Keeping Tabs on the Ninth Circuit
November 11, 2022 - This Week at the Ninth

This Week at the Ninth: The Tax Injunction Act

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This week, the Ninth Circuit considers whether the Tax Injunction Act bars online merchants from asking a federal court to enjoin California’s sales tax scheme requiring them to obtain seller’s permits.

The Court holds that the Tax Injunction Act precludes an association of e-commerce merchants from suing in federal court to enjoin California’s requirement that its members obtain seller’s permits to facilitate sales tax collection.

Panel: Judges S. R. Thomas, M. Smith, and McShane (D. Oregon), with Judge S. R. Thomas writing the opinion.

Key highlight: “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.”

Background: The Online Merchants Guild is a trade association of e-commerce merchants, many of whom sell products through Amazon. Amazon collects payment from customers, charges these third-party merchants a commission, then credits their accounts for the sales. Before October 2019, California required such third-party merchants to collect and pay sales tax on sales to California residents. California’s Marketplace Facilitator Act shifted that burden to “marketplace facilitators” like Amazon. But that change was not retroactive, and California continued to seek sales tax remittances from third-party merchants for pre-October 2019 sales. When California sent notices to Guild members informing them that they must obtain seller’s permits to process these tax remittances or face criminal penalties, the Guild sought declarative and injunctive relief in federal court. The district court dismissed, holding that the claims were barred by the Tax Injunction Act.

Result: The Ninth Circuit affirmed. 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. As the Court explained, this “precludes suits in federal court where the requested relief would ‘to some degree stop’ the assessment or collection of a state tax.” The Guild’s claims met that standard because “Guild members cannot remit the sales tax they are required to collect under California law without obtaining a seller’s permit.” The Court rejected the Guild’s argument that they were only seeking to enjoin information gathering requirements—“[t]he relief the Guild requests would prevent the collection of taxes owed.” 

The Court also concluded that the Guild had a “plain, speedy, and efficient” state remedy—it could “register, pay the taxes due, and then pursue a refund action.” The Supreme Court has specifically held that “California’s tax refund procedures [are] a ‘plain, speedy, and efficient’ remedy for constitutional and statutory challenges to tax information and reporting requirements.” The same was true here, “even if Guild members may be subject to ‘civil and criminal penalties for nonpayment.’”