Guild v. Hassell, CIVIL ACTION NO. 1:21-CV-369

ONLINE MERCHANTS GUILD, Plaintiff v. C. DANIEL HASSELL, in his official capacity as SECRETARY OF REVENUE,DEPARTMENT OF REVENUE, Defendant

CIVIL ACTION NO. 1:21-CV-369

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

May 28, 2021

(Judge Conner)

MEMORANDUM

Plaintiff Online Merchants Guild (the "Guild")—a group of merchants who supply various products to Amazon for sale and distribution—asks this court to enjoin the Pennsylvania Department of Revenue (the "Department") from utilizing a voluntary compliance program to identify certain taxes potentially owed to the Commonwealth by nonresident Guild members. The Guild claims this program evinces an assertion of authority over Guild members that violates the Due Process Clause, the Commerce Clause, and the Internet Tax Freedom Act. Before the court are the Guild's motion for a preliminary injunction and the Department's motion to dismiss the Guild's complaint. As explained below, the Guild has standing and its claims are ripe, but we will abstain from hearing them under the comity doctrine.

I. Factual Background and Procedural History

The Guild is "a trade association for online merchants" who supply Amazon and other e-commerce retailers. (Doc. 1 ¶ 14). The Department is responsible for collecting sales, use, and income tax in the Commonwealth. (Id. ¶ 17). Defendant C. Daniel Hassell is Secretary of the Department. (Id.) The dispute sub judice stems from the Department's efforts to determine whether nonresident Guild members owe taxes to the Department for goods stored by Amazon within the Commonwealth.

A brief summary of the relationship between Guild members, Amazon, and the Commonwealth will suffice for purposes of the instant motion. Amazon supplies consumers with its products through two main methods. It maintains a program called "Fulfilled by Amazon" ("FBA"), through which Guild members supply their products to Amazon for sale. (See id. ¶ 6). It also executes "first-party" sales, for which Amazon self-sources goods. (Id. ¶ 19). The FBA program is the focus of this action.

The FBA program operates as follows. Suppliers identify and source products to be sold on Amazon's platform. (Id. ¶¶ 19-23). The supplier then ships the products to a fulfillment center chosen by Amazon, which can be located anywhere in the country. (See id. ¶ 22). Amazon then takes physical possession of the products, stores them, markets them to consumers, and sells and delivers them without supplier involvement. (Id. ¶¶ 19-23). Critically, Amazon has wide latitude to decide which warehouse or fulfillment center to store a supplier's products in.(See id. ¶¶ 22, 26, 27). Amazon eventually charges suppliers a commission on the sale of their products. (Id. ¶ 23).

The Guild alleges that Amazon declined to collect sales tax on its FBA sales for "much of the last decade," thereby enabling Amazon to charge artificially lower prices and externalize supply chain costs. (Id. ¶¶ 28-30). In 2017, Pennsylvania's General Assembly passed Act 43, which imposes marketplace sales tax collection, notice, and reporting requirements on e-commerce retailers. (See id. ¶¶ 36-38). Amazon began collecting sales tax on its FBA sales in 2018. (Id. ¶ 37).

As part of its tax-collection efforts, the Department recently began sending Guild members form letters that state in relevant part:

The Pennsylvania Department of Revenue has determined that your business may have a physical presence in the Commonwealth and may be subject to Pennsylvania's income and sales tax laws. The Department of Revenue is currently offering a voluntary compliance program to help certain businesses become compliant with past due tax obligations. This business may be eligible to participate in that program.

Pennsylvania's Tax Reform Code provides that storing property or the property of a representative, including inventory, at a distribution or fulfillment center, or any other location within the Commonwealth, constitutes a physical presence that creates certain tax obligations with Pennsylvania. Income and applicable sales taxes should be reported and remitted to the Pennsylvania Department of Revenue starting with the date that property was first located within the state.

The voluntary compliance program is offering a limited lookback period from Jan. 1, 2019. Businesses that choose to participate in this voluntary compliance program will not be liable for taxes prior to this date. They will also be given penalty relief for anynon-compliance for past due tax returns that were not filed and taxes that were not paid.

(See id. ¶ 41). The letters then admonish that failure to provide the requested information "will result in additional enforcement actions and the business will forfeit any penalty relief or limited lookback provisions provided by the voluntary compliance program." (See Doc. 1-2 at 5; Doc. 1-3 at 6). To participate in the program, recipients must complete and submit an informational questionnaire by June 8, 2021. (See Doc. 1-2 at 5; Doc. 1-3 at 6).¹ Quite understandably, the Guild interprets these letters as a "precursor to tax demands" upon FBA merchants. (Doc. 1 ¶ 42).

The Guild promptly initiated this action, alleging that the Department's conduct vis-à-vis nonresident Guild members violates the Due Process Clause (Count 1), the Commerce Clause (Count 2), and the Internet Tax Freedom Act, 47 U.S.C. § 151 et seq. (Count 3). On March 3, 2021, the Guild moved for a temporary restraining order and preliminary injunction on Count 1. The Guild thereafter agreed to withdraw the motion for a temporary restraining order. On April 29, the court held a preliminary injunction hearing, during which the parties presented evidence and argument. Four days later, on May 3, the Department moved to dismiss the Guild's complaint. Both motions are now ripe for disposition.

II. Legal Standard

A. Rule 12(b)(1)

Federal Rule of Civil Procedure 12(b)(1) provides that a court may dismiss a claim for lack of subject matter jurisdiction. See FED. R. CIV. P. 12(b)(1). Such jurisdictional challenges take one of two forms: (1) parties may levy a "factual" attack, arguing that one or more of the pleading's factual allegations are untrue, removing the action from the court's jurisdictional ken; or (2) they may assert a "facial" challenge, which assumes the veracity of the complaint's allegations but nonetheless argues that a claim is not within the court's jurisdiction. Lincoln Benefit Life Co. v. AEI Life, LLC, 800 F.3d 99, 105 (3d Cir. 2015) (quoting CNA v. United States, 535 F.3d 132, 139 (3d Cir. 2008)). In either instance, it is the plaintiff's burden to establish jurisdiction. See Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977). Courts may grant a Rule 12(b)(1) motion based on the legal insufficiency of a claim only when it appears with certainty that assertion of jurisdiction would be improper. See Gould Elecs. Inc. v. United States, 220 F.3d 169, 178 (3d Cir. 2000).

B. Rule 12(b)(6)

Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for the dismissal of complaints that fail to state a claim upon which relief may be granted. FED. R. CIV. P. 12(b)(6). When ruling on a motion to dismiss under Rule 12(b)(6), the court must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. Countyof Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (quoting Pinker v. Roche Holdings, Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)). In addition to reviewing the facts contained in the complaint, the court may also consider "exhibits attached to the complaint, matters of public record, [and] undisputedly authentic documents if the complainant's claims are based upon these documents." Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010) (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993)).

Federal notice and pleading rules require the complaint to provide "the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Phillips, 515 F.3d at 232 (alteration in original) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). To test the sufficiency of the complaint, the court conducts a three-step inquiry. See Santiago v. Warminster Township, 629 F.3d 121, 130-31 (3d Cir. 2010). In the first step, "the court must 'tak[e] note of the elements a plaintiff must plead to state a claim.'" Id. at 130 (alteration in original) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 675 (2009)). Next, the factual and legal elements of a claim must be separated; well-pleaded facts are accepted as true, while mere legal conclusions may be disregarded. Id. at 131-32; see Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009). Once the court isolates the well-pleaded factual allegations, it must determine whether they are sufficient to show a "plausible claim for relief." Iqbal, 556 U.S. at 679 (citing Twombly, 550 U.S. at 556); Twombly, 550 U.S. at 556. A claim is facially plausible when the plaintiff pleads facts "that allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678.

III. Discussion

The Department raises many threshold challenges to the Guild's claims, both in its motion to dismiss and in its opposition to the Guild's motion for a preliminary injunction. The Department argues that the Guild lacks Article III standing, that ripeness considerations require dismissal, and that the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341, bars the Guild's claims. In the alternative, the Department urges the court to abstain from hearing the Guild's claims based on the comity doctrine. As we explain below, the Guild has standing, its claims are ripe, and the TIA does not divest us of jurisdiction, but we nonetheless must...