On September 9, 2022, the Commonwealth Court of Pennsylvania granted relief to Online Merchants Guild, a trade association composed of independent e-commerce businesses, for Fulfillment by Amazon (FBA) merchants. The ruling — stating that non-Pennsylvania businesses selling merchandise through Amazon’s FBA Program are not required to collect and remit Pennsylvania sales tax or pay personal income tax — is a win for most FBA merchants outside of the Commonwealth. It also may impact other states’ appetite for pursing similar FBA merchants.
Merchants all over the globe are signing up and entering into the FBA program. Once merchants release their inventory to one of Amazon’s fulfillment centers, the merchant no longer has control over where the inventory is sent and no contact with the final customers who purchase it. Pennsylvania Department of Revenue took the position if the “merchant” is participating in the FBA program, that merchant is creating state tax obligations because the inventory is stored in Pennsylvania, which presumably gives the merchant a physical presence, thus creating nexus and tax obligations.
The key issue examined in this case was whether FBA merchants are subject to Pennsylvania sales and personal income tax, since Amazon is the entity that actually holds, controls and ships the inventory from their warehouses located in Pennsylvania.
Through the state’s nexus questionnaire, the Pennsylvania Department of Revenue claimed that FBA merchants with inventory in the Commonwealth creates sufficient minimum contacts to meet the requirement of maintaining a place of business in Pennsylvania.
However, the Court found that mere participation in the FBA program does not create nexus, and the existence of minimum contacts requires some type of “act” in which an entity is availing “itself of the Commonwealth’s protections, opportunities, services.” In other words, there needs to be a connection between the entity and taxing authority to subject the entity to taxation under due process.
Importantly, the Department of Revenue has chosen not to appeal the decision. To comply with the Court’s decision, the Department plans to revise its business activity questionnaire used to request nexus information from retailers, likely removing FBA related questions.
E-commerce businesses participating in Amazon’s FBA program should carefully review the details of this case, as the ruling is limited to the specific set of facts presented. In most scenarios, however, the court’s ruling reaffirms the due process clause and is a positive outcome for businesses in the program. Additionally, this decision will impact states such as California and others that house FBA fulfillment centers across the country, potentially dissuading them to pursue tax payments from businesses with similar fact patterns.
Contact Nick Longo at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
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