Pennsylvania: Remote Sales via Amazon FBA Did Not Create Sales Tax and Personal Income Tax Nexus

The Pennsylvania Commonwealth Court (one of Pennsylvania’s appellate-level courts) has unanimously ruled that the Pennsylvania Department of Revenue could not assert nexus against out-of-state online businesses that sell merchandise through Amazon’s Fulfillment by Amazon (FBA) program. (Online Merchants Guild v. Hassell, Commonwealth Court of Pennsylvania, No. 179 M.D. 2021, September 9, 2022).
 

Case Details 

The Online Merchants Guild case is one of the first state court decisions since the U.S. Supreme Court’s Wayfair decision to apply Due Process Clause nexus to internet sellers.  The main issue before the court was whether non-Pennsylvania merchants that sell through Amazon’s FBA program are subject to the sales tax and personal income tax (PIT) provisions of the state’s tax code because Amazon stored their merchandise inventory in warehouses located in Pennsylvania.  Fulfillment by Amazon is a service that allows businesses to outsource order fulfillment to Amazon. Businesses send products to Amazon fulfillment centers and when a customer makes a purchase, Amazon picks, packs and ships the order.  Ever since the U.S. Supreme Court’s Quill decision, the Due Process Clause’s “minimum contacts” nexus has only required an out-of-state business to have purposefully availed itself of a state’s market, including purely economic connections with the state. 
 
Ultimately, the court held that the Department failed to provide sufficient evidence that non-Pennsylvania businesses selling merchandise through the FBA program have sufficient contacts with the state.  The court reasoned the connections to the state were shown to be limited to the storage of merchandise by Amazon in one of Amazon’s Pennsylvania warehouses.  As such, FBA sellers do not have sufficient contacts with the state such that the Department can mandate they collect and remit sales tax or pay PIT.
 
While analyzing the specific facts of this case, the court indicated that an FBA seller has no control over its merchandise once Amazon receives the inventory.  Applying the Due Process clause and the so-called stream-of-commerce theory, the court stated that it is “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 not be purchased by a customer located in [Pennsylvania], or has availed itself of [Pennsylvania’s] protections, opportunities, and services.”
 
The court also addressed the Department’s authority of its nexus-auditing policy of issuing Business Activity Questionnaires (BAQs) to the FBA sellers.  The 2021 BAQ indicates that a business may be subject to tax due to the storage of merchandise in one of Amazon’s Pennsylvania warehouses.  The Department argued that the BAQ was merely a “demand for information.”  The court disagreed with the Department.  The BAQ indicates that “[f]ailure to provide the information requested will result in additional enforcement actions,” language that clearly suggests the existence of pending enforcement actions according to the court.  The court was critical of the Department’s arguments, stating that the Department’s statutory investigative powers apply to the records of taxpayers, not individuals or entities the Department suspects may be taxpayers.  The court went on to say that the Department does not have “unfettered authority to seek business information from any person or entity it desires for the purpose of determining its status as a taxpayer.”
   

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