Special Tax Alert
Online Merchants Guild, a trade association of online sellers, filed a lawsuit last week against the Pennsylvania Department of Revenue (DOR) in the U.S. District Court for the Middle District of Pennsylvania. The lawsuit was spurred by recent attempts by the DOR to collect unpaid sales tax from third-party sellers on sales made into the state via the Fulfillment by Amazon (FBA) program. According to the complaint, Pennsylvania’s attempt to target third-party sellers, as opposed to Amazon itself, exceeds the state’s legal ability to tax out-of-state taxpayers and violates the Due Process Clause and the Commerce Clause of the U.S. Constitution, as well as the Internet Tax Freedom Act.
The lawsuit is based on a letter the DOR has sent to many FBA sellers notifying them that they may be subject to Pennsylvania tax because “storing property or the property of a representative, including inventory, at a distribution or fulfillment center, or any other location within the Commonwealth constitutes a physical presence that creates certain tax obligations within Pennsylvania.”
This, in and of itself, is a statement of longstanding nexus rules; owning property in a state constitutes physical presence within the state, which establishes nexus (a taxable presence). Once nexus is established, the state is free to impose tax responsibilities upon the taxpayer.
However, states are subject to certain limitations with respect to the ability to tax out-of-state taxpayers. Specifically, the Due Process Clause of the U.S. Constitution requires that there must be some minimum connection between the in-state activities of the taxpayer and the taxing state before the taxing state may impose its tax.
In its complaint, the Online Merchants Guild points out that once FBA sellers ship products to Amazon, Amazon takes physical possession of the goods until they are sold to Amazon customers. While in Amazon’s possession, the goods may be stored in a single Amazon warehouse or moved from warehouse to warehouse. Amazon has full discretion over the location of the goods, and, in many cases, FBA sellers do not know where their products are physically are being stored.
The complaint also notes that Amazon is responsible for collecting payments from customers. Amazon subsequently sends FBA sellers their share of the purchase price, but at no time do the FBA sellers have the opportunity to collect sales tax directly from the customers. As a result, the complaint requests an injunction against Pennsylvania’s attempts to collect back taxes from FBA sellers, arguing that Amazon should be the party responsible for any unpaid tax.
The outcome of the litigation is yet to be determined. In the meantime, however, Pennsylvania is offering a temporary voluntary compliance program for FBA sellers. Sellers that participate in the program will not be liable for taxes on transactions prior to January 1, 2019 and will be given penalty relief for any non-compliance.
A&M Tax Says
Pennsylvania is not the first state to attempt to collect unpaid sales tax from FBA sellers. In fact, in September 2020 the Online Merchants Guild filed a similar lawsuit against the state of California . As states continue to face budget deficits caused by COVID-19, taxpayers should prepare for states to take aggressive measures to raise revenue. If you are interested in discussing your options as an FBA seller, please do not hesitate to reach out to one of our Alvarez & Marsal Taxand State and Local Tax (SALT) team members.