A U.S. District Court in Illinois recently rejected an Illinois online seller’s motion for a preliminary injunction against the California Department of Tax & Fee Administration to stop levying sales and use taxes on products sold in California.1 Under the federal Tax Injunction Act (TIA), the Court lacked subject matter jurisdiction to hear the case because the online seller could pursue a plain, speedy and efficient remedy in California state court.
Isabel Rubinas owned and operated a children’s clothing business from her home in Illinois and made most of her sales online through the Fulfilled by Amazon (FBA) program operated by Amazon.com. After Amazon accepted a listing for clothing offered by Rubinas, Amazon directed Rubinas to ship the clothing for storage in an Amazon warehouse. Following shipment, Rubinas had no control over where the items were stored or sold. Amazon processed the sales, shipped the items to customers, received payment, and provided customer service following the sales.
Neither Rubinas nor Amazon collected sales and use tax on any of these sales. Rubinas claimed that she was notified by California in July 2019 that she would be required to collect use tax on the California sales. After she became aware of the tax obligation, she paid the assessed use tax of over $2,600 for the 2019 tax year. In January 2020, her accountant also prepared and filed sales and use tax returns for 2017 and 2018. Based on the tax returns, Rubinas owed over $2,600 for the 2017 tax year and over $4,600 for the 2018 tax year. After the tax returns were filed, Rubinas notified California that she was unable to pay the assessed taxes. California eventually issued collection notices to Rubinas and seized nearly $2,400 from her bank account.
Rubinas sought relief from the federal District Court in Illinois by moving for a temporary restraining order and preliminary injunction. Specifically, Rubinas asked the Court to stop California from issuing further levies and to require the state to return the funds that it seized. Rubinas explained that she was facing financial hardship and feared that Amazon would seize and sell her inventory. On Jan. 18, 2021, the District Court denied her motion for a temporary restraining order because the TIA barred subject matter jurisdiction to hear the claim.2 In the instant decision, the District Court considered Rubinas’s motion for a preliminary injunction.
Tax Injunction Act
The federal TIA provides that “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.”3 According to the U.S. Supreme Court, the state court remedy must satisfy certain minimal procedural criteria that provide “the taxpayer with a full hearing and judicial determination at which she may raise any and all constitutional objections to the tax.”4 The three statutory requirements that the remedy be plain, speedy and efficient have been addressed by courts. First, a remedy is “plain” if it is clearly available to the party seeking the remedy.5 Second, a state remedy is “speedy” provided it does not take significantly longer than federal remedies.6 Finally, a remedy is “efficient” if it does not impose “an unusual hardship requiring ineffectual activity or an unnecessary expenditure of time or energy.”7 Exceptions to the TIA must be narrowly construed so that congressional intent is respected.8
Federal Court lacked subject matter jurisdiction
After determining that the TIA applies to this case and the remedy available to Rubinas in California state courts is plain, speedy and efficient, the District Court denied Rubinas’s motion for preliminary injunction. The District Court relied on its prior decision denying the motion for a temporary restraining order, but also considered new arguments that were raised by Rubinas in a supplemental briefing.
The District Court clearly explained in its prior decision addressing the temporary restraining order request why the TIA applies to the instant matter and the remedy available in California state court is adequate.9 Rubinas argued that the TIA does not apply because the remedy available in California courts is not plain, speedy and efficient. The District Court acknowledged that Rubinas’s best argument was that California does not provide for injunctive relief requiring a return of funds that have already been seized. In fact, the California Constitution prohibits its courts for issuing declaratory or injunctive relief against tax collection.10 Under California law, only the legislature is permitted to authorize refund suits. Before filing a refund suit, a taxpayer must file a refund claim with the state.11 Rubinas argued that this state remedy does not satisfy the TIA because the state requires her to pay the assessed taxes prior to seeking a refund through state court. Acknowledging the practical obstacles faced by Rubinas (and perhaps other similarly situated small businesses) by the “pay-first” model, the Court noted that the U.S. Supreme Court and the U.S. Court of Appeals, Ninth Circuit have held that California’s refund procedures satisfy the TIA.12 On that basis, the District Court rejected Rubinas’s argument that an exception from the TIA should be created for a tax based on online sales.
California remedies are ‘plain’
In its original decision addressing the temporary restraining order request, the District Court rejected Rubinas’s argument that there was no “plain” remedy available in California courts. As explained by the Court, the definition of a “plain” remedy refers to accessibility of a remedy. In support of the temporary restraining order motion, Rubinas suggested a lack of standing to file suit in California courts. Rubinas argued that she lacked standing because California could characterize her as a “tax collector” rather than a “taxpayer.” In a use tax case decided in 1970, Scol Corp. v. City of Los Angeles, the California appeals court decided that a retailer could not file suit because it was not the “taxpayer.”13 In rejecting Rubinas’s argument, the Court characterized Scol as outdated and rejected by courts. Under the fairness test currently used by California, Rubinas should have standing in California courts. Furthermore, California statutes have been amended to address the harsh results of Scol by allowing a “claimant” to bring a refund action.14 Therefore, the Court determined that Rubinas’s standing was not sufficiently in doubt to make the California courts inaccessible.
California remedies are ‘speedy’ and ‘efficient’
In determining that the California remedies are “speedy” and “efficient” in its original decision, the Court explained that the state court remedy should not take significantly longer than a federal court remedy. Under California law, if the Department does not act within six months after the refund claim is filed, Rubinas could file suit in state court.15 The Court determined there was no reason to conclude that California does not provide a speedy and efficient remedy. Furthermore, the U.S. Supreme Court and Court of Appeals decisions holding that California remedies satisfied the TIA did not criticize the speed or efficiency of the state process.16 In the instant case, the Court held that there was no subject matter jurisdiction because the TIA applies.
The District Court’s original decision noted that even if it had subject matter jurisdiction, California’s sovereign immunity would preclude the Court from returning the funds that had been seized. The Eleventh Amendment of the U.S. Constitution forbids Rubinas from seeking monetary damages against the state. Because Rubinas was seeking the return of a tax payment held by California, the Eleventh Amendment barred federal courts from providing the requested remedy to Rubinas.
Additional arguments for granting preliminary injunction
The District Court considered Rubinas’s additional arguments before denying her subsequent motion for preliminary injunction. Prior to addressing the new arguments, the Court noted that “[t]here is still no doubt that this case presents challenging questions of tax law and fundamental fairness.” Rubinas argued that she had standing to invoke preemptive federal law under the Internet Tax Freedom Act (ITFA).17 However, the Court determined that it could not consider the preemption argument because the TIA prevented it from having subject matter jurisdiction to hear the case, and the TIA did not contain an exception for ITFA preemptive claims.
Rubinas also unsuccessfully argued that a remedy for a violation of the ITFA must include injunctive relief. The Court noted it did not have jurisdiction to consider ITFA claims because there is a plain, speedy and efficient remedy in state court. Furthermore, the Court disagreed with Rubinas’s argument that the application of the TIA serves to “nullify” the ITFA. The Court explained that the ITFA is not being nullified because Rubinas merely is being directed to raise her claims in state rather than federal court.
While federal courts historically have been viewed by taxpayers as more favorable venues to taxpayers than state courts, this decision follows a recent trend of federal decisions reacting negatively to sales tax litigation brought by taxpayers, particularly where an alternative remedy is available at the state level. For example, a U.S. District Court in Pennsylvania recently dismissed a sales tax class action lawsuit because the claim was not covered by state consumer protection law.18
Online remote sellers participating in the FBA program and similar ventures may discover that they now have sales and use tax collection responsibilities under remote seller and marketplace facilitator laws enacted by states in response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.19 Many of these online sellers are small businesses with limited resources. The small amount of funds in dispute often may not justify the legal expense of pursuing a refund claim. Under the FBA program, the online sellers do not know where their inventory is stored or their products are eventually sold, which can lead to sales tax notices from jurisdictions in which remote sellers may have limited connections.
While appearing sympathetic to Rubinas’s plight, the District Court did not have subject matter jurisdiction to consider her case due to the TIA, even though the Court had previously acknowledged in its original decision that Rubinas’s strongest argument related to California’s lack of injunctive relief. The Court was bound by pre-Wayfair federal court decisions holding that the California state court remedies satisfy the TIA. These decisions do not account for a dramatically different sales tax landscape for online sellers now subject to sales and use tax collection responsibilities pursuant to the laws enacted after Wayfair.
The Rubinas case sheds light on state tax procedures for contested sales tax collection obligations in states such as California that have not been revised in concert with the rapid recent change in sales and use tax collection responsibilities for online retailers. Specifically, the case calls into question whether, in the interest of fairness and equity, injunctive relief should be available to relatively small online retailers who recently have become liable for sales and use tax collections, particularly when they may lack the resources to pay the tax in advance and then pursue a refund claim.
1 Rubinas v. Maduros, U.S. District Court for the Northern District of Illinois, Eastern Division, No. 1:21-CV-00096, Sep. 16, 2021.
2 513 F. Supp. 3d 994 (N.D. Ill. 2021).
3 28 U.S.C. § 1341.
4 Rosewell v. LaSalle Nat. Bank, 450 U.S. 503 (1981).
5 Lowe v. Washoe Cty., 627 F.3d 1151, 1156 (9th Cir. 2010).
6 Hyatt v. Yee, 871 F.3d 1067, 1073 (9th Cir. 2017).
8 California v. Grace Brethren Church, 457 U.S. 393 (1982).
9 513 F. Supp. 3d 994 (N.D. Ill. 2021).
10 CAL. CONST., art. XIII, § 32.
11 CAL. REV. & TAX. CODE § 6902(a)(1), (2).
12 California v. Grace Brethren Church, 457 U.S. 393 (1982); Hyatt v. Yee, 871 F.3d 1067 (9th Cir. 2017).
13 12 Cal. App. 3d 805 (Ct. App. 1970).
14 CAL. REV. & TAX. CODE § 6933.
15 CAL. REV. & TAX. CODE § 6934.
16 California v. Grace Brethren Church, 457 U.S. 393 (1982); Hyatt v. Yee, 871 F.3d 1067 (9th Cir. 2017).
17 47 U.S.C. § 151 note. The Internet Tax Freedom Act provides that no state or political subdivision may impose: (i) taxes on Internet access; or (ii) multiple or discriminatory taxes on electronic commerce.
18 Lisowski v. Walmart Stores, U.S. District Court for the Western District of Pennsylvania, No. 2:20-cv-1729-NR, Aug. 4, 2021. For a discussion of this case, see GT SALT Alert: Pennsylvania rejects sales tax class action suit.
19 138 S. Ct. 2080 (2018).
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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