Class Action Ban For California Consumers Is Struck Down

California residents nearly lost their right to file class action lawsuits against online retailers like eBay, Amazon or Etsy for the next four years—and they had no idea.

With Assembly Bill 147, California would be given the ability to start collecting sales tax from online giants who don’t have a physical location within the state. Snuck into the legislation was a clause which would have placed a ban on class action lawsuits until 2023.

It was a clause that went largely unnoticed by the general public. Luckily, the Consumer Attorneys of California (CAOC) stepped in and fought for consumer litigation rights as AB 147 aimed to limit them.

Infringements on citizen rights usually draws scrutiny and mass attention. Freedom of speech and the right to bear arms are hot button topics, but many citizens don’t think about how their class action rights may be violated.

Organizations like the CAOC work to protect consumer rights and monitor laws that may make it difficult for plaintiffs to hold companies accountable for their actions.

AB 147 was passed in response to a Supreme Court decision that changed the way that sales tax was charged in states.

However, section 6048 of AB 147 would have prevented consumers from filing class action lawsuits against retailers that overcharged taxes before Jan. 1, 2023.

This means that, for four years, California consumers would have been unable to file class action lawsuits against retailers that charged sales tax improperly.

The bill stated that “a class action may not be brought against a marketplace facilitator on behalf of purchasers arising from or in any way related to an overpayment of sales or use tax collected before January 1, 2023, by the marketplace facilitator, regardless of whether such action is characterized as a tax refund claim.”

After realizing that AB 147 would severely restrict consumer’s litigation rights, the CAOC stepped in. The CAOC usually does not get involved with tax issues, but made an exception due to the limitations of consumer litigation rights.

“While we support the responsible collection of sales and use taxes by businesses in the state, a class action ban, for any time period, is horrible precedent; we know of no similar language in any California statute,” the CAOC said in their letter of opposition. “Further arbitrarily limiting legal rights of consumers would incentivize improper collection of up to millions of dollars by large marketplace companies. We respectfully ask that this language be removed.”

Due to the efforts of the CAOC, the class action ban was removed from the bill on Feb. 27.

On June 21, 2018, the Supreme Court ruled in South Dakota v. Wayfair that a physical presence in the state is not the only requirement to allow a business to collect state sales tax. This decision overturned decades of precedence that sales tax collection laws could only be imposed for out-of-state sellers if they have a physical presence.

It determined that if a business had an economic nexus, a strong connection, to the state, the business was subject to state sales tax laws. The Supreme Court ruled that if more than $100,000 of goods were sold or if 200 transactions were completed in a year, a business has sufficient connection to a state.

“Wayfair really changed the core of how you deal with sales tax,” said Jamie Yesnowitz, a tax expert, according to Accounting Today. “Now remote sellers have to consider whether their markets are large enough to be required to collect and remit sales tax in places they have not envisioned before.”

“One of the major challenges companies are facing is the non-uniform treatment of the new rule with different thresholds, tax bases etc.,” Yesnowitz added. “For many this is a giant tracking exercise.”

In response to the Supreme Court decision, states have been attempting to find a way to impose rules about sales tax on out-of-state businesses. By expanding the requirement for economic nexus, states aimed to even the playing field between massive online retailers and smaller local businesses which have been subject to state laws for years.

Other states have aimed to expand the taxability on digital goods and some services, affecting online businesses such as Amazon and eBay.

“Wayfair and federal tax reform provided the states with a significant opportunity to engage in their own state-specific tax reform,” Yesnowitz said. “While many states enacted legislation in response to federal tax reform, states such as New Jersey, Connecticut, Kentucky and Missouri enacted significant state-specific tax reform that went far beyond adopting or decoupling from federal tax reform provisions.”

California was one of these states, and AB 147 aimed to increase the threshold for tax collection laws to revenue exceeding $500,000 per year. Under AB 147, California could stand to collect more than $500 million between July 1, 2019 and June 30, 2020.

According to California Assemblywoman Autumn R. Burke and Senator Mike McGuire, AB 147 seeks to provide relief for smaller businesses across the state.

“A one-size-fits-all approach modeled after South Dakota law is not necessarily appropriate for a state with 40 million residents,” said Burke, according to Lake County News. “Today’s passage of AB 147 out of the Assembly Committee on Revenue and Taxation demonstrates the willingness of legislators and stakeholders to implement a thoughtful application of the Wayfair decision in California that creates a level-playing field for small and large businesses. We look forward to ushering this critical piece of legislation through the process so that all businesses, in and out of state, have a clear understanding of the changing dynamic of California’s e-commerce sector.”

Although AB 147 stands to provide numerous benefits, the original wording of the law would have limited the rights of consumers. Luckily, CAOC fought against these changes and preserved consumer litigation rights.