Amazon Warehouse Does Not Create Physical Nexus in PA

In a decision that may eventually have sales tax repercussions elsewhere, a state court has decreed that an Amazon warehouse creates no physical nexus for a group of online sellers.

The Commonwealth Court of Pennsylvania sided with the Online Merchants Guild when the latter contested charges by the state Department of Revenue (DOR) for taxes owed.

The Guild is a group of online businesses who participate in Amazon’s Fulfillment by Amazon (FBA) Program, who generally had limited choice where their inventory was stored and who had no other connections to the state.

“Revenue has failed to provide sufficient evidence that non-Pennsylvania businesses selling merchandise through the FBA Program (FBA Merchants), 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,” the Court opinion reads.

An agreement altered

Physical nexus is created when a business has a physical connection with a tax jurisdiction, such as storing inventory or maintaining a warehouse – including goods sold through online marketplace facilitators such as Amazon.

Thresholds to ignite sales tax reporting obligations are generally the same for marketplace facilitators as for online sellers; tax for sales through the marketplace are collected by the facilitator, not by the sellers.

Ten years ago, an initial agreement was reportedly made with Amazon and the Pennsylvania DOR in which Amazon voluntarily agreed to collect and remit Pennsylvania sales tax on internet sales. The DOR has sought tax dollars from the FBA merchants since 2017; the following year, Amazon and the DOR created an agreement that Amazon would collect and remit on behalf of their FBA merchants.

The DOR nonetheless approached FBA merchants requesting taxes owed and even offered voluntary compliance programs to assist them in catching up on taxes owed. The Guild countered last year with a complaint in federal district court that the DOR’s attempts to collect sales tax form the Guild members violated their constitutional rights.

Potential fallout

With concentrations in California, Texas, New Jersey and the South (so far), Amazon has more than 100 warehouses nationwide with many more planned – meaning a lot of FBA merchants are potentially on the physical nexus hook for sales tax obligations. How the decision in Pennsylvania will ripple out to affect them is to be seen. Stay tuned.

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