Multistate Businesses Can Benefit from Reviewing Nexus With an Eye on Due Process Protections

In Online Merchants Guild v. Hassell, Secretary of Revenue (Online Merchants Guild), the Commonwealth Court of Pennsylvania found merchants selling through the Fulfillment by Amazon (FBA) program are not required to collect and remit sales tax or pay personal income tax. While the ruling appears narrow, the court’s analysis may be more broadly applied to multistate businesses.

Any company facing the imposition of an unpaid tax, reflecting contingent tax liabilities on financial statements, engaging in tax due diligence, or considering new distribution channels for their products should consider reviewing state and local tax nexus through a Due Process lens. This article analyzes the court’s reasoning in Online Merchants Guild and how it may inform future nexus determinations.

The Online Merchants Guild Decision

On September 9, 2022, the Commonwealth Court of Pennsylvania in Online Merchants Guild, held that businesses located outside of Pennsylvania lack the requisite contacts with the state for purposes of requiring investigation into the collection of a sales tax or imposition of personal income tax even though the businesses had inventory in the state located in an Amazon warehouse. The court focused on the Due Process requirement that there must be a definite link or minimum connection with the taxing state whereby a person purposefully avails themself to the forum state. When a merchant places inventory in an Amazon warehouse, it is Amazon and not the merchant that determined where the inventory is later shipped. Citing U.S. Supreme Court precedent, the court said it is not enough for a minimum connection to arise under Due Process when a taxpayer “… might have predicted that its goods will reach the forum state.” (See J. McIntyre Mach., Ltd. v. Nicastro (2011)).

Taxing Jurisdiction and the Scope of Due Process

The Online Merchants Guild decision leaves an open question as to whether activity broader than merely storing inventory in a third party’s warehouse may be enough to create a minimum contact under the Due Process standard. On its face, the court specified that the only connection to Pennsylvania was storage of merchandise in an Amazon warehouse. However, the court does acknowledge that sales to Pennsylvania customers from the Amazon FBA program may not be enough for the state to have jurisdiction over the out-of-state seller. This principle may be applied to other contexts. For example, a customer located in New Jersey may purchase property and direct the seller to ship the property to Pennsylvania, the seller’s only contact with the state. The Due Process guardrails followed in Online Merchants Guild may stand for the proposition that the seller did not purposefully avail themself of the Commonwealth and prohibit taxing jurisdiction for both sales tax and personal income tax.

The court did not address sellers with activities in addition to the Amazon sales. The direct marketing and sale of goods to a customer would appear to be a purposeful direction, the threshold for which is not clear. The court highlights that South Dakota v. Wayfair, Inc. (2018) was decided on Commerce Clause grounds, leaving the scope of Due Process unanswered. While one may consider the Due Process minimum connection standard a lower threshold for taxable jurisdiction than substantial nexus under the Commerce Clause, the Commonwealth Court of Pennsylvania reminds us that Due Process continues to limit state taxing power.

The Takeaway

After the 2018 Wayfair decision determined that a physical presence was not required for a state to impose a sales tax collection obligation, it appeared that multistate businesses lost nearly all protections against the imposition of state and local taxes. The Online Merchants Guild decision provides analysis upon which we may refocus attention on Due Process. Any company facing the imposition of an unpaid tax, reflecting contingent tax liabilities on financial statements, engaging in tax due diligence, or considering new distribution channels for their products should consider reviewing state and local tax nexus through a Due Process lens.

If you have any questions, please contact a member of Andersen’s SALT team.