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California’s government has become infamous for abusing its citizens, from steep taxation to burdensome regulations to arbitrary covid impositions. But less noticed is how it is also trying to abuse other Americans as well.
As reported in a December 28 Los Angeles Times editorial, the California Department of Tax and Fee Administration (CDTFA), which oversees sales and use tax collections, is trying to retroactively impose sales taxes on out-of-state retailers as far back as 2012.
Prior to 2018’s South Dakota v. Wayfair Supreme Court ruling, states had the power to mandate that companies with a physical presence in their borders collect and remit taxes on sales in the state, even if the products involved came from outside the state. But they could not force companies with no physical presence in the state to do so. Then South Dakota v. Wayfair gave states the power to mandate that companies with no physical presence in their state also pay taxes on sales within their borders if they have a sufficient economic nexus (volume of business, essentially) to the state. California passed such a law in 2019. Since those sellers were only confronted with the law then, in fairness those taxes should only apply afterward.
But the CDTFA has been asserting that out-of-state retailers who sold and shipped through Amazon Fulfillment Services (AFS) now owe back sales taxes from the first date their products were stored in a California Amazon warehouse, even back to 2012, when Amazon was first required to pay California state taxes on its direct sales from out-of-state locations into the state.
The Menace of Retroactive Taxation
In a letter to Governor Gavin Newsome over a year and a half ago, Fiona Ma, California state treasurer, laid out the CDTFA’s actions as “unlawful, unconstitutional and impractical” and asked him to stop both the retroactive and prospective taxation on sales that small, out-of-state businesses are “not legally responsible for under California law.” But such action has still not been taken, which forced the Online Merchants Guild to issue a legal challenge in October.
While those so inclined can pursue the legal arguments and precedents in more depth, I wish to emphasize that retroactive, or ex post facto, taxation is not only blatantly unfair, but violates the constitutional ban on both state and federal adoption of ex post facto laws.
The arbitrariness and unfairness of retroactive rule changes is obvious.
How fair or entertaining would any sport be if referees could change the rules after the fact (e.g., arbitrarily adding time to the clock late in a football game or negating any goal scored in hockey by a team that has pulled its goaltender)? Who would go to Las Vegas if the payoffs were subject to arbitrary changes after the roulette wheel has stopped? How well would the labor market work if employers could retroactively lower the wages you earned last year?
Such retroactive changes would also have been abhorrent to America’s founders.
In article 1 of the Constitution, section 9 banned federal ex post facto laws and section 10 banned them in states (though the Supreme Court long ago decided not to apply this ban to taxes). The Commerce Clause also means, as Justice Kennedy noted in his majority opinion in South Dakota v. Wayfair, that states, “may not impose undue burdens on interstate commerce.”
In “Federalist No. 44,” James Madison describes ex post facto laws as “contrary to the first principles of the social compact and to every principle of sound legislation,” with the consequence that “All of them are prohibited by the spirit and scope of these fundamental charters.”
Madison used similar reasoning in support of the prohibition against states issuing their own money in Article 1, Section 8: “Retrospective alterations in its value might be made, and thus the citizens of other states be injured.” That same argument also underlies the Constitution’s imposition of a uniform national bankruptcy code.
When applied to ex post facto taxation, California’s “sales tax grab” also runs afoul of Madison’s “Federalist No. 10“:
The apportionment of taxes…seems to require the most exact impartiality; yet there is perhaps no legislative act in which greater opportunity and temptation are given…to trample on the rules of justice. Every shilling which they overburden [one group with] is a shilling saved to their own pockets.
It is unfortunate that California is not only trying to abuse out-of-state sellers, but trying to do it retroactively. That goes beyond even the abuse it imposes on its own citizens, in defiance of fairness and clear constitutional principles. And when the state treasurer publicly makes that case to the governor without effect, it says a lot about how concerned California’s government is with people’s “general welfare” in contrast with its own interests.
