State wants $11M from online auto parts retailer
After the Arizona Department of Revenue slapped an online auto parts retailer with $11 million in retroactive sales taxes, the company is asking the state Supreme Court to take up the case and local attorneys are warning it could impact businesses across the state and country.
RockAuto, which is based in Wisconsin, did not pay Arizona’s sales tax between 1999 and 2019 because it does not have a physical presence in the state, which was previously a requirement for taxation under state tax laws.
After being alerted by a Gilbert taxpayer and the city of Gilbert, ADOR conducted an audit of the company and notified the retailer that it needed to pay $8 million in taxes and penalties incurred between 2013 and 2019. That number has now increased to $11 million as penalties continue to be incurred.
RockAuto filed a lawsuit against ADOR in Maricopa County Superior Court in 2020. The tax judge in that case ruled in favor of RockAuto in 2023, but the Arizona Court of Appeals reversed that decision earlier this year.
According to the appellate court, RockAuto utilizes six Arizona distributors that occasionally ship products to Arizona customers, those distributors are required to use RockAuto packaging materials and RockAuto employees took business trips to the state during the 2013 to 2019 period. The court said those criteria were enough to establish a physical presence in the state, despite the company not having any property or employees in Arizona.
RockAuto has since cut ties with its Arizona distributors and is considering ending sales in the state due to concerns about further taxes that could be levied, CEO Jim Taylor said.
“The idea that one state has caused so much trouble and so much harm to our business makes us wonder why we’re doing business in that state at all,” Taylor said.
Local attorneys James Busby and Paul Eckstein are representing RockAuto in its appeal to the Arizona Supreme Court and say ADOR’s actions could open the door for retroactive tax charges to other out-of-state companies.
“We’re really hoping that the Arizona Supreme Court will recognize the importance of this case, and not just for RockAuto, because it has a chilling effect on business across the state,” said Busby, who specializes in Arizona tax law.
The state Supreme Court has not yet agreed to take up the case, but state lawmakers and interest groups have taken an interest and sent letters to ADOR on RockAuto’s behalf.
State Rep. Michael Carbone said in a letter that the department “appears to be unlawfully taxing” the company and he is considering introducing legislation in 2025 “to correct the issue.” Carbone, a District 25 Republican, did not immediately respond to a request for comment on the legislation he is considering.
Taylor said he’s not confident that new legislation will address the issue because he said RockAuto was already compliant with state tax laws.
“I’m worried, just because it’s not as though there wasn’t legislation before…” Taylor said. “[ADOR is] just thumbing their nose at it and saying, ‘Well, we don’t care what the law says, we don’t care what our own guidance says. If we want your money, we’re going to come take it.’”
The president and CEO of the Arizona Technology Council, Steven Zylstra, also wrote a letter to ADOR asking the department to reconsider its actions against RockAuto.
“As it stands, the results of this case ultimately could result in great financial risk for countless online retailers and discourage out-of-state entrepreneurs from doing business with Arizona companies,” Zylstra wrote.
ADOR did not directly respond to requests for comment on the case, but did provide its letter in response to Carbone in which it declined to discuss the case while litigation is ongoing.
However, RockAuto’s attorneys said the case could be resolved outside of court because the tax charges were brought against the company during former Gov. Doug Ducey’s administration.
“The Department of Revenue and the Governor’s Office, they [could] decide that what the Court of Appeals decided is erroneous and harmful to Arizona’s business,” Eckstein said. “The governor, we think, has special reason to do this because this didn’t happen under her administration.”
In the meantime, Eckstein said they’re hopeful the Arizona Supreme Court will take up the case within the next few months and eventually rule in favor of RockAuto.
“We have to convince the court that this is an issue of statewide importance, and we think we made a compelling case,” Eckstein said. “It remains to be seen, but we are awaiting the Supreme Court’s determination.”