RockAuto isn’t the only place you can find car parts online, but it’s certainly one of the biggest. But if you live in Arizona, you probably won’t be able to shop there after November, even if you really want a specific part. Why? Because the Joe Arpaio State recently decided the parts site owes about $11 million in unpaid sales taxes, an amount RockAuto’s president said in a recent op-ed amounts to “far more money than we earned in 20 years selling auto parts to Arizonans.” What the heck? That doesn’t sound right.
Well, as it turns out, it’s a little complicated, but it boils down to the state deciding that RockAuto has a physical presence in the state and therefore owes back taxes on its sales, plus penalties. RockAuto disagrees and has said it will simply stop doing business in Arizona next month as it tries to work out a solution with the state. Unfortunately for most of us, understanding the details of what’s going on also requires working our way through several court cases. The good news is, The Autopian recently published a deep dive into this whole situation, and while it’s long, odds are, it’ll answer any questions you may have.
Until very recently, states weren’t allowed to collect sales taxes from online retailers that didn’t have a physical presence in those states. However, in 2018, the Supreme Court decided that, actually, states could collect taxes from companies that do business in the state, even without establishing a physical presence there. That, of course, made the states happy, since states love being allowed to collect more taxes. Arizona responded with the Transaction Privilege Tax, which went into effect in 2019, and RockAuto has been collecting and paying sales taxes from its Arizona sales ever since.
RockAuto and other online retailers may not have been thrilled about that ruling, but they complied. It was only when the Arizona Department of Revenue conducted an audit that things got contentious.
Actually, you owe us $11 million
Following its audit, ADOR decided that, actually, RockAuto really did have a physical presence in the state and therefore owed back taxes and penalties. $11 million worth of back taxes and penalties. RockAuto disagreed, arguing that using suppliers that may be physically based in Arizona doesn’t amount to RockAuto itself having a physical presence in the state. The Superior Court of the State of Arizona sided with RockAuto. As The Autopian put it:
However, the Court claimed that RockAuto’s suppliers in Arizona do not exist to help RockAuto establish a market in Arizona, as ADOR insisted. Instead, the Court claimed, whether a customer gets a part from a supplier in Arizona or not is entirely up to them. RockAuto can be configured to get parts to you based on your desired cost, speed, or efficiency. Because of this, only 11 percent of orders placed in Arizona are fulfilled by suppliers in Arizona, and the Arizona suppliers ship most packages to other states.
The Court ruled that RockAuto did not have the requisite physical presence for the state to try to collect taxes from RockAuto. The Court then ordered ADOR to pay RockAuto $892.95 in costs and $136,875 in attorney fees.
Instead of letting that be the end of it, ADOR appealed, and that time, it won:
In the end, the Arizona Court of Appeals ruled that RockAuto does have a presence in Arizona, since it has its Arizona suppliers ship to Arizona customers, use RockAuto’s systems, and handle RockAuto’s returns. The Court supports its conclusion by pointing out that RockAuto’s employees also visited the suppliers in Arizona and that RockAuto sends promotional materials to customers in the state. The Arizona Court of Appeals ruling also seems to imply that the Arizona Tax Court might have been applying Quill‘s nexus test in a post-Quill world. Either way, this spells bad news for RockAuto.
RockAuto responds
As you can imagine, RockAuto wasn’t happy about that decision. As president Jim Taylor put it in the previously mentioned 2024 Arizona Capitol Times op-ed:
Somehow, every Arizona factory and wholesaler selling parts to us became our branch office when we asked them to ship directly to our customers. Address labels became stores, refrigerator magnets became salespeople and, magically, RockAuto was in Arizona.
No previous court case (including ours in the Arizona Tax Court) found a retailer “physically present” without employees or assets or someone making in-state contact with customers. ADoR’s own publications say “drop-shipping” from Arizona suppliers does not create tax liability. But ADoR persists in demanding six years of taxes (which we didn’t collect from customers) plus interest and penalties — far more money than we earned in 20 years selling auto parts to Arizonans!
At the time, Taylor said RockAuto may have to stop doing business in Arizona, but he didn’t include a specific deadline. However, a TikTok (embedded above) claiming RockAuto will no longer ship orders to Arizona has recently gone viral. So is that it? Can Arizona residents no longer order from RockAuto? Not exactly, but when The Autopian reached out to Taylor for clarification, he explained in an email that “the current situation is not sustainable so we plan to stop sales to Arizona in early November.” So if you need car parts, you better get your order in fast.
That said, Taylor’s response was at least seven paragraphs long and included a lot more details that it would be fair to include here, so why don’t you head on over to The Autopian to give the entire thing a read. And while you’re there, maybe tell Mercedes her old Jalop-buddies say hi.
