Pennsylvania Commonwealth Court rules out-of-state online marketplace sellers not required to collect sales tax | Blank Rome LLP

Can an online retailer have a connection to a state because their goods may be stocked in the state? And how far does the government have authority to investigate the online retailer out of state for information about its in-state activities? Both issues are the subject of a recent decision by the Pennsylvania Commonwealth Court. Online Merchants Guild v. Hassell, E No. 179 MD 2021 (Pa. Commw. Ct. September 9, 2022). The Commonwealth Court ruled that the Treasury failed to show that the foreign online traders under the Due Process Clause had sufficient domestic contacts to request responses to inquiries in questionnaires sent to those traders. That explains the decision Wayfairs The trade clauses analysis may not be the final word on Nexus due to the due process clause. It also shows that states do not have absolute authority to audit non-state based companies where there is not a sufficient connection with the state.

The facts: The petitioner, Online Merchants Guild (‘Online Merchants’), is a trade association made up of online businesses that sell goods through Amazon’s ‘Fulfillment by Amazon’ programme. Under this program, companies ship products to Amazon fulfillment centers, and when customers make an online purchase, Amazon processes the order and ships it to the customer. To participate in the program, the retailer must ship their merchandise to an Amazon-designated warehouse location — which may be in Pennsylvania — after which the retailer had “no further control” over the merchandise unless they moved it out back to the sale. The merchants had no contact with customers and claimed they didn’t know how much of their inventory Amazon actually stocks in Pennsylvania (or any other state) on their behalf.

In 2017, Pennsylvania enacted a marketplace intermediary sales tax law that requires online intermediaries to collect sales tax on sales made on behalf of marketplace sellers under a fulfillment program. However, the Treasury Department began tracking uncollected sales taxes from marketplace merchants for periods prior to the law’s enactment, beginning with the sending of about 11,000 business activity questionnaires to non-resident merchants in the Amazon program. Those questionnaires indicated that the dealers may have a physical presence in Pennsylvania — the tax periods in question included periods prior to the U.S. Supreme Court’s 2018 decision Wayfair— and found that storing inventory in Pennsylvania created a tax collection obligation. The questionnaires gave traders 15 days to respond under threat of “additional enforcement action”.

Online retailers sued for summary judgment, alleging that the department’s questionnaires violated retailers’ constitutional rights under the due process clause. It argued that the Department had not established sufficient “minimum contacts” that would give the Department jurisdiction over the merchants, and claimed that merely participating in the Amazon program did not establish meaningful contacts with the state. The ministry denied that traders’ rights to due process were violated by what it described as “requests for information”.

The decision: The Commonwealth Court ruled in favor of the retailers, finding that the department had failed to provide sufficient evidence that the online retailers – whose Pennsylvania ties included storing goods at Amazon’s Pennsylvania warehouse – had sufficient contacts to collect sales tax having to move in and take away. Addressing the requirements to comply with due process under previous Pennsylvania court decisions and not the requirements of the Commerce Clause, under which Wayfair was decided, it agreed with the online retailers that the retailers had no control over the goods being sent to the warehouse designated by Amazon and whether the goods remained at that location was Amazon’s sole responsibility. The court concluded that the department did not have authority to examine the dealers’ records because it had failed to establish minimum contacts to meet the due process clause, solely on suspicion that the dealer violated Pennsylvania tax law had violated.