Contracting with Third-Party Fulfillment Centers in Virginia Creates Nexus for Sales Tax

July 31, 2017

Retailers that engage a third-party fulfillment center may need to register their businesses for sales tax in states where their fulfillment company has warehouse locations.

As the retail industry continues to evolve in the online marketplace, many smaller companies are using third-party fulfillment networks to store their products and provide pick, pack and ship and customer support services. For these companies, this service allows them to be able to scale their businesses and reach more customers while increasing their visibility in the online marketplace. However, the presence of resale inventory in these fulfillment centers has created questions regarding the state tax nexus implications of these arrangements.

On May 23, 2017, Virginia released a letter ruling to clarify whether the use of a third-party fulfillment center in Virginia is sufficient activity to require registration for the collection and remittance of the Virginia retail sales tax. [1] The taxpayer operates an online business located outside Virginia and does not own any real property, have any employees or make any deliveries into the state. However, resale inventory is located at the fulfillment center in Virginia where the product is packaged and shipped by a third party based on orders placed with the taxpayer. Virginia ruled that this activity is sufficient to create nexus for retail sales tax purposes.

Previously, Virginia had ruled that the use of a fulfillment center in Virginia was not sufficient to create nexus for retail sales tax purposes. [2] However, in 2017, Virginia amended its governing statute to provide that a dealer has sufficient activity to require retail sales tax registration if the dealer owns tangible personal property for sale located in the state. [3] This change is effective June 1, 2017.

This ruling clarifies that the ownership of resale inventory at a third-party fulfillment center in Virginia meets this requirement. Further, this interpretation of the registration requirement based on the ownership of resale inventory in a third-party fulfillment center is not limited to Virginia. With the increase in the use of fulfillment networks (similar to Amazon FBA services), this ruling and similar interpretations in other states can significantly increase an online retailer’s sales tax compliance process. These fulfillment networks act as multi-state warehouse and distribution companies, and they may move a retailer’s resale inventory between the fulfillment locations without a retailer’s prior knowledge. Thus, wherever the fulfillment company has a warehouse location, the online retailer may likely have nexus due to the movement of inventory among the various locations.

As a result, a retailer that engages a third-party fulfillment company must make determinations regarding when and where to register its business for sales tax, which may include the locations where the fulfillment company has warehouse locations. To further complicate this process, these fulfillment companies may require that the retailer provide a sales tax registration number in all states in which the company has a fulfillment warehouse. Therefore, engaging a third-party fulfillment company may significantly increase the number of states in which the retailer is required to collect and remit sales tax as well as file sales tax returns.

The SALT team at Aprio has experience in performing nexus studies, which identify business activities that create nexus. We also make sure that businesses are in compliance with any state tax requirements so that they do net get hit with unexpected exposures. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the July 2017 SALT Newsletter. You can view the full newsletter here.

[1] Virginia Public Document Ruling No. 17-71, 05/23/2017.

[2] Virginia Public Document Ruling No. 15-194, 10/16/2015.

[3] H.B. 2058 and S.B. 962, amending Virginia Code § 58.1-612C(9).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.