Pennsylvania Rules that Presence of Amazon FBA Seller’s Inventory Does Not Create Nexus

By: Aspen Fairchild, SALT Senior Associate

At a glance

• The main takeaway: A Pennsylvania court ruled in favor of an Amazon FBA Seller stating that the taxpayer does not have nexus if its only connection is through inventory controlled by Amazon.
• Assess the impact: While Amazon FBA Sellers can find solace in Pennsylvania, this ruling is in direct contrast with a recent Washington Board of Tax Appeals decision. The inconsistency between the state’s rulings can cause uncertainty for Amazon FBA Sellers with inventory stored across the country.
• Take the next step: Aprio’s State and Local Tax (SALT) team has extensive experience with a variety of nexus issues and can help your business evaluate and remedy any potential tax exposures.

Schedule a free consultation today to learn more!

The full story:

The Commonwealth Court of Pennsylvania recently ruled in favor of a taxpayer, determining that the Fulfillment by Amazon (FBA) seller’s sole contact with Pennsylvania consisting of the presence of marketplace inventory is not sufficient to establish nexus and thus, is not sufficient to create a sales tax obligation.[1] The decision blocked the Pennsylvania Department of Revenue’s (DOR) efforts to impose sales tax compliance obligations on FBA sellers that had inventory stored by Amazon in Pennsylvania warehouses.

Amazon’s FBA program provides storage and shipment outsourcing services to participating sellers. FBA sales are fulfilled entirely by Amazon, who ships the business’ merchandise directly from an Amazon warehouse and collects payment from the customer on the business’ behalf. Sellers participating in the FBA program cannot select the warehouse their merchandise is stored at and shipped from, unless they pay an “inventory placement service” fee, which only enables them to direct inventory to certain locations on initial shipments (i.e., an FBA seller retains no further control over the inventory other than to withdraw it from the program).

Take a closer look at the case

The taxpayer in question is a trade association comprised of online businesses that sell merchandise through Amazon’s FBA program. Members of the association had received a “Business Activities Request” from the DOR indicating that they “may have” a physical presence in Pennsylvania that would require state sales tax collection.[2] The request noted that storing property at any location within Pennsylvania constituted a physical presence and indicated that failure to provide the information requested would result in enforcement actions. The taxpayer’s members never received any tax assessments from the DOR, but the taxpayer brought this case to stop any further enforcement.

When brought before the Commonwealth Court of Pennsylvania, the court ruled that the DOR failed to provide sufficient evidence that non-Pennsylvania businesses selling merchandise through the FBA program have “established sufficient contact” such that the DOR can mandate collection and remittance of sales tax. FBA sellers lack control over their merchandise once Amazon receives it, as Amazon is the one controlling where the goods are stored and shipped. FBA sellers do not receive any information regarding the identity and location of purchasers. Therefore, the court concluded, “We are hard-pressed to envision how, in these circumstances, an FBA Merchant has placed its merchandise in the stream of commerce with the expectation that it would be purchased by a customer located in the Commonwealth, or has availed itself of the Commonwealth’s protections, opportunities, and services.”[3]

There are two important points to note: 

• First, this decision is in direct contrast to a recent Washington Board of Tax Appeals decision, which we wrote about in our June 2022 SALT Newsletter, that ruled FBA sellers are subject to Washington B&O tax because they had a physical presence within the state created by its inventory stored in Amazon’s Washington warehouses. While the Pennsylvania decision focused on the taxpayer’s lack of control once Amazon maintains its goods, Washington’s ruling focused on the taxpayer’s deliberate decision to list its goods under the FBA program in order to reach customers across the country.
• Second, from a sales tax perspective today, it is likely that this decision has less of an impact for taxpayers selling via Amazon or another marketplace platform where the marketplace facilitator is collecting and remitting the sales tax under recent marketplace facilitator sales tax collection rules. However, if a business is selling via a platform that for whatever reason is not collecting sales tax, there may be an issue (given the split between Washington and Pennsylvania) as to whether the presence of inventory in a state will give rise to a sales tax collection obligation by the selling merchant.

The bottom line

Aprio’s SALT team has extensive experience with these types of nexus issues, and we can assist your business to evaluate and remedy any potential tax exposures as well as monitor these issues going forward to ensure that your business remains in compliance. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Aspen Fairchild, SALT Senior Associate, at Aspen.Fairchild@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the October 2022 SALT newsletter.

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[1] Online Merchants Guild v. Hassell, Department of Revenue¸ Commonwealth Court of Pennsylvania, No. 179 M.D. 2021 (September 9, 2022).

[2] For an example of Pennsylvania’s Business Activities Request Form, see Business Activities Questionnaire (REV-203D) (pa.gov).

[3] While the court does not devote much attention to income tax, its opinion does state that if the Commonwealth’s argument is based solely on the same position regarding the presence of inventory, then it “must fail.”

Disclosure

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.