The Pennsylvania Department of Revenue (“Department”) attempted to collect information from approximately 11,000 out-of-state sellers that provide inventory to Amazon for fulfillment of sales to determine sales tax nexus. The terms of agreements with Amazon require these sellers to provide their inventory to Amazon for storage in Amazon warehouses in any location deemed appropriate by Amazon. Sellers typically have no control or knowledge of where the inventory is located.
On behalf of the Fulfilled-By-Amazon (FBA) sellers that received Business Activities Questionnaire Requests from the Department, the Online Merchants Guild filed a petition1 for review with the Commonwealth Court, whereas both parties subsequently filed cross-applications for summary relief. The principal issue was whether the FBA sellers were subject to sales tax and personal income tax because Amazon stored their merchandise in warehouses in Pennsylvania. Also at issue was whether the Department’s enforcement efforts violated the Internet Tax Freedom Act and whether the Commonwealth could collect sales taxes retroactively.
The Department argued that the requests for information were not a demand for tax payments but rather an information request authorized under Section 272 of the Tax Reform Code of 1971, and the claim was premature as no tax assessment was issued. The Court did not agree with this position, noting that the request states that failure to provide the information would result in further enforcement actions.
In the Court’s decision, it was stated that the Due Process Clause requires a connection between the taxing authority and the person or entity it seeks to tax as well as “some act” by which an entity “purposefully avails itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws.”2 Given the facts of the FBA sellers’ agreement with Amazon, the Court could not envision how a seller “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.”
The Court granted the Guild’s motion for summary relief based on the due process claim and did not consider the remaining arguments.
Implications
This case has widespread implications in both sales tax and in income tax arenas. At present, at least 21 states have taken the position that warehouse inventory can provide nexus for out-of-state sellers for purposes of sales tax. It is possible that the issue could be challenged in these additional states. The Court did not address application to the corporate income tax provisions, possibly because many small sellers use pass-through entities, but it is also possible to assert the Court’s reasoning to refute income tax nexus, claiming protection under P.L. 86-272 for inventory stored in the state by Amazon for FBA sellers.
The Court’s restriction on the Department’s investigative powers is also notable. It was stated that the investigative powers only apply to taxpayer records, not to entities the Department suspects may be taxpayers. The Court stated that under the law, the Department did 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.”
Please contact your Ryan professionals for information as to how this may impact your business.
1 Online Merchants Guild v. Hassell, PA Commonwealth Court. No. 179 MD 2021, September 9, 2022.
2 Wirth v. Commonwealth, 95 A.3d 822 (Pa. 2014)., 95 A.3d at 838 [quoting Hanson v. Denckla, 357 U.S. 235, 253 (1958)].
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