Pennsylvania denies nexus based on inventory


On Sept. 9, 2022, the Pennsylvania Commonwealth Court ruled that the Pennsylvania Department of Revenue (Department) could not collect sales tax from out-of-state retailers having inventory housed in the state through participation in an Amazon sellers program because the arrangement was insufficient to create nexus with the state.1 The Court reasoned that the Department failed to establish that businesses selling merchandise through the Fulfillment by Amazon (FBA) Program have sufficient minimum contacts with Pennsylvania under a due process analysis to mandate the collection and remittance of sales tax or payment of personal income tax (PIT).






Under the FBA program, retailers selling through Amazon’s online marketplace often retain title to their products as Amazon transports them between distribution and/or fulfilment centers so that they may be delivered to the customer more quickly. Under this arrangement, inventory may be relocated to an intermediate state without the seller’s knowledge, giving retailers physical presence in a state where they may not be registered to collect sales tax. As a result, some states have begun asserting nexus and sales tax obligations on businesses having inventory in their states for periods preceding the South Dakota v. Wayfair decision issued by the U.S. Supreme Court in June 2018.


Long before the Wayfair decision, in Jan. 2012, Amazon entered into an agreement with the Department to voluntarily collect and remit Pennsylvania sales tax on its online sales. In 2017, Pennsylvania enacted Act 43, which added provisions to Pennsylvania tax law regarding the collection of sales tax on remote and marketplace sales.2 The enactment of Act 43 coincided with the Department’s new strategy for collecting sales tax from FBA sellers that had a physical presence in Pennsylvania through the storage of inventory in Amazon warehouses located in the state. As a result, Amazon and the Department entered into a second agreement in April 2018, under which Amazon agreed to collect and remit Pennsylvania sales tax on FBA sales, but would not be liable for tax obligations on FBA sales made prior to April 1, 2018.


In March 2021, the Department began mailing notices and registration demands to out-of-state sellers, including FBA sellers, indicating they may have physical presence in the Commonwealth and potential sales tax collection and remittance obligations owing to the storage of inventory in the state. In conjunction with these registration demands, the Department launched a voluntary compliance program offering a limited lookback to Jan. 1, 2019, and penalty relief for participating remote sellers.3 The program began in March 2021 and continues to run for impacted remote sellers. The registration demand letters further suggested that failure to participate in the program and register with the state may result in additional enforcement actions along with the forfeiture of penalty relief and limited lookback provisions offered under the program.


In response, the Online Merchants Guild, a trade association for independent online retailers, filed a lawsuit in the U.S. District Court for the Middle District of Pennsylvania in Feb. 2021, challenging the state’s registration demands and seeking declaratory and injunctive relief.4 The Guild argued that the Department’s attempts to collect Pennsylvania sales tax from Guild members violated the Due Process and Commerce Clauses of the U.S. Constitution, in addition to the Internet Tax Freedom Act (ITFA). In May 2021, the federal court dismissed the Guild’s lawsuit on comity grounds, reasoning that the lawsuit was better suited for state court. In response, the Guild filed a state lawsuit in Commonwealth Court in June 2021, arguing that: (i) the FBA sellers could not be subject to sales tax or PIT based on the storage of their merchandise in Amazon’s Pennsylvania warehouses; (ii) that the Department could not retroactively collect sales tax; and (iii) that the Department’s threatened enforcement efforts violated the ITFA.




Commonwealth Court decision


The Court determined that the Department failed to provide sufficient evidence that FBA sellers have the required minimum contacts with Pennsylvania such that the Department could mandate the collection of sales tax and payment of PIT. In doing so, the Court considered the following issues: (i) whether the imposition of sales tax collection and remittance provisions on nonresident FBA merchants violates the Due Process Clause; and (ii) whether the Department could use its investigative powers on nonresidents believed to be taxpayers for PIT purposes.


Insufficient connection with Pennsylvania for sales tax imposition


Based on a review of Pennsylvania case law, the Court stated the due process principle that an entity or person must have a “definitive link” or “minimal connection” with the taxing state in order to be subject to tax.5 “Minimal connection” requires the purposeful availing of the privilege of conducting activities in the taxing state, such that the taxpayer could reasonably anticipate being taxed.6 According to Pennsylvania courts, purposeful availing requires something more than the taxpayer merely predicting that their goods would reach the forum state.7


Turning to Pennsylvania statutory law, the Court noted that Pennsylvania sales tax must be collected and remitted by “[e]very person maintaining a place of business” in the Commonwealth.8 Maintaining a place of business includes having, maintaining or using “an office, distribution house, sales house, warehouse, service enterprise or other place of business,” either directly or through a subsidiary, representative or an agent.9


The Court first turned to the Department’s argument that the FBA sellers’ due process rights had not been violated because the demand letters were demands for information authorized under Pennsylvania law regarding potential tax liabilities, rather than formal tax assessments. The Department further argued that by participating in the FBA program, FBA sellers should have reasonably anticipated that they would incur tax liability in Pennsylvania. The Court disagreed, calling the Department’s arguments circuitous and unsupported by Pennsylvania law. The Court pointed out that the Department’s business activity requests did not merely demand information but rather threatened additional enforcement action. Although the Department claimed that the Guild’s due process claims were premature, the Court noted that the administrative appeal process identified in the business activities request was not available to taxpayers until after a determination of tax liability. The Court concluded that Pennsylvania law “does not grant [the Department] unfettered authority to seek business information from any person or entity it desires for the purpose of determining its status as a taxpayer.”


The Court next examined whether the FBA merchants’ lack of control over their merchandise once transferred to Amazon meets the “minimum connection” required to establish a sales tax filing requirement under the Due Process clause. Based on the Court’s reading of Pennsylvania case law, a prediction that inventory would reach Pennsylvania was not alone sufficient to establish “minimum connection” with the Commonwealth. The Court noted that under the FBA program terms, Amazon determines the location where goods are shipped by an FBA seller, and FBA sellers have no control over their goods once they are received by Amazon. Once the FBA seller’s merchandise is purchased by the customer, Amazon is responsible for shipping goods to the customer. Further, the FBA seller has no way to identify the purchaser’s identity or location. Under these facts, the Court was “hard pressed to envision how . . . 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.”


Department lacks authority to investigate nonresidents for PIT purposes


Similar to the conclusion reached under its sales tax analysis, the Court determined that the FBA sellers did not have income from Pennsylvania sources due to the possible storage of property in an Amazon warehouse located in the state. The Court noted that the Department’s power to examine a taxpayer’s records does not extend to demanding business information from every participant in the Amazon FBA program. In the Court’s view, the Department’s mere belief that a person or business may be violating Pennsylvania tax law is not reason enough for the agency to require businesses to provide information. 


Importantly, the Court further determined that the Commonwealth’s investigative power is limited to that of in-state residents. Pennsylvania case law requires that common carriers delivering goods by a nonresident shipped into the state maintain adequate records of these deliveries.10 The Court determined these cases to mean that the Department is not granted the broad power to obtain records from nonresidents. For these reasons, the Court concluded that the Department could not seek information from the FBA sellers in the form of the business activity request letters.






With this decision, the Commonwealth Court became the first court to rule against a state in a so-called “inventory nexus” case where states are pursuing out-of-state retailers and FBA sellers for back taxes based on having inventory located in the state. The Court’s decision is likely to be used as persuasive authority in other states by similarly situated entities using FBA to show an insufficient connection between themselves and the taxing state. Several other states are taking similar enforcement actions against FBA sellers, most notably California, Washington and Wisconsin. California has been the most aggressive in its pursuit of unpaid sales taxes from remote sellers participating in the FBA program. As a result, the Guild challenged the California Department of Tax and Fee Administration’s (CDTFA) sales tax assessments against FBA sellers before the enactment of the state’s marketplace facilitator law, filing a lawsuit in federal court.11 Most recently, the U.S. district dismissed the case on the grounds that the federal lawsuit was barred by the federal Tax Injunction Act.12 The Guild appealed this decision to the Ninth Circuit, where oral arguments are scheduled for Oct. 2022. It remains to be seen whether the decision in this matter by a state court influences future litigation to be pursued by entities and affected individuals in state, rather than federal courts.


From a sales tax perspective, the scope of the Court’s decision may be somewhat limited prospectively by state marketplace facilitator and remote seller economic nexus laws enacted in response to the Wayfair decision, which abolished a physical presence requirement for sales tax nexus. However, the ruling may still have important implications for small business sellers who do not meet the bright-line sales or transaction thresholds to establish economic nexus and a sales tax filing requirement. Additionally, the decision does not specifically address the fact pattern of FBA sellers who sell directly to consumers while holding inventory in separate third-party distribution warehouses located in the state.


While the Commonwealth Court’s decision focuses solely on the collection of sales tax and PIT from remote retailers, the case may also have implications extending to the corporate income tax context. The decision did not mention corporate income tax provisions, presumably because the businesses represented by the Guild generally operate as pass-through businesses or sole proprietorships, pursuant to which income earned in the periods at issue ultimately would have resulted in PIT obligations to the owners. From a corporate income tax perspective, Public Law 86-272 (P.L. 86-272) offers a level of protection for businesses from net income taxes if their only connection with a state is the solicitation of sales of tangible personal property. If FBA sellers’ presence in Pennsylvania is limited to inventory they do not control, they could attempt to claim P.L. 86-272 protection from corporate income taxes. If the states elect to pursue income taxes from FBA sellers or retailers, the Guild’s challenges may further amplify the debate over the limits of P.L. 86-272 protection.


As the conflict over inventory nexus continues to flourish, other federal and state courts are likely to hear similar cases on the merits. Depending on how each venue interprets the presence of inventory as a means to assert nexus, a split across jurisdictions could develop in the near term, which could ultimately inspire an appeal to the U.S. Supreme Court to resolve down the road. Whether that ultimately happens will depend in part on how federal courts like those in California decide whether they have proper jurisdiction to hear such cases, and if they do not, whether these controversies are moved to state courts. 


Specific to the Pennsylvania litigation, the Department ultimately declined to appeal the decision to the Pennsylvania Supreme Court, making the Commonwealth Court decision the final disposition of the case. Although the Department decided against an appeal based on the reasoning that the case was limited to a unique set of facts without broader applicability,13 the appellate court decision nonetheless has the potential to influence ongoing inventory nexus cases in other states.


Online Merchants Guild v. Hassell, No. 179 M.D. 2021, Pennsylvania Commonwealth Court, Sept. 9, 2022.
2 Pa. Act 43 (P.L. 672), Laws 2017.
Voluntary Compliance Program for Retailers with Inventory in Pennsylvania, Pennsylvania Department of Revenue. For further discussion of the Voluntary Compliance Program, see GT SALT Alert: Pennsylvania starts 90-day tax compliance program. 
Online Merchants Guild v. Hassell, No. 1:21-cv-00369, U.S. District Court for the Middle District of Pennsylvania, filed Feb. 26, 2021.
5 Citing Equitable Life Assurance Society of the U.S. v. Murphy, 621 A.2d 1078 (Pa. Commw. 1993).
6 Citing Wirth v. Commonwealth, 95 A.3d 822 (Pa. 2014).
7 Citing J. McIntyre Mach., Ltd. v. Nicastro, 564 U.S. 873 (2011).
8 72 Pa. Stat. § 7201(b).
9 72 Pa. Stat. § 7201(b)(1).
10 Citing Bloomingdale’s By Mail, Ltd. v. Department of Revenue, 516 A.2d 827 (Pa. Commw. 1986); L.L. Bean, Inc. v. Commissioner, 516 A.2d 820 (Pa. Commw. 1986).
11 Online Merchants Guild v. Maduros, No. 2:20-cv-01962, U.S. District Court for the Eastern District of California, filed Oct. 13, 2021.
12 Another federal court in Illinois also dismissed a lawsuit brought by an Illinois-based retailer against the CDTFA on jurisdictional grounds. Rubinas v. Maduros, U.S. District Court for the Northern District of Illinois, Eastern Division, No. 1:21-CV-00096, filed Sept. 16, 2021. For further discussion of the California and Illinois litigation, see GT SALT Alert: Federal court dismisses California sales tax suit and GT SALT Alert: Federal court passes on California sales tax suit.
13 Maria Koklanaris, Pa. Won’t Appeal ‘Fulfillment by Amazon’ Nexus Ruling, Law360 Tax Authority, Oct. 11, 2022.





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