Fulfillment by Amazon program does not create nexus with Pennsylvania

By James A. Beavers, CPA, CGMA, J.D., LL.M.

Amazon’s storage in a Pennsylvania warehouse of merchandise of a nonresident retailer participating in Amazon’s Fulfillment by Amazon (FBA) program was not sufficient to create the minimum contacts with Pennsylvania necessary for the state to subject the nonresident retailer to sales tax or personal income tax (PIT).


Internet retail titan Amazon, besides selling merchandise it owns on its website, also sells the merchandise of third-party retailers (FBA merchants) through its FBA program. Under the program, the FBA merchants send the merchandise Amazon sells for them under the FBA program to one of Amazon’s warehouses. After receiving the merchandise, Amazon is free to, and does, move the merchandise to other warehouse locations around the country, including warehouses in Pennsylvania. The FBA merchants have no control and generally no knowledge of when and where Amazon moves their merchandise.

Amazon and the Pennsylvania Department of Revenue (DOR) agreed in 2012 that Amazon would voluntarily collect and remit Pennsylvania sales tax on its internet sales delivered to Pennsylvania of goods it owns and sells. In 2017, the DOR, seeking to expand its sales tax revenue base, began developing a strategy for collecting sales tax from FBA merchants that had a physical presence in Pennsylvania. To this end, Amazon and the DOR entered into a second agreement whereby, effective April 1, 2018, Amazon would collect and remit Pennsylvania sales tax on FBA sales. Amazon’s FBA merchants were not parties to the 2018 agreement and remained obligated to pay any outstanding sales tax for pre–April 1, 2018, FBA sales and for any FBA sales made after that date if Amazon failed to collect sales tax.

The DOR then began to send a Business Activities Questionnaire Request (BAR) to persons and entities that it identified as FBA merchants making sales in Pennsylvania. The BAR indicated that they “may have” a physical presence in Pennsylvania that would require the collection and remittance of Pennsylvania sales tax and the payment of PIT. The BAR stated that, under Pennsylvania law, storing property, including inventory, at a distribution or fulfillment center or at any other location within Pennsylvania constituted a physical presence that created tax obligations, such as income and sales tax, that must be reported and remitted as of the date the property was first located within Pennsylvania.

Recipients of the BAR were offered the opportunity to participate in a voluntary compliance program. Businesses interested in participating were directed to complete and return a questionnaire to the DOR within 15 days of the BAR’s date, which the DOR would thereafter review for purposes of determining the businesses’ tax obligations. The BAR further indicated that “[f]ailure to provide the information requested [would] result in additional enforcement actions and the business [would] forfeit any penalty relief or limited lookback provisions provided by the [compliance program].”

Some of the FBA merchants have banded together to form the Online Merchants Guild trade association. The guild and its members were not happy about the BARs, and the guild filed a petition on behalf of its members for review with the Pennsylvania Commonwealth Court. At this point, Pennsylvania had not moved beyond requesting information and informing the FBA merchants of the dire consequences of not providing a response to the BARs. It had not assessed or collected any tax based on its theory that the FBA sales were subject to Pennsylvania tax because Amazon stored their merchandise in warehouses located in Pennsylvania.

The court’s decision

The Pennsylvania court held that the FBA merchants, whose connections to Pennsylvania were limited to Amazon’s storage of merchandise in one of its Pennsylvania warehouses, did not have sufficient contacts with Pennsylvania such that the DOR could mandate the FBA merchants collect and remit sales tax or pay PIT.

As the court explained, the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution protects citizens from unfair tax burdens by limiting the power of states and their political subdivisions to impose extraterritorial taxation. To comply with due process, such taxation is restricted to cases in which the taxpayer in question has some minimum contacts with the taxing state. The existence of minimum contacts requires an act by which the taxpayer purposefully avails itself of the privilege of conducting activities within the taxing state, which invokes the benefits and protections of the state’s laws. The placement of goods within the stream of commerce with the expectation that sales of the goods will be made in the taxing state may be purposeful availment. However, it is not enough that the taxpayer might have predicted that its goods would reach the taxing state.

The guild argued that the DOR could not establish that sufficient minimum contacts existed with Pennsylvania that would satisfy due process and make FBA merchants subject to Pennsylvania tax. In the guild’s view, Amazon, not the FBA merchants, controls the storage and shipment of goods in the FBA program, and an FBA merchant’s mere participation in the FBA program does not create meaningful contacts with Pennsylvania. At most, the guild argued, it creates the possibility that Amazon would “unilaterally decide to store goods in Pennsylvania, as opposed to” a facility located in another state.

The DOR conceded that a nonresident business must have minimum contacts with a state before the state can require the nonresident business to pay taxes. It contended, however, that the BAR sent to FBA merchants was not a demand for tax payments. Rather, it was a “demand for information concerning potential tax liability,” which the DOR has the authority to seek under Section 272 of the Pennsylvania tax code (72 Pa. Stat. §7272). The DOR denied that its compliance program violates an FBA merchant’s due process rights, as any FBA merchant declining to participate will receive notice of any adverse decision made by the DOR and be given an opportunity to appeal that decision. It also contended that the guild’s due process claim was premature because no FBA merchants had been assessed tax based on the BAR. It further asserted that the FBA merchants could not press a federal due process claim because they had not first taken advantage of any available administrative processes.

The court rejected all of the DOR’s arguments. It did not agree that the BAR was merely a demand for information; rather, its language clearly suggested the existence of pending enforcement actions. Also, the due process claim was not premature, the court found, because it was unclear what, if any, administrative processes were available to FBA merchants other than strict compliance with the reporting requirements in the BAR.

The court determined the DOR’s third argument failed because the only administrative process the DOR identified as available to taxpayers would be to appeal an adverse assessment, which a taxpayer can only do after a determination of a liability. The court interpreted the DOR to be arguing that simply by joining Amazon’s FBA program, taxpayers put themselves in Pennsylvania’s jurisdiction, and they could not challenge the DOR’s authority to investigate their records and determine their tax liability until after the DOR had investigated their records and determined their tax liability.

The court found that this “line of reasoning is unsupported by the statutory framework and controlling jurisprudence.” The court noted that Section 272 allows the DOR to investigate taxpayers, not suspected taxpayers, and the law did not give the DOR unfettered power to seek business information from any person or entity it chooses for purposes of determining that person or entity’s status as a taxpayer.

Rather, according to the court, due process required a connection between the taxing state and the person or entity it seeks to tax and an act by the alleged taxpayer availing itself of the taxing state’s protections, opportunities, and services. After reviewing the description of Amazon’s FBA program in the record, the court concluded that an FBA merchant, by participating in the program, had not placed its merchandise in the stream of commerce with the expectation that it would be purchased by a customer in Pennsylvania and had not availed itself of Pennsylvania’s protections, opportunities, and services. Thus, the court held that FBA merchants were not subject to sales tax (and under similar reasoning, the PIT) just because Amazon, as part of the FBA program, stored their merchandise in warehouses located in Pennsylvania.


In its opinion, the court reiterates important and taxpayer-friendly precedent regarding the scope of Section 272. In L.L. Bean, Inc. v. Pennsylvania Department of Revenue, 516 A.2d 820 (Pa. Commw. Ct. 1986), the court held that Section 272 did not grant the DOR broad power to obtain the records of a nonresident. In Bloomingdale’s by Mail, Ltd. v. Pennsylvania Department of Revenue, 516 A.2d 827 (Pa. Commw. Ct. 1986), relying on L.L. Bean, the court held that the DOR could only use its subpoena power under Section 272 within the borders of Pennsylvania.

Online Merchants Guild v. Hassell, No. 179 M.D. 2021 (Pa. Commw. Ct. 9/9/22)


James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.

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