RockAuto, a well-known online auto parts store, has been serving customers globally since 1999 from its base in Madison, Wisconsin. Founded on the principle of providing “all the parts your car will ever need,” RockAuto caters to a wide range of customers, from car enthusiasts tackling DIY projects to professional mechanics.
However, RockAuto is currently facing a significant challenge in Arizona, a state where it has always diligently paid sales taxes since the introduction of the “economic nexus” law in 2019. This law requires out-of-state businesses to collect and remit sales tax, which RockAuto has consistently done.
Despite complying with the current tax regulations, the Arizona Department of Revenue (ADoR) has recently taken an unexpected and aggressive stance against RockAuto. The ADoR successfully argued in the Court of Appeals that RockAuto had a physical presence in Arizona even before 2019, under the older tax law. This assertion is based on the premise that Arizona-based factories and wholesalers that supplied parts to RockAuto and shipped directly to RockAuto’s Arizona customers effectively became extensions of RockAuto’s business.
According to this interpretation, simply using suppliers in Arizona and having them ship directly to customers transforms address labels into store locations and refrigerator magnets into sales personnel, magically establishing RockAuto’s physical presence within the state.
This interpretation is unprecedented and contradicts previous legal precedents, including a ruling from the Arizona Tax Court in RockAuto’s own case. No prior case has ever determined that a retailer had “physical presence” in a state without any employees, assets, or direct customer interactions within that state. Furthermore, the ADoR’s own publications have previously indicated that “drop-shipping” from Arizona suppliers does not create sales tax obligations.
Nevertheless, the ADoR is demanding six years of uncollected taxes from RockAuto, along with substantial interest and penalties. This amount significantly exceeds RockAuto’s profits from two decades of serving Arizona customers, placing an undue burden on the online auto parts retailer.
RockAuto has appealed to the Arizona Supreme Court to review this contentious decision. The Arizona Tech Council and State Representative Michael Carbone have also voiced their support, emphasizing that tax laws are the domain of the legislature, not the tax department’s interpretation. Numerous Arizona customers have also reached out to Governor Hobbs, urging her administration to foster a more business-friendly environment by restraining the ADoR’s overreach.
Customer testimonials highlight the vital role RockAuto plays in Arizona, particularly for those in rural areas where finding auto parts locally can be challenging. Customers have praised RockAuto’s competitive pricing and essential service, especially for owners of older vehicles who rely on the online store for parts. One customer, an accountant with sales tax law expertise, called the state’s case “blatantly incorrect,” while another worried about the broader implications for other online retailers that Arizona residents depend on.
Despite these appeals and logical arguments, the ADoR has remained unresponsive, emboldened by the appeals court ruling.
To protect their business and families from further unwarranted attacks, RockAuto has made the difficult decision to cease purchasing from Arizona-based suppliers. The company is even contemplating halting sales to Arizona customers altogether. These measures, while drastic, are necessary to avoid operating at a loss or under constant threat of arbitrary and retroactive rulings. Ending long-standing business relationships is deeply regrettable, but essential for survival.
This situation poses a threat to other online retailers who have sourced or currently source goods from Arizona suppliers, even if they do not meet the “economic nexus” threshold. These businesses could be the next targets of the ADoR’s aggressive tax enforcement. The implications of this case extend beyond RockAuto, potentially impacting any business that relies on online retailers and highlighting the need for fair and predictable tax policies.
