I figured it out. It's one of those things so simple you can't imagine you didn't think of it in the first ten minutes. Now I know how Kary Mullis felt after he came up with PCR. (It was so simple an idea, he couldn't believe that no one else had already thought of it.)
You can't use a paragraph end tag before the block quote. Just use a line break instead and use the paragraph end tag
after the block quote. That way the block quote won't be looked upon as a new paragraph and get automatically indented. This is true whether you use CSS to do the space removal/indents or allow Calibre to do it.
Duh! So simple....
Thanks for everyone's help!