In this week’s episode of the Garlic Marketing Show, we talk with Paul Rafelson, an e-commerce lawyer who’s hungry to fight back against Amazon and their increasingly shady online retail tactics.
Paul has served as in-house legal counsel for massive global corporations including Microsoft and Walmart. While working as a tax lawyer for General Electric, he started taking on numerous Amazon clients who were being crushed by taxes. Paul’s dedication to fighting against Amazon has led him to the Online Merchants Guild, a nonprofit trade association that advocates for fair e-commerce laws and policies.
What You’ll Learn:
- How the Supreme Court’s Wayfair decision will impact online retailers
- What Amazon is doing to avoid taxes and legal liabilities
- The shady tactics driving the Amazon Basics product line
- Why you shouldn’t listen to any self-confessed Amazon “gurus”
- The reason you absolutely need to enforce your IP rights
Connect with Paul:
Links and Resources:
Full Episode Transcript:
Welcome to the Garlic Marketing Show. Today’s guest — we’re going to be talking legal again, it’s an important subject — but we got an awesome guest who was in-house counsel for Microsoft, at Walmart and General Electric doing litigation before moving to a private practice. But first, let’s get a little message from our sponsor, StoryCrews:
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Alright! On to our guest today, an expert in e-comm, ran his own e-comm store, but also has worked with, like I said, Microsoft, Walmart, General Electric. Paul Rafelson, thanks for being on the show.
Thanks for having me on.
Once again, I think this is a super interesting topic when it comes to marketing, when it comes to running a business, especially online business is e-comm and tax law because it’s going to affect the markets, right Paul? Tell us a little bit how it’s changing and how it’s affecting the markets.
Yeah, unfortunately, it’s having a pretty negative effect on the market, although things are starting to turn. The problem with e-commerce is it’s almost too easy in some respects. It’s very easy to just sort of to use legal phrase to sort of dive headfirst into the stream of commerce. And so you’re you’re operating your small business owner, a micro business owner, and you know, with just a few clicks and you’re now selling into multiple state in every state.
Basically, you’re selling into multiple countries. You might be sourcing from China, visiting the Canton Fair, having to deal with import-export. Really, it’s become too easy to access the global economy. And that’s really what e-commerce is. It’s become a portal to the global economy for anyone.
So in many ways, it’s been very liberating, but the problem is the tax regulators, who have the e-commerce aptitude of Senator Hatch asking Mark Zuckerberg how you make money on Facebook when you don’t charge for the services, are making terrible policies and laws and they’re crushing it. You talk about a burden on interstate commerce, as we say in the law, tax is at the forefront of burgeoning that interstate commerce here and unfortunately, it’s kind of not a well-understood issue and very misrepresented. But it’s crushing a lot of good people.
It’s crazy because I was just looking through it. Let’s talk about the recent Supreme Court Wayfair law or Wayfair decision. Can you explain what happened there and what does that mean?
Wayfair is overturning a long-standing precedent of physical presence is required to be subject to the jurisdiction of the state for tax purposes or what we call nexus. We often think of nexus for those people who… I have a Facebook group of 2,500 people who talk about nexus, which is crazy. It’s becoming a term that most e-commerce sellers actually are familiar with and not a technical legal term.
Basically, there are two types of nexus. There’s the nexus we all know and love from first-year law school with Pennoyer v. Neff, Burger King, these cases about when the courts can have jurisdiction. The courts over time have sort of created a sort of a secondary layer of nexus specifically to tax called physical presence nexus which we saw in this case called Quill v. North Dakota most recently prior to Wayfair. At that time — pre e-commerce, really, pre-internet — the courts just decided, hey, we’re going to create a bright line here that if a company doesn’t have a physical presence in the state, it shouldn’t be subject to their tax system.
Big companies have sort of gamed it. They’ve played games with their operations, trying to structure themselves around having physical presence. For the longest time have been taking advantage of that fact to basically avoid collecting sales tax for purposes of having cheaper prices. The most notorious obviously is Amazon. Enough is enough.
The court of South Dakota changed their law to this concept of economic nexus where if you have so many transactions or $100,000 or 200 transactions — we’ll get back to that 200 transaction thing maybe later — you have an economic nexus with our state and we can subject you to tax and totally flew in the face of physical presence for sales tax purposes. But it was for the purposes of mounting challenge and so the case went to the court and the court basically decided just to undo the bright-line rule and just said it was just no longer workable.
To a great extent, I think the court was a hundred percent right. I wrote an amicus brief actually for that case for Online Merchants Guild on behalf of the small sellers on Amazon that this nonprofit that I helped run Online Merchants Guild basically we advocate for them. But you know, if you really read the Court’s decision, it’s actually pretty sound because the court was very clear that you know, hey, we’re removing this physical presence barrier, but that doesn’t necessarily mean that every small business in the world can now be subject to tax.
The court was actually very specific in saying that we don’t have anything on the record to really discuss the economic impact of making a kitchen table enterprise file tax returns in every state and sort of open the door to a future challenge. The one thing the court did note was that they said that if they’re encouraged, software technology trends will progress to the point where compliance with all the state laws could be made really easy.
And sort of indict a sort of said well if that were to happen or if that does happen, then there’s probably not much of a challenge because you’ve eliminated the burden of having to be compliant with all these laws and rules and forms and state of Colorado has like 700 different little mini tax departments you have to comply with. I mean, it’s an absolute nightmare. But the states have sort of ignored that and despite the fact that the court was sort of very clear that Wayfair was a ginormous company billion dollar company and therefore it was pretty ridiculous that they were claiming it’s an undue burden when plenty of smaller companies can handle it.
The states have decided, hey, we’re going to go after those mom and pop businesses, those micro business owners. In fact, California has been the worst but recently Massachusetts has just sort of reared his ugly head.
In fact, I had a client who just got $200,000 siphoned out of his bank account the other day by Massachusetts and he’s done. I mean the can’t make payroll. I mean this guy’s totally freaking out because they just made up a number and said this is how much tax you owe. The funny thing is that even though I don’t think he owes the tax under Mass law and there’s a-whole-nother layer of BS around this, the actual tax amount in controversy would probably be more around $13,000 not 200, but it’s a process just to get that fixed and they’ve already taken the money.
So, you know getting money back from a state. It’s a nightmare. So, you know, these poor people now have to hire lawyers who used to work for GE, like me, to help them. The fact that I have these clients for tax cases I always say that sort of evidence per se of the burden on interstate commerce because lawyers like me shouldn’t really have clients like that. They shouldn’t need lawyers who’ve done 50 state tax litigation. That’s crazy.
It’s scary. I know so many people in that especially like Amazon sellers we’re talking about that instantly became not only national but global enterprises and now they’re getting hit. What are you seeing this do to Amazon sellers to these types of businesses because it seems like all of a sudden now you’re filtering out and you’re giving preferential treatment to larger organizations.
Yeah. I know. It really is. The funny thing about this is that with Amazon in particular, especially with the Fulfillment by Amazon program, it’s forget the constitutional law. It’s not even state law. The way Amazon operates their “marketplace” to say it’s a marketplace is a bit ridiculous. Amazon controls the customer, they control the experience. It’s not like you can advertise or direct customers to your own website.
You think about it, you know the Mall of America… Well, I mean if the Mall of America was like Amazon’s “little malls” every sign would say Mall of America in prominent display and maybe you know sold by Apple and find prints somewhere. The Mall of America would be able to tell Apple to take back an iPhone past the return policy.
It’s really sort of a joke that Amazon sort of uses their adhesive contracts to circumvent their obligations as a retailer but the states are willing to buy it because Amazon’s a job giver and they have 30,000 jobs in the state of California. And despite the treasurer of California writing a five-page letter to Amazon dictating all the reasons why… sorry, a five-page letter to California… dictating all the reasons why the sellers are not responsible for the tax, but Amazon is.
Governor Newsom has decided, you know to go head-on against the sellers and give Amazon a pass that makes absolutely no sense. She used to be the head of sales tax. That’s the funny thing too. She was on the Board of Equalization. She was one of the top people in the sales tax department in California, so she knows very well how it works and for her to have gone out on a limb like that.
I mean, I admire Fiona a lot because it’s not like a lot of these people are out of staters. They’re not her voters, but she just in principle, you know sees how wrong this is to do that but Amazon’s and so influential and being able to sort of get states to look the other way and give them a pass.
And so when you talk about things like the retail Armageddon or apocalypse and you know, I just love when state officials will blame a kitchen table enterprise in Iowa for the retail apocalypse in their state, not something that maybe this “marketplace” called Amazon — that really doesn’t operate like a marketplace but as a traditional retailer — is the reason because you let them get away with not collecting sales tax.
They deliberately shifted business towards their marketplace in order to avoid their tax collection obligations. They gamed everybody and they followed it up with really aggressive lobbying and incentive programs. Just a little decide about incentive programs… I used to work for GE and it’s kind of funny, one of the last things I did at GE was I helped move their headquarters to Boston from Connecticut. I was part of that team and it’s amazing how nice states will be to you when you’re when you’re bringing goodies like that.
And so when I see Amazon getting away with something that no other company in the world would get away with it’d be like Walmart not having to collect sales tax in their stores because it says sold by Apple on the price tag somewhere. It’s absolute nonsense…. sort of violates the core principle of substance over form, yet here we are and there’s no question that with headquarters to the Amazon jobs and warehouses is just that there’s a clear correlation here between what Amazon is getting away with but it’s unfortunate that states that decided to have their cake and eat it too by going after small out-of-state sellers and that’s the key is that they’re out of state, so the states don’t care about.
Interesting. Yeah, it’s an interesting place we’ve found ourselves in. You mentioned Online Merchants Guild which is your nonprofit. I want to go into that a little deeper because you haven’t just said okay I’m going to be an attorney and take people’s money. You’re doing a lot of work to help prevent this from happening. Tell me a little about the organization.
Sure. So the organization is the advocacy. If I have a you know a client who’s being hit up for a million dollars in California, I represent them, I helped them, I have co-counsel in California I work with but we take it. That’s my practice.
The Online Merchants Guild is an advocacy group that I volunteered to help start and sort of the first of its kind trade association for e-commerce sellers. I think one of the biggest surprises to me coming into this space was that Wisconsin cheese farmers have a trade association representing the collective interests of the Wisconsin cheese farm industry yet millions of active online sellers have no representation at all in a lobbying capacity and advocacy capacity.
Myself and a few other sellers decided to start the process of changing that informed online merchants. Like I said, I volunteer a lot of my time because I think the legal issues are really cool. I mean they’re tragic but it’s cutting-edge constitutional law stuff and somebody who spends a lot of time in state tax litigation, especially con law is key and it’s everything we do is the Constitution right?
Federal tax law when you argue the Constitution usually end up in jail like with Wesley Snipes. But in state tax it’s pretty common. And this is some really cutting-edge stuff and I wanted to get involved. So I’m happy to volunteer and be an advocate because I just see how wrong this is and how wrong these government actors are and we’ve got to stand up to them and push back.
I think it’s been a good lesson too. I do tell people had you had a trade association that sort of advocated for e-commerce 10 years ago this probably wouldn’t have happened. Somebody would have been on for out in front of it. And been advocating in the other direction.
Currently, we are lobbying heavily in California both on the back tax issue that is sellers being held accountable for back taxes. We’ve lobbied successfully to make Amazon a tax collector starting October 1st. So now we’re just focusing on the back tax issue, and we’ve also worked on the first of its kind Seller Protection Law. California has an assembly bill in going through the process right now just came out of the Senate Judiciary Committee called AB1790 which has really cool seller protection language. It’s not perfect but it’s the first of its kind and it’s a starting point. Where are you know Amazon has to disclose with specificity why you’re being suspended or why they’re holding your funds or can they compete against you.
We want sellers to carry insurance to kind of filter out all the junk from China that’s burning people’s houses down where there’s no accountability. Amazon seems to be structuring their system in a way where if you’re in China, you have a bigger advantage. I even have this private boat for sellers just in China that’s cheaper freight than typical.
Amazon wants to keep the prices low so they really go out of their way to encourage sellers in China to sell direct but there’s no accountability and every time there’s a case that someone tries to sue Amazon a product liability theory. Amazon keeps playing this marketplace card.
However, that has changed last week. There was a decision in the third circuit, Pennsylvania, where the court actually did find Amazon could be held liable. So I think I think people are starting to wake up to the reality that this use of the term marketplace in the context of Amazon is probably a bit BS. It’s all form no substance, whereas, eBay certainly has more of the feel of a bazaar, although you can say that a lot of the same things.
Sort of look at it as like a spectrum or even Amazon on one end, maybe eBay the middle and then you’ve got sort of Craigslist and Facebook on the other end where you really are the seller in those scenarios or your own shop if I say where it’s your own website, your own branding. You’re the direct seller, but with the Amazon Marketplace and when you go through the process… most consumers I talked to who shop on Amazon just say I buy prime. They don’t even know who they’re buying from, right? They don’t know the name of the seller. They don’t care. They might know their product but they don’t they don’t know the seller is nor do they care to know. They’re just clicking because they’re a Prime member.
Interesting. I personally order through Prime but I’ve noticed I’ve ordered less and less because the quality has gone down and down. It’s easy to get caught up in one of those Chinese deals. It’s fulfilled and everything, but then you realize this is a complete scam.
How do you see this… I see a lot of Amazon sellers. I’ve been to a lot of Amazon Seller events and a lot of these e-comm businesses start on Amazon. You think that’s still a good idea from a legal standpoint? And don’t forget here guys: if you’re listening, this is not legal advice. Paul and I are not your attorneys. Talk to your attorney. But from a legal standpoint, how would you be starting in Amazon business? Econ business, sorry.
It’s interesting. I was just speaking at a seller event, Seller Fest in Tel Aviv, and one of the last speakers was sort of how to get your product into Walmart. As opposed to you know talking too much about Amazon. I was like, you know, don’t forget that there’s traditional retailers out there or Target. I think the problem, you know, Amazon is very addicting because if you know how to do it, you can really generate a lot of sales and you can generate sales quickly.
You can get product reviews, you can do all those things. It’s very tempting. It’s hard for e-commerce sellers to generate the volume that they generate off of Amazon than they generate on Amazon because Amazon’s got, what, a hundred million Prime users? I mean, you’ve got a locked in audience, which I think is partially the problem with Amazon.
I can give you my how would I break up Amazon strategy if you want at some point. I wrote a CNN editorial about it — kind of got titled the wrong way — but I think that’s part of the problem is that they’ve got a hundred million sticky people and it’s just hard to not want to be a part of that.
I mean people still make money with Amazon. The problem is what Amazon gives away is just I think too much, right? If you’re selling a product, imagine walking into Walmart store and putting your iPhone next to a product and finding out how many units Walmart just sold of that product and you’re a competitor, right?
The information that Amazon makes public about your product is just so much, and your IP risk and your ability to enforce IP rights is so restricted on Amazon. It’s hard to say, but there are plenty of people out there who still say it’s the best way. If you’re getting into private label and you’re going on Alibaba and you’re putting your stamp and making your changes to a sort of a common product, I don’t see a problem with Amazon.
I think if this is the idea of a lifetime that you’ve had, this is your Shark Tank moment, I definitely would consider approaching with caution. And certainly understand Amazon, which is what we focus on. We have all of our lawyers… kind of have an Amazon take on that. We have one lawyer who is a seven-figure seller on Amazon. So, you know, it’s hard to say because that volume of sales is so tempting but you’re putting all of your cards out there. I mean everybody can see what you’re doing, how much you’re selling.
And once you’ve signed away a lot of your rights via the arbitration clause with Amazon… that’s a big thing right now is that Amazon… basically, any complaint or any failure of Amazon to act or any action, it takes its adverse. You’re pretty much limited to arbitration-level damages and that’s just not very appealing. You throw away a lot when you go to Amazon. There’s a number of factors that you have to think about it.
But you know, certainly if you’re just sort of one of those people who are just kind of like moving in and out of different products based on trends. I still think that there’s money to be made. It’s a skill. Some people are better at it than others. But if this is really like your life’s work, you may want to approach with caution.
And there’s some things you can do. We could talk about maybe the end, we can talk about some tips that might give you a little bit more leverage when dealing with Amazon, especially in terms of protecting our IP rights, but it’s still it’s a little scary out there. I don’t like that they give away your information. I don’t like that they tell other people how much you’re saying because it’s just invites that race to the bottom effect of you have a successful product and the next thing you know, there’s a whole bunch of knockoffs competing with you and prices are coming down and totally lost everything. Yeah, it’s a bit of a rat race still.
I mean, I’ve heard… this is all hearsay… but I have heard of other people having products on Amazon saying I want to see your supply chain and then all of a sudden Amazon has the same product under the Amazon brand.
That’s not a big secret. Amazon just figuring it out, or you know… There’s multiple types of Amazon sellers. You’ve got your share of your retail arbitrage crew — which I used to do back in the day when I was in law school a long time ago — which is when you’re flipping things you’re buying in the retail stores because you can sell it online for a higher price. You’ve got the wholesalers who develop relationships with the brands, you know, bigger brands out there and sometimes they have the right, sometimes they’re diverting to sell the products.
What Amazon might do in that instance is if you’re selling a really popular product like maybe a kitchen knife that’s really popular, Amazon might go directly to your manufacturer and try to cut you out. So that’s the other way that they can deal with/work around sellers if they want and they’ve done that. They’ve been known to do that too. That’s happened to a number of sellers where basically Amazon has cut them out.
And then with the private label products sellers. Yeah, I mean you have a great idea and it’s trending the next thing, you find your product isn’t Amazon Basics. Now, Amazon Basics gets all the prominent display, prominent search results, and you’re left with nothing. You’re holding a bunch of inventory you can’t use.
Wow. It’s crazy. Now I want to get into actually, you know, I’ve worked with a lot of attorneys and been legal for a long time and you start this law firm and what’s interesting to me is A) I think it’s genius and I know it came organically is that you niched and I think it’s so important. I always tell people when you’re starting a law firm, get ultra niched. I want to talk about how that came about. But also my second part of that question is have you ever seen in the history of law — obviously, I’m not an attorney, so I don’t know in the entire history of our law — but where a single company created essentially a need for a niche of law.
Yeah, that that’s interesting. Really. No. I’m trying to think like, you know, like with the apps, the app developer. But in this way, I mean, Amazon has its own court system. I don’t think people realize that. The Supreme Court of Amazon is actually email@example.com.
If you’re a seller and your account has been shut down for some reason, maybe it was a dirty seller trick, which is what my colleague or not a colleague my I guess it’s my competitor in the suspension space, but the friends and they sign off and says is that she calls them dirty seller tricks, but if you know for example, I’ll give an example the dirty seller trick we dealt with actually not that long ago.
Somebody claimed to be a design patent owner of a product that one of our sellers was selling and it wasn’t even infringing and we don’t usually go into infringement because that can open up a whole can of worms. But what was interesting was the person claiming infringement was the rights owner and the rights owner is dead and it doesn’t mean that you can’t have a right owner, but they were actually claiming to be that person.
They were Bob rights owner but Bob rights owner actually died, so there’s no way Bob’s rights owner can be writing an email and signing his own name to it. It used the generic outlook.com address. You basically have a dead guy claiming that somebody’s infringing on their patent to get them knocked off so that they’re competing product can sell.
These are the types of tricks and so when you’re dealing with that, there’s a process you go through and after going through that process if you don’t get the results that you’re looking for, you have like sort of one last appeal. You have to have all your ducks in a row and you have to send an email to firstname.lastname@example.org and there’s a whole process and procedure and strategy to how you write what we call a Jeff letter. And email@example.com is a prioritized sort of high-level review, you know highest level review of your case.
And they will make an ultimate determination as to whether or not you are allowed to sell an Amazon again. So it’s really crazy. It’s a court system and it’s very not transparent. You don’t know who’s reviewing it. The people who are oftentimes charged with reviewing these cases are you know doing three four minutes…
Little secret about me: my wife used to be one of those people. She was one of the first when it was a little bit less process driven and more actually had to think, and she was an Amazon — they call it solid performance now when she did it I think was called T RMS. So one of the other reasons I just happen to know a lot about Amazon in addition to being a seller is that everybody I knew when I lived in Seattle, I used to hang out with the Amazon people more so than the Microsoft people and I just learned a lot about the Amazon Marketplace through working with the people policing it, or knowing the people who policed it. So it sort of weird fact pattern that just really led me down this road in terms of tax becoming the top issue and then having to know a lot about it.
Interesting. Wow, this is fascinating stuff that most of us don’t know about. We just click and order and don’t realize all this stuff happened in the background. So let’s talk about how you went from in-house counsel to private practice to this very niche private practice.
Yeah, so I was loving life as an in-house lawyer.
I was for years at Microsoft and then I got recruited to go to Walmart in Arkansas, which sounds crazy but actually was really cool. Then I got contacted by GE’s outside recruiter who does all of GE’s recruiting and they asked me if I wanted to go to GE now as a tax lawyer. Going to GE is kind of a big deal.
Or at least at the time it was right. I mean, they pay no tax. They were written up in the New York Times as the best tax law firm in the country despite being in-house. Every tax department in the country, every tech acknowledges that they want to be like GE.
That’s the way it was. So I of course jumped on that opportunity and moved to Connecticut. My time at GE, I enjoyed it, but it was sort of you could see what was coming down the road because a lot of the deals I was getting involved in were disassembling GE, from NBC to GE Capital. We’re going to get rid of GE Capital. Which division are we getting rid of? Is it the credit cards? Is it…?
No. All of it. Half the company we’re going to just dissolve. We’re just going to sell it off. I mean, it was really just kind of a down time to be there, but I did that and you know where it went from there, I was sort of planning to just go to one of these law firms that I’ve worked with my whole career and I’ve worked with so many different tax law firms.
Around that same time, it was actually one of my wife’s co-workers who is now an Amazon consultant, reached out to me and said hey, I’ve got all these Amazon clients who are getting pounded about tax and I don’t know what to tell them. He knew what I used to do and what I did in Microsoft and asked me to do a blog post and what started with one blog post, I quickly saw so many sellers started reaching out to me. Hey, I’ve got a bill from California for a million dollars. I got this and I got you know, what do I do?
And I started like taking on clients. I was going to go to a couple law firms, but I kind of quickly realized that I actually can’t go to a law firm because my position on this is so anti-Amazon that any of the law firms that I knew and we’re interested in wasn’t going to take a hostile and anti-Amazon position.
It’s the most desired client. It’s a Fortune 500 company, and typically the clients I would be working with are in that space and just nobody was comfortable taking a position that was really against the Fortune 500 and that was sort of my realization that if I want to have an honest and open no filter discussion about the issues and be an advocate, I have to be on my own and that’s just kind of how it happened.
So I just started on my own and then kind of pulled in a lawyer from Seattle who I used to work with in Microsoft. He’s a patent lawyer. His name is Fern Francis and he used to be the senior patent counsel to the chief software architect of Microsoft. So I sort of say, you know, you can have Bill Gates’ lawyer working for your Amazon accounts is kind of cool, huh?
Yeah, so we kind of know what we’re doing. And then I took on another lawyer not that long ago named Jeff Sheck who, you know, he’s a young lawyer but he’s got about eight years of being a seven-figure Amazon seller and his legal experience is really that Amazon court system. He knows that system and so having someone like that on the team is really important so that we can help our seller clients when they get in trouble with Amazon.
Having somebody that really knows the legal system of Amazon and I call it the legal system of Amazon, but most people who practice that space are not lawyers. In fact, one of my biggest frustrations of being a lawyer in private practice is how many non-lawyers seem to be practicing law right now.
I’ve never realized how unprotected our industry was until now. It’s really frustrating. My biggest competitors in this space are typically just people claiming to be an IP expert. Well, how can you be an IP expert if you get an infringement notice. Call me. I’m in an IP expert but I think that’s a legal issue.
But you know, everybody is just claiming to be an expert tax. I mean, you know, yes accountants can practice tax, but you know, should they be making constitutional law arguments and determinations? No. Absolutely not. But they are. Two tech software companies are out there saying what nexus is and what the Constitution says and they’re completely wrong and yet they’ve got a powerful marketing engine and are able to do that and I do I actually feel like because it’s a little bit stressful and frustrating at times being an attorney in private practice because I just feel like the bar association is kind of out of date.
Our hands are tied and we can’t do anything. Nobody really wants to partner with you because you can’t pay them unless they’re a law firm, right? You can’t get into referral arrangements. Meanwhile, the tax software companies pay however many bucks per customer that they get and it’s like so a law that’s designed to protect the client is actually working to drive clients away from lawyers and towards these zero qualification consultants that some don’t even have a college degree.
I mean, there’s M&A advisors, mergers and acquisitions advisors, buying and selling your Amazon account. It’s a big thing right now. There are folks out there who have done it once. They had an Amazon business, they sold it and now they call themselves Amazon M&A experts and they’re out there.They know nothing about due diligence or any of the issues involving a typical M&A deal and yet they’re out there calling themselves experts.
So this is a bit of a divergence and I don’t want to drift too far away from center here, but it just felt like the opportunity to gripe, I guess.
It’s interesting to me because, you know, being in legal marketing how much the bars have especially attacked small private practices and I’ve seen it over and over again and you know private practices are so scared to market and so scared to do a lot of this stuff, and you’re right. Now they’re driving people to non-legal means, non-attorney means and so it’s really really interesting and they’re so far outdated and I won’t get into it because I know some of the people.
I just had a discussion today about North Carolina. North Carolina is the only one that requires attorneys to register their trade name if they have a different trade name for their website. And it’s just like why is this so different but that’s neither here nor there.
With the internet people are smarter. They do the research. It’s just different now than it was back then, but it just seems like… I almost want to resign my law degree and just practice as a consultant. It’s like, what’s the point?
My clients don’t want to litigate. They can’t afford it. I’m not going to be going to court on behalf of my clients anytime soon. At least most of them, right? I mean, it’s just what’s the point? It’s so discouraging and I never knew, you know, obviously being in tax we do deal with it because we have like… when you’re a tax lawyer and your competition is like Waterhouse because they’re kind of like quasi practicing law.
In fact those big four accounting firms employ more lawyers in the biggest law firms, but they’re not practicing law, right? I know that frustrates a lot of my colleagues in the legal space. But even at this level where it’s like I did something once and I would call myself an expert because I think it’s just rinse and repeat every time. It’s frustrating and then of course there is the LegalZoom side of things where these Amazon gurus will say don’t hire a lawyer to do anything. Don’t hire a lawyer for a trademark. Don’t hire a lawyer for a corporation. Just open up a Wyoming LegalZoom, get the Wyoming special from LegalZoom and you’ll be just fine and I’m thinking myself if you sell a hover-board and that hover-board burn someone’s house down.
And there’s three people to sue: the manufacturer in China, you and Amazon. You’re probably the primary target now. You might have insurance but if you have any net worth, do you really think the LegalZoom LLC formed and probably didn’t maintain or do anything right is going to be the best form of protection for you and the assets that you have.
If your kid out of college it’s one thing — what do you have. But I mean smart people listen to these gurus have who some of whom have no credibility. They’ve been caught faking pictures of land but you’re renting a Lambo for the day and taking pictures and it’s like these are the people we’re getting legal advice from and so the bar association is this is what’s happening.
We’re getting advice from gurus in Lambos, not lawyers, and something’s gotta give because a lot of my clients come to me, especially tax litigation clients the ones who I actually have to write appeals for, because they listen to a non-lawyer tax advisors who’s not even accountant — one of many out there, and they told him to go register and collect sales tax in California and work out a deal. And it turns out the deal California wants to give them is a million dollars on a payment plan.
That’s not going to work for that. These amounts might bankrupt them and legally they were not obligated to collect in California and yet they were given that advice and now they’re down a road where it’s too late. Now you got to go to appeals because you’ve gone past the point of no return, right?
Yeah. It’s crazy to me and and on top of it just the added layer of complexity that you talked about how many attorneys are staying up to date on this even if they are attorneys.
It’s true. I guess my message for that is just be mindful when you’re dealing with Amazon sellers that you’re not dealing with a small business you’re dealing with a global small business. It’s a totally different type of thing. It didn’t exist 25 years ago when that sales tax decision was made. These are global small businesses. When the Supreme Court decided physical presence was a rule, the thought process obviously was that if you were to have physical presence in 50 states, you had to be a big company, right?
Well, you’re going to define physical presence as an Amazon warehouse, which I think is complete nonsense and violates the due process clause — look up J. McIntyre v. Nicastro 2011. You know lack of purposeful availment, but nonetheless, I mean if that’s how we’re going to look at it then there you go. You have nexus and 50 states and all you’ve done is ship a box, you gave a box to UPS and you have a nexus in 50 States. There’s just a lot of confusion out there.
Prop 65 in California. I don’t know if you know what that is. That’s the little sticker you have to put on your product to say that it causes all sorts of diseases or else you’re in violation. It’s like if you rent a car in California often times on the glove box, they’ll be a giant stickers that say Prop 65 Warning: the chemical used to make this, in this process of manufacturing this product have been known to cause all sorts of diseases. That’s a California law.
But how do you bifurcate your supply chain only to put a sticker on a California product. You can’t. So, you know, people in Connecticut are getting hit by sort of bounty hunter lawyers who are going after Amazon sellers for Prop 65 violations, and you didn’t put a proper Prop 65 warning on your product or you didn’t test it.
And it’s like are they even subject to the jurisdiction of California? If all they did was turn a box over to UPS? And once in an Amazon warehouse? There’s so much. It really is the legal Wild West — this Amazon thing and the way they fix it. I mean really the way to fix it is just a kind of look like what like what we say with tax. Why is Amazon any different than any other retailer in the country? Why is Amazon different than Walmart? Why is the Amazon different than Target? I mean they’re doing the exact same thing. These sellers are effectively suppliers. They are in essence suppliers. They don’t have any other rights in the contract than a supplier would normally expect. Amazon just sort of calls them little individual retailers, even though they get no retail presence in a transaction, a privy contract with the consumer.
And I think that that is going to be the way forward is that we’re going to have to stop looking to these sellers, but for now just be mindful. It’s the wild west but your seller clients opening up a tea shop around the corner is a lot different than starting an Amazon business these days. There’s just a lot more headache that goes with it because it’s just the complete Wild West right now.
Wow, that’s crazy. All right. Well then on a positive note. What are some of your Amazon seller tips that you can give them?
Yeah, so one of my favorite tips right now is I want people to think about intellectual property differently. I think Amazon has this program called brand registry where you register your trademark and you can enforce your rights. I want people to think differently and think about possibly holding your intellectual property in a separate company than the company register for brand registry and you can do that.
And the reason is that we’ve noticed is that when it comes down to tax to take someone down for IP violations Amazon’s actually more responsive when you’re an outsider. So in other words an outsider means somebody who hasn’t signed an arbitration contract with Amazon. So think about being a distributor for Nike and that distributor doing business with Nike versus Nike itself.
When Amazon gets a cease and desist letter from Nike or gets a note, a takedown notice from Nike, they’re going to be much more responsive than maybe some dispute with the distributor because Nike’s an outsider enforcing their IP rights. Being an insider, having signed Amazon’s arbitration clause, the team seemed to be slow to react so being careful about how you structure your business and it’s kind of crazy to think that small businesses might need IP holding companies. But if you have a valuable product and get valuable intellectual property and you want to keep others from stealing it, consider using an IP holding company.
And the other thing is don’t forget common copyright. Digital Millennium Copyright Act has a takedown procedure. It’s statutory. It’s a great tool. Everybody’s focused on trademark, but you basically have a copyright the moment you create something, but why not register your copyright? It’s very easy and cheap to do ensuring you can then take certain legal action if needed but also it just adds some substance and you can actually use that to take advantage of the DMCA to take down a seller who maybe is using a drawing or likeness of a drawing that you copyright it to make a product that looks like your products.
Design patents are great. Trademarks always helpful, but don’t forget the common copyright. This is a really great tool and I don’t think enough Amazon sellers really realize how cheap and easy it is to do and how powerful it is because it’s the only area of inertial property to a statutory law and take down.
The DMCA does not apply to patents and trademarks, so you gotta get creative out there. It’s really hard to get Amazon to act these days. They’re starting to ignore people’s design patents, especially if the design patent owners is filing the complaint within Seller Central meaning they’re an insider. So, you know, these are just some strategies you can use.
And the last bit of good news is on the sales tax front. The one thing that has changed is thankfully a number of states have passed these Cellar Marketplace Facilitator Laws. So starting October 1st, California will be collecting sales , already a number of states are already collecting sales tax by making Amazon do it, not the sellers individually, and I think that’s the trend.
If you’re thinking about selling on Amazon right now or you’ve been reading some sales tax blogs, you really need to think twice before you go registering for sales tax in a whole bunch of states because it’s really not what it was two years ago and I wouldn’t have advised it then and I’m not saying not to do it because everyone’s situation is different — not legal advice — but I’m just saying that a lot has changed since then so definitely be careful what you read and even that 200 transaction test for your Shopify site. A lot of states have pulled back on the 200s transaction test. You sell something for $20 times 200, that’s four grand. I don’t think anybody’s going to be held accountable for nexus for having four thousand dollars of sales based on the economic nexus threshold.
I think there are some positive stuff coming out there. So just be mindful out there. Be careful what you read. Consider the source. If they’re trying to sell you a software, it’s probably going to tell you the thing that’s gonna scare you into buying that software.
So yeah, if they have a Lambo you might not trust them either.
Yeah, if you have a Lambo… they have two Lambos then that’s fine because they cancel each other out.
Yeah man, that frustrates me too. The Lambo thing. And the sad part is that it works. It’s crazy. I won’t name any people but you know who you are. Well, Paul Rafelson, it’s been awesome talking to you today. I found this super interesting and very very helpful. Thanks so much for being on the show.
You bet. Thanks for having me on today. I appreciate it. It was great talking to you.
And if you want to contact Paul, go to ecomattorneys.com. And also if you are an online seller, especially in the Amazon space, make sure to check out onlinemerchantsguild.org — the nonprofits really about bringing people together, like Paul said, bringing together a trade association to help protect your rights, but thank you all for listening. This has been Paul Rafelson and I’m Ian Garlic on the Garlic Marketing Show, and thanks for taking us on your journey.
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