may pass the tax

along to the consumer if they wish.1 Id. §§ 6051, 6901.5. The first step in

remitting collected sales tax to the state is to apply for a “seller’s permit.” Id. §

6066. After a permit issues, sellers are assigned an account number, which is used

to process the quarterly returns remitting the sales tax that sellers must file. Id. §§

6066.4, 6051, 6452(b), 6454.

1 The use tax, on the other hand, is an excise tax “imposed on the storage, use, or other consumption in [California] of tangible personal property purchased from any retailer. Cal. Rev. & Tax Code §§ 6015, 6201. The taxpayer for the use tax is the consumer, not the retailer, although retailers must collect and remit the use tax on behalf of the consumer. Id. §§ 6202(a), 6203(a). Property for which sales tax is collected is exempted from the use tax. Id. § 6401. 4 Failure to register for a required seller’s permit is a misdemeanor punishable

by a fine of $1,000–$5,000 and up to a year in jail. Id. §§ 6071, 7153. More

serious violations of the tax code result in felony punishment. Id. § 7153.5.

As part of its efforts to collect sales tax, the Department sent notices to Guild

members informing them that they must obtain seller’s permits. The notices also

inform the recipient of the criminal penalties for violating the tax code. See id. §§

6071, 7153, 7153.5. These “registration demands” and “penalty threats,” as the

Guild labels them, are the subject this appeal.

In September 2020, the Guild filed suit in the Eastern District of California

claiming the Department’s tax collection efforts against Guild members violated

the Due Process, Equal Protection, Privileges and Immunities, and Commerce

Clauses of the United States Constitution, as well as the Internet Tax Freedom Act,

47 U.S.C. § 151. The complaint alleges injuries from both the registration

demands and the Department’s broader policy of collecting taxes on FBA sales

from Guild members rather than Amazon. The Guild claims that Amazon should

collect and pay all sales and use tax on products sold through the FBA program

because of Amazon’s extensive control over how the products are stored,

marketed, sold, and shipped. The Guild seeks declarative and injunctive relief and

requests damages, costs, and fees.

5 The Department moved to dismiss the complaint for lack of jurisdiction

pursuant to the TIA, as well as the principles of comity and abstention.

The district court granted the motion to dismiss, holding the Guild’s claims

were “clearly barred” by the TIA because they did not “fall within the exception to

the TIA for ‘information gathering’ activity.” The district court also noted it

“agrees that it should abstain” from addressing the Guild’s claims under comity.

The Guild timely appealed.

The Guild appeals only the dismissal of Counts 2, 4, and 7 of the complaint,

which it construes as challenging the registration demands and penalty threats and

not the taxes themselves.

II

The district court properly dismissed the action pursuant to the TIA. Under

the TIA, “district courts shall not enjoin, suspend or restrain the assessment, levy

or collection of any tax under State law where a plain, speedy and efficient remedy

may be had in the courts of such State.” 28 U.S.C. § 1341. The TIA “was

designed expressly to restrict ‘the jurisdiction of the district courts of the United

States over suits relating to the collection of State taxes.’” Hibbs v. Winn, 542 U.S.

88, 104 (2004) (quoting S. Rep. No. 1035, 75th Cong., 1st Sess., 1 (1937)). “[I]n

enacting the TIA, Congress trained its attention on taxpayers who sought to avoid

6 paying their tax bill by pursuing a challenge route other than the one specified by

the taxing authority.” Id. at 104–105. However, the TIA does not preclude all

challenges to state taxation.

We hold that the TIA bars federal jurisdiction over the Guild’s claims

because the Guild seeks an injunction that would to some degree stop the

assessment or collection of a state tax and an adequate state law remedy exists.

A

In order to determine whether the TIA bars the Guild’s claims, we must first

characterize those claims. Id. at 99. In doing so, we must identify the “relief

sought.” Direct Marketing Association v. Brohl, 575 U.S. 1, 7 (2015).

In its complaint, and on appeal, the Guild characterizes its claims as

challenges to the Department’s registration demands and penalty threats—the

imposing letters Guild members received informing them of their duty to obtain a

seller’s permit. But the relief the Guild seeks is not so limited. The Guild seeks

“injunctive and declaratory relief . . . to remedy the Department’s violations of law

and to vindicate the constitutional rights of the Guild and its members and to

prevent irreparable injury to the interstate economy.” Placed in context with the

registration requirements the Guild challenges, the relief sought here is injunctive

7 and declaratory relief preventing the Department from enforcing the requirement

that Guild members apply for a seller’s permit.

B

The TIA precludes suits in federal court where the requested relief would “to

some degree stop” the assessment or collection of a state tax. Direct Marketing,

575 U.S. at 7. Relieving Guild members of the duty to obtain seller’s permits

would prevent the remittance of sales tax. The Guild’s suit is therefore barred by

the TIA.

No party disputes that applying for a seller’s permit is the first step in

reporting and paying sales tax. After obtaining a permit, sellers are assigned an

account number, which is used to process the quarterly returns remitting the sales

tax that sellers must file. Cal. Rev. & Tax Code §§ 6066.4, 6051, 6452(b), 6454.

In other words, Guild members cannot remit the sales tax they are required to

collect under California law without obtaining a seller’s permit. The relief the

Guild requests would therefore “to some degree stop” the assessment or collection

of sales tax in California.

Direct Marketing is not to the contrary, and the reporting and information

gathering requirements at issue in that case are distinguishable from the

registration requirements here. In Direct Marketing, a trade association of direct-

8 to-consumer sellers sued the Director of Colorado’s Department of Revenue,

seeking to enjoin Colorado’s imposition of sales and use tax-related “notice and

reporting requirements” on out of state retailers. 575 U.S. at 5–6. More

specifically, Colorado required retailers that did not collect Colorado sales and use

tax to notify their Colorado customers of the customer’s duty to file a sales or use

tax return and provide those customers with annual reports detailing their

purchases. Id. at 6. Colorado also required the retailers to send an annual report

to the state “listing the names of their Colorado customers, their known addresses,

and the total amount each Colorado customer paid for Colorado purchases in the

prior calendar year.” Id. The purpose of this requirement was to facilitate

Colorado’s collection of sales and use tax from the customer. The Court held the

TIA did not bar the trade association’s suit because although enjoining the laws

would inhibit Colorado’s ability to collect taxes, it would not stop it from

collecting those taxes. Id. at 14.2

2 The Guild argues that under Direct Marketing, we cannot uphold the district court’s ruling unless we define one of the TIA’s listed tax enforcement phases—assessment, levy, or collection—to include the step in the taxation process that they “challenge,” which is the requirement that they register as sellers. But Direct Marketing is not so narrow. The Supreme Court went beyond the discussion of those tax enforcement phases and overturned the Tenth Circuit’s broad definition of “restrain,” holding that in the TIA, that word means “to some degree stop,” rather than “inhibit.” Id. at 12–14. 9 In contrast, here, the Guild seeks to enjoin much more than “information

gathering” that makes it easier for the state to collect taxes from a third party.

Unlike the Association in Direct Marketing, the Guild’s members are the actual

taxpayer. The relief the Guild requests would prevent the collection of taxes owed.

Therefore, the requested relief would “to some degree stop” the assessment or

collection of a state tax, and federal courts lack jurisdiction under the TIA.

C

The TIA precludes federal jurisdiction only if there is a “plain, speedy, and

efficient” state remedy available. 28 U.S.C. § 1341. This “requires only that a state

court remedy meet certain minimal procedural criteria. Specifically, a plain,

speedy, and efficient remedy must provide a taxpayer with a full hearing and

judicial determination at which he may raise any and all constitutional objections

to the tax.” Hyatt v. Lee, 871 F.3d 1067, 1073 (9th Cir. 2017) (internal quotation

marks and citations omitted).

Here, the Guild members have a state remedy: register, pay the taxes due,

and then pursue a refund action. See Loeffler v. Target Corp., 58 Cal. 4th 1081,

1101–02 (2014) (explaining scope of California’s constitutional prohibition on

state court challenges to tax collection). Refund actions must first be brought in

administrative proceedings. Cal. Rev. & Tax. Code § 6932. If the Department

10 denies the claim or does not respond within six months, the taxpayer can sue in

state court for a refund. Id. §§ 6931–6937.

The Supreme Court has held California’s tax refund procedures to be a

“plain, speedy, and efficient” remedy for constitutional and statutory challenges to

tax information and reporting requirements. California v. Grace Brethren Church,

457 U.S. 393, 398, 414–17 (1982). In Grace Brethren, California churches and

religious schools brought constitutional claims seeking to enjoin, among other

things, the collection of “both tax information and [a] state tax.” 457 U.S. at 398.

The district court held that a state tax refund suit would not provide a “plain,

speedy and efficient” remedy, “because the plaintiffs claimed not only that their

property had been taken unlawfully, but also that the ‘very process of determining

whether any tax is due at all results in a violation of their First Amendment

rights.’” Id. at 401. The Supreme Court disagreed and held that California’s tax

refund system constituted a “plain, speedy and efficient remedy” both for the direct

challenges to taxation, but also for the challenges against the pre-assessment

recording and recordkeeping requirements. Id. at 414–17. “Nothing in this scheme

prevents the taxpayer from raising any and all constitutional objections to the tax in

the state courts,” and if those objections are successful, “there is every reason to

11 believe that once a state appellate court has declared the tax unconstitutional the

appropriate state agencies will respect that declaration.” Id. at 414.

Under Grace Brethren, Guild members have a plain, speedy and efficient

remedy in state court. They may pay the tax and seek an administrative refund on

the grounds that the registration requirement is unconstitutional or unlawful as

applied to them. If the administrative claim is denied or six months passes, they

may sue in state court. If they are successful, “there is every reason to believe” the

Department will “respect that declaration.” Id. at 415. This expectation is

reasonable, contrary to the Guild’s assertions, even if Guild members may be

subject to “civil and criminal penalties for nonpayment.” Matthews v. Rodgers,

284 U.S. 521, 526 (1932).

III

The district court also properly concluded that it should refrain from hearing

the claims under the principles of comity. However, having concluded that federal

jurisdiction is constrained by the TIA, there is no need for us to reach that issue.

AFFIRMED.