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Inventory in Amazon Warehouse Did Not Create Nexus in Pennsylvania

Sep 28, 2022

In September 2022, the Commonwealth Court of Pennsylvania held that non-Pennsylvania businesses selling merchandise through Amazon, and whose only contact with the state was inventory storage in one of Amazon’s Pennsylvania warehouses, were not subject to Pennsylvania’s sales/use tax laws or its personal income tax laws (and did not even need to respond to a business activity questionnaire). Corporate net income tax was not addressed. The following is a summary of the Online Merchants Guild v. Department of Revenue decision and its implications.


In 2012, Amazon and Pennsylvania entered a mutual agreement where Amazon would start collecting and remitting tax to the state, physical presence notwithstanding. However, that agreement only applied to goods owned and sold by Amazon. It did not apply to goods sold by third parties under the Fulfillment by Amazon (“FBA”) program.

In 2018, Pennsylvania implemented a tax collection requirement on online marketplaces that sell products on behalf of third-party vendors. PA Act 43 of 2017 required the online seller to collect and remit tax on both their own sales and on FBA sales. In cases where Amazon did not properly collect and remit the tax, the FBA merchant would be liable.

In the years that followed, the Pennsylvania Department of Revenue mailed more than 11,000 business activities questionnaires to FBA merchants that have a storage of inventory in Amazon warehouses located in Pennsylvania, along with an opportunity to participate in a voluntary compliance program that offered limited lookback and penalty relief. Failure to provide the information requested in the questionnaire would result in “additional enforcement actions” against the merchants.

Petitioner’s Case

The Online Merchants Guild (the “Guild”) is a trade association comprised of online businesses that sell merchandise through the FBA program. The Guild filed suit against the PA Department of Revenue on behalf of its members who received the business activity questionnaire, arguing it is a violation of their due process rights. The Guild argued, and the court agreed, that while the FBA merchant owns the inventory, it is Amazon that controls the storage and shipment of the goods, and the seller has no knowledge of which warehouse Amazon will ultimately use to store the products after the inventory is transferred. The opinion stated: “We 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.” The court rejected the Department’s argument that by participating in the FBA program, the merchants should have reasonably anticipated that they would incur tax liability in the Commonwealth.

Department’s Argument

The Department’s rebuttal to the Guild’s due process claim was rooted in the fact that the merchants never received a demand for tax but, rather, a demand for information concerning potential tax liability. Since no tax assessment was ever issued, the taxpayers have not been deprived of any available administration process. Furthermore, Section 272 of Pennsylvania Statute Title 72 authorizes the Department to “examine the boxes, papers and records of any taxpayer in order to verify the accuracy and completeness of any return made or, if no return was made, to ascertain and assess the tax.”

The court, while acknowledging there was no demand for tax, disagreed that the business activities request was merely a demand for information, since the form indicated that failure to provide the information requested would result in additional enforcement action. The opinion noted: “If we follow Revenue’s [circuitous line of reasoning], FBA merchants have placed themselves within Revenue’s jurisdiction, and thus have no means to challenge Revenue’s authority to investigate their records and determine their tax liability until after Revenue has investigated their records and determined their tax liability.” The court opined that “Revenue’s investigative powers under Section 272 apply to the records of taxpayers, not individuals or entities Revenue suspects may be taxpayers.”

Implications of the Court’s Decision

The ruling of the Commonwealth Court raised more questions than it answered. For example, if Section 272 only applies to taxpayers, can Pennsylvania no longer audit out-of-state businesses and individuals that aren’t already registered for Pennsylvania tax? What if the state has reasonable cause? Was the information provided by Amazon regarding FBA merchant inventory not reasonable to warrant the business activities questionnaire in the matter at hand?

If the ruling stands, and “control” of inventory becomes the de facto test for nexus purposes, how do we define control? Will the use of order fulfillment companies no longer create nexus in Pennsylvania, since the seller has no physical control over inventory, even though the fulfillment company only has one warehouse which is located in the state?

The Department of Revenue has 30 days to appeal the decision to the Pennsylvania Supreme Court. Hopefully, the future will provide answers to the many questions left open from this decision.

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Vincent M. Occhino

Vincent Occhino is a Manager in the State and Local Tax Group. His specific areas of service encompass nexus studies, income/franchise tax refund reviews, multi-state tax planning, and cost of performance studies.

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