Wayfair Updates on the Sales Tax Nexus of Amazon Sellers in California and Pennsylvania
In the almost five years since the U.S. Supreme Court’s monumental Wayfair decision, state revenue departments have increased their collection of sales tax from online retailers that make sales to customers located within their borders. Businesses now have the privilege of managing their sales tax compliance all over the country.
Complicating those compliance obligations is confusion over who has responsibility for the sales tax when your business relies on a third-party, marketplace facilitator to fulfill customers’ orders. Two recent cases out of Pennsylvania and California highlight questions over which party should have responsibility and nexus for sales tax and shows the potential for conflicting results from state to state. We explain the details of those cases below and discuss some practices marketplace sellers could consider for protecting themselves from unnecessary sales tax exposure.
Pennsylvania Court Rules Inventory Through FBA Service Does Not Create Nexus
A Pennsylvania court recently determined that businesses with inventory in the state through Amazon’s fulfillment service (i.e., FBA sellers) do not have sufficient contacts to make them subject to Pennsylvania’s sales tax registration and collection requirements.
The Commonwealth Court of Pennsylvania, in Online Merchants Guild v. Hassell, ruled that the Pennsylvania Department of Revenue cannot assert sales tax jurisdiction over out-of-state businesses based solely on their inventory held in the state without any physical presence in Pennsylvania. This decision is significant for businesses that use Amazon fulfillment services, specifically Fulfilled by Amazon (FBA), and may have implications for other states with similar sales tax nexus laws.
In its opinion, the court relied heavily on the fact that the FBA sellers had little control over their inventory. Specifically, they had no say over where Amazon stored their inventory and did not receive any notification when an item was delivered to a Pennsylvania customer.
For online businesses that use Amazon fulfillment services, this decision clarifies certain sales tax obligations in Pennsylvania. However, it's important to note that this ruling only affects sales tax nexus based on inventory in Pennsylvania through the FBA service and does not impact other types of sales tax nexus, such as economic nexus for other online retailers.
It's also worth noting that the Commonwealth Court's decision is an intermediary appellate court ruling, which means it could be subject to further review by the Pennsylvania Supreme Court. While the decision provides helpful guidance for businesses facing sales tax audits and assessments in Pennsylvania, it's possible that the ruling could be overturned or modified by a higher court.
Ultimately, businesses that use Amazon fulfillment services in Pennsylvania should consult with experienced sales tax professionals to ensure that they are properly complying with the state's sales tax laws and regulations. While the recent decision provides clarity around sales tax nexus based on inventory in the state, it's important for businesses to stay informed about any changes to Pennsylvania sales tax law and to maintain compliance with any new requirements that may emerge.
California Court Holds the CDTFA Has the Discretion to Determine Retailer Status in Marketplace Transactions
Another recent case also raised the question about the sales tax obligations between Amazon and the marketplace sellers that use its FBA service. Specifically, who the “retailer” is under these transactions, which effectively asks the question of which party is responsible for collecting and remitting the sales tax.
In Grosz v. Cal. Dep’t of Tax & Fee Admin., the marketplace seller (Grosz) sought a declaration from the court that the CDTFA has a mandatory duty to assess and collect sales tax from Amazon for items sold through the FBA program. The court disagreed and held that the CDTFA has the authority and discretion to determine who is the retailer in a transaction under the FBA. The CDTFA has no mandatory duty to pursue sale tax from the marketplace facilitator (i.e., Amazon), which means that the CDTFA could make either the marketplace facilitator or the marketplace seller responsible for collecting and remitting sales tax, depending on the specific circumstances involved.
This court's ruling underscores the awareness marketplace sellers should have over sales tax compliance when working with facilitators like Amazon in California. While this is an appellate opinion that could face further scrutiny from the California Supreme Court, the message is that the onus is on the marketplace seller to ensure tax is properly paid on their transactions in California because of the CDTFA’s discretion.
Key Takeaways for Marketplace Sellers and Online Retailers with Sales Tax Nexus Concerns
These cases in Pennsylvania and California showcase the potential divergence in sales tax nexus practices and related rules for marketplace sellers that rely on Amazon, Etsy, and other facilitators to process their transactions. As a safeguard against future sales tax compliance issues in the states where you make online sales, consider the following practices:
- Have a written agreement with your marketplace facilitator that explains which party is responsible for collecting and remitting the sales tax.
- Keep detailed records of your dealings through FBA or another facilitator, including, sales volume, state of delivery, and the amount of sales tax charged for your transactions.
- Work with a sales tax professional to review your current marketplace facilitator arrangements for potential sales tax issues.
Following Wayfair, states (and their revenue collection departments) have broad authority to create their own rules concerning the sales tax of online retail within their borders. This can create a host of compliance issues for businesses that sell all over the country through various online marketplaces and outlets.
If you have concerns about potential economic nexus in a state or your marketplace facilitator’s handling of sales tax, take a moment to meet with one of our professional sales tax consultants. We help online businesses take proactive measures to reduce their sales tax exposure when possible and mitigate the fallout of potential noncompliance through the management of sales tax audits, participation in voluntary disclosure, and other sales tax administrative appeals.
Get the sales tax help your online business needs and schedule your free consultation today.