In a long-awaited decision in the Online Merchants Guild case against the Pennsylvania Department of Revenue (“the Department”), the Pennsylvania Commonwealth Court (“the Court”) ultimately ruled in favor of marketplace sellers.  The Court held that marketplace sellers that participated in Amazon’s Fulfilled by Amazon (“FBA”) program had not created sales tax nexus in Pennsylvania when Amazon directed the sellers’ inventory into one of its own Pennsylvania fulfillment centers.

By way of background, Amazon offers its merchants two primary marketplace options – Fulfilled by Merchant (“FBM”) and FBA.  The primary difference between the two programs is the logistics of fulfilling the order.  In FBA, Amazon handles all of the logistics for each of its FBA merchants.  Part of the logistics solution Amazon is offering to its FBA program customers is storing of the merchant’s inventory.  We all know how fast Amazon can deliver an item we order.  A big reason behind that speed is the company’s vast network of company-owned fulfillment centers.  Since Amazon is handling all of the logistics for its FBA merchants, Amazon itself directs the inventory of its FBA merchants to various fulfillment centers of its choosing in order to meet that speed of delivery need that has come to be expected of Amazon.  In other words, even though the FBA merchants still own the inventory, they have no control over where Amazon sends the inventory nor do the merchants ultimately know the location of where its goods are sold and shipped to by Amazon.  That is the central issue in the Online Merchants Guild’s case.

In 2019, the Department specifically targeted FBA merchants by requesting information from Amazon on its FBA merchants with inventory in Pennsylvania of at least $10,000 in value, to which it sent business activity questionnaires.  Its rationale in going after the FBA merchants was that because the sellers ultimately owned inventory in an Amazon-owned fulfillment center in Pennsylvania, the seller had created sales tax nexus with the state (i.e., physical presence).  Therefore, the FBA merchant was retroactively responsible for sales taxes on Amazon’s sale of its products back to when the seller’s products were first put in a Pennsylvania fulfillment center up through when Amazon itself began collecting and remitting Pennsylvania sales taxes on its FBA merchants’ sales.

The Online Merchants Guild filed suit against the Department in an effort to shield their constituents from this significant reach and potential assessment.  Fortunately, the Court sided with the Online Merchants Guild in holding that these FBA merchants had not created the requisite nexus for sales tax purposes because it’s Amazon that controls every aspect of that inventory; that the FBA merchants have no knowledge of where the inventory goes or how much.  Specifically, the Court stated “[W]e are 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 be purchased by a customer located in the Commonwealth, or has availed itself of the Commonwealth’s protections, opportunities, and services.”

Many believe this ruling is precedential and that we could see this exact issue and defense popping up in myriad states as FBA sellers attempt to thwart a state’s attempt to assess retroactive sales taxes merely from owning inventory in an Amazon fulfillment center via its FBA program.  Please contact Clarus Partners with any questions on what this means to your online business.

Brian Hollingsworth
Partner

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