Financial Win for FBA Sellers in PA Court

On September 9, 2022, the Commonwealth Court of Pennsylvania released an order prohibiting the state’s Department of Revenue (DOR) from pursuing Amazon FBA sellers for sales tax nexus owed from previous years. 🎉☝️

This means less financial burden to bear especially amid the mounting Amazon fee stack moving into the fourth quarter! 

What is Sales Tax Nexus?

In tax law, nexus describes the level of connection between a business and a taxing authority such as Pennsylvania’s DOR. Nexus specifically applies to businesses with little to no physical presence in a state, aka out-of-state online sellers, who meet certain criteria such as having physical inventory in the state – as is the case with FBA warehousing – or who exceed a set level of sales or number of transactions within the state.

Until a nexus is established, a state cannot impose its sales tax on a remote seller.

The US Constitution provides two clauses to determine a nexus:

• The Due Process Clause which requires a definite or minimal connection between a state and the business it seeks to subject to sales tax
• The Commerce Clause which requires substantial presence 

Nexus determination may vary by state, but it generally requires that an entity such as your Amazon business must meet the following conditions to be considered to have a connection or presence in a particular state.

• You maintain a place of business
• You employ workers or salespeople
• You store merchandise in a warehouse
• You engage in an activity related to leasing or servicing of property

The third bullet point puts FBA sellers in a very tricky situation because Amazon distributes their inventory across multiple states.

Suppose Amazon stores a portion of your inventory in a state where nexus laws are enforced. In that case, the retail giant may be authorized to collect taxes on your sales in that state and remit them to the revenue department on your behalf. Or, depending on the nexus provisions of the state, the tax man may require you to pay directly.

For years, Amazon has resisted calls from state governments to charge sales tax to keep the prices of goods on their platform more affordable than brick-and-mortar stores. Both parties have engaged in a long, arduous debate over whether online sellers having a physical presence in a particular state through FBA (i.e., storage and distribution centers) causes them to have a nexus. 🤔

In a 2017 New York Times post, Amazon reportedly found a loophole that allowed them to collect sales tax only when the order came from their own inventory, e.g., customers buying from AmazonBasics, not from third-party sellers who account for 60% of Amazon’s total sales. This action basically left sellers to charge and remit taxes on their own. 🤦‍♀️

Many sellers found this action unfair and self-serving, claiming that they don’t have control over which warehouse location(s) Amazon selects to store their goods. Besides, Amazon is the owner of these warehouses, which establishes their connection with the state.

Therefore, out-of-state sellers, whose only connection to an Amazon warehouse is their inventory, should be exempted from sales tax. 

Unfortunately, the loophole has resulted in millions of dollars in uncollected sales tax revenue and states aggressively pursuing sellers (instead of Amazon) for back taxes they presumably owe. 😓

Paul Rafelson, Director of Online Merchants Guild (OMG), said he believed that some states were chasing after sellers for back taxes to prevent a clash with Amazon. 

States Started Taking Action

To close any loophole and protect their budget, several states have passed nexus laws, aka Amazon laws. These laws seek to remove the burden and cost on out-of-state FBA sellers to charge and remit sales and income taxes.

Some states have also used different approaches, such as increased reporting requirements on retail companies and implementing certain mechanisms (e.g., concessions or state agreements) to collect back taxes that sellers owe.

As of this writing, Amazon now collects and remits for many states, but not all of them. Florida, for example, still requires third-party sellers to pay directly. Either way, this puts an end to tax-free online shopping on Amazon and places more strain on sellers and consumers.

👌 This is why getting the Pennsylvania (PA) court to side with FBA sellers is a pivotal moment, as groups like OMG could leverage this win as precedent to challenge other similar Amazon laws. It could also pave the way for more states to stop pushing for more e-commerce taxation.

Dispute Over Obligations to Pay PA Sales Tax

In OMG (a group of Amazon sellers) vs. Hassell (Secretary of Revenue), the PA court found that:

“The Revenue has failed to provide sufficient evidence that non-Pennsylvania businesses selling merchandise through the FBA Program, and whose connections to the Commonwealth were only shown to be limited to the storage of merchandise by Amazon in one of Amazon’s Pennsylvania warehouses, have sufficient contacts with the Commonwealth such that Revenue can mandate they collect and remit sales tax pursuant to the Tax Code.”

Simply put, any attempt to collect sales tax from out-of-state FBA sellers is considered illegal in Pennsylvania. 🚨

This legal battle within the Keystone State has been going on since 2012, when non-PA online retailers, including Amazon, agreed to voluntarily collect and remit sales tax on their internet, catalog, and telephone sales. However, this state agreement did not apply to FBA sellers.

In 2018, Amazon entered into a new agreement with the state to collect and remit sales tax for FBA sellers. The remittance also included taxes the retail giant failed to collect before 2018. 

Furthermore, representatives from the DOR handed out Business Activities Questionnaire Requests to members of the Online Merchant Guild. These forms indicated that they may have a physical presence in PA that would subject them to sales tax and personal income tax. In addition, the DOR provided voluntary compliance services to assist the Guild members in paying back the taxes owed.

In 2021, OMG filed a lawsuit with the Pennsylvania Court to stop DOR’s attempt to request payment from its members, stating that it violated their civil rights.

When asked about the impact of the PA’s ruling on nexus with other states, OMG Director Rafelson told EcommeceBytes that “Basically all of that tax nonsense for the last five years, and even going forward was bogus and unconstitutional. Of course, this is one state ruling, but it is a first state ruling.” 🔥