The United States Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. eliminated the requirement for a seller to have a “physical presence” in a state before it is subject to that state’s sales tax. The Wayfair decision held that going forward, sales tax could be applied to any activity “with a substantial nexus” to the taxing state. For example, if an out-of-state business delivered a certain threshold amount of sales to customers in the taxing state, that could satisfy the substantial nexus requirement.
But what about a situation where a seller uses a third-party company to handle its customer orders? Many large companies offer such “fulfillment” services, which give smaller sellers access to the larger company’s warehousing and delivery infrastructure. For example, Amazon’s “Fulfilled by Amazon” (FPA) program enables third-party sellers to sell their goods through Amazon’s website. The seller also sends their inventory to an Amazon warehouse for storage. Amazon then delivers and provides customer service for those orders.
The question then becomes, Is the seller liable for collecting sales tax in the state where Amazon chooses to store the inventory? For instance, say you are a seller based in Wisconsin. You participate in the FBA program. Amazon tells you to ship your inventory to its warehouse in Pennsylvania. Amazon then fulfills your customers’ orders from that warehouse. Do you now have to collect Pennsylvania sales tax?
According to a recent Pennsylvania appellate court decision, the answer is “no.” The Commonwealth Court of Pennsylvania recently addressed this issue in a case, Online Merchants Guild v. Hassell, brought by a trade association of Amazon FBA program participants challenging the Pennsylvania Secretary of Revenue’s jurisdiction over their sales. The Court ultimately held that the Secretary could not take any enforcement action against the out-of-state merchants.
To be clear, the issue in this litigation was not whether Pennsylvania had the legal authority to collect sales tax from Amazon. In 2012, Amazon and the Secretary signed an agreement with respect to the collection of Pennsylvania sales tax for goods “owned and sold by Amazon” directly. In 2018, the parties signed a revised agreement whereby Amazon further agreed to collect sales tax from FBA participants who had a physical presence in Pennsylvania.
Three years later, in 2021, the Secretary sent a “Business Activities Questionnaire Request” to several out-of-state FBA participants. This Request asserted that Pennsylvania sales tax covered any business that stored property “at a distribution or fulfillment center, or at any other location within Pennsylvania,” which the Secretary considered sufficient proof of “physical presence.” The businesses were told they had to respond to the Request by a specified deadline and indicate whether they wished to participate in a “voluntary compliance program” to settle any past-due tax obligations.
The Online Merchants Guild, a group of out-of-state FBA program participants, subsequently filed an application for emergency relief in Pennsylvania state court, seeking to delay the Secretary’s deadline for responding to the Request. The Guild simultaneously filed a lawsuit in federal court, seeking a declaration that the Secretary’s actions violated its members’ constitutional rights.
The Commonwealth Court, one of Pennsylvania’s two intermediate appellate courts, held oral arguments on the request for state-law relief in June 2022. On September 9, the Court agreed the Guild was entitled to relief. Judge Ellen Ceisler, writing for the unanimous seven-judge court, rejected the Secretary’s argument that the Business Activities Request Questionnaire was simply a “demand for information” that did not trigger constitutional due process concerns. To the contrary, Ceisler said Pennsylvania tax law did not grant the Secretary “the unfettered authority to seek business information from any person or entity it desires for the purpose of determining its status as a taxpayer.” Due process first required some “connection” between the taxing authority and the potential taxpayer.
Here, the Secretary could not establish that connection based merely on the fact that Amazon chose to store some of its FBA participants’ inventory in its Pennsylvania warehouses. Ceisler noted that the FBA sellers had no say in where Amazon chose to store their goods for fulfillment. Indeed, Amazon oversaw the entire fulfillment process without any further involvement by the FBA seller. Under these circumstances, Ceisler said the Secretary could not plausibly argue that a FBA seller had intentionally “placed its merchandise in the stream of commerce with the expectation that it would be purchased by a customer located in [Pennsylvania],” or had in any way “availed itself of the Commonwealth’s protections, opportunities, and services.”
For that reason, Ceisler said the Secretary could not proceed with the Business Activity Requests. The Secretary only had the legal authority to demand information and examine the business records of established Pennsylvania taxpayers. This did not include out-of-state businesses that the Secretary “suspects” might be a Pennsylvania taxpayer.
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