Isabel Rubinas, a small, online business owner from Glen Ellyn, Illinois filed a civil rights lawsuit Thursday in the US District Court for the Northern District of Illinois against the state the California Department of Tax and Fee Administration (CDTFA), the state agency that oversees the collection of sales and use taxes.

Rubinas alleges in the suit that CDTFA is “crushing” her online business and thousands of others “not because of what they did but because of what California tax officials did for nearly a decade giving Amazon unfair tax breaks by not requiring it to charge sales tax.” The complaint alleges instead of making Amazon pay the uncollected back tax, CDTFA is illegally targeting small out-of-state business owners like Rubinas for the money.

Rubinas, a mother of two young children operates Lollipop Seeds, a virtual online boutique and Amazon Third Party Supplier that specializes in clothing for young children online via Amazon. She runs the business from her kitchen table at her home in Glen Ellyn.

California Froze Bank Account Without Warning

In December without warning, CDTFA froze Rubinas’ business bank account in Illinois in an effort to collect thousands of dollars in taxes on sales that Lollipop Seeds made to California shoppers through in 2017, 2018 and 2019. The freeze threatens to push Lollipop Seeds out of business. 

“This is devastating for me and my family. With my account frozen, I cannot pay my inventory costs, and other expenses including a business loan payment due in late January. which will lead to the destruction of my company. My sales are already down 75 percent since the pandemic began. My family and I cannot survive this. We depend on the money from my business.”

Isabel Rubinas

The complaint asks the court to order CDTFA to halt all tax collection action against Rubinas immediately. Rubinas supplies goods to Amazon, which Amazon warehouses in a network of nearly 200 facilities in North America. Amazon is the cashier for every transaction and delivers the goods.

The complaint alleges that the duty to collect sales taxes should have fallen on Amazon, which acts as a virtual consignment store and should have been treated that way. For years, CDTFA allowed Amazon to refuse to collect sales taxes on most sales in its store,

That gave Amazon an instant pricing advantage over its competitors, who did collect taxes. In exchange, Amazon gave the state “benefits” in the form of promised development. In 2019 the state of California changed its law and currently does require Amazon to charge sales tax. Now California wants the uncollected sales tax going back to 2012.

California Going After Small Businesses Instead of Amazon

Instead of making Amazon pay, it is going after Amazon’s suppliers outside the state, who tend to be small businesses that have none of Amazon’s political or economic power within California.

“This is one of the biggest tax frauds in history and it deliberately targets small business owners, who have no political pull or lawful connection to California, in an effort to mitigate the billions in lost tax revenue the state suffered in their efforts to grant Amazon political favors in the form of a tax exemption that would allow Amazon to undercut local competition within the state.”

Rubinas’ attorney, Paul S. Rafelson

Rafelson, who spent most of his career as a tax litigator for companies like Walmart, Microsoft and General Electric, is an attorney with the Florida law firm Rafelson Schick, PLLC.

In addition to his private practice, Rafelson volunteers his time to serve as an advocate for small ecommerce companies as the Executive Director of a newly formed (2018) non-profit trade association for small ecommerce companies called the Online Merchants Guild. Rafelson is also an adjunct law professor at Pace University School of Law in New York, where he teaches a constitutional law course on state taxation.

“The amounts are crushing, and when California’s targets don’t pay and most of them cannot, the state will seize their bank accounts just like it did with Isabel Rubinas. Her story is not unique, it is happening to thousands of small business owners around the country, ” added Rafelson.

Even California’s Treasurer Agrees Enforcement is Illegal

The complaint includes a letter from California Treasurer Fiona Ma to Governor Gavin Newsom advising him the tax collection is illegal and morally wrong for the state to be going after small businesses that seized the opportunity that Amazon and other online platforms presented.

The Los Angeles Times recently published an editorial also critical of the tax grab writing, “the state should stop hounding small businesses for sales taxes they didn’t know they’d be asked to remit and move on.”

“Ecommerce is our nation’s greatest source for socioeconomic progress, and has enabled thousands of people including female and minority entrepreneurs to launch successful online businesses,” said Rafelson. “Now the state of California is destroying their American Dreams with this illegal tax scheme, in an effort to cover up the tens of billions in tax losses caused by Amazon and their influence over corrupt politicians within that state over the last decade. It is time to make Amazon pay its fair share, and stop sticking it to small business people in other states with no connection to California, in violation of their civil rights.”

Following the filing of the lawsuit, the Guild intends to file a motion for a preliminary injunction seeking expedited relief, in order to prevent Ms. Rubinas’ business from going under.

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