Online retailers win sales-tax fight

A state court has sided with online retailers who say they are being unfairly targeted by Pennsylvania tax collectors.

  • In a ruling Friday, Commonwealth Court blocked efforts by the Pennsylvania Department of Revenue to collect state sales and personal income taxes from the retailers, which sell their products through Amazon.
  • At issue are back taxes the state had been trying to collect from the retailers after agreeing in 2018 not to collect them from Amazon itself, according to complaints filed by the Online Merchants Guild, a trade association.
  • However, the revenue department failed to show the retailers had “sufficient contact” with Pennsylvania to trigger a tax liability, according to the 23-page decision written by Judge Ellen Ceisler.
  • A spokesperson for the revenue department said the agency is reviewing the decision.
  • Aaron Block, an Atlanta-based attorney who represented the merchants guild, said: “The Pennsylvania Department of Revenue gave a billion-dollar secret subsidy to Amazon, and then targeted over 10,000 small businesses to pay for it. We’re grateful that the Commonwealth Court ruled that the Constitution stands in the way of that denial of due process.”

Who are the retailers: Companies that sell goods through Amazon’s Fulfilled by Amazon, or FBA, program.

  • Under the program, Amazon provides an online sales platform for the retailers and it receives and ships the products on their behalf.
  • Independent retailers accounted for 58% of Amazon’s sales in 2018, according to materials submitted as part of the guild’s lawsuit.

What about the taxes: In 2012, Amazon began collecting sales taxes for products it sold directly but not on behalf of retailers in the FBA program, according to court documents filed by the merchants guild. The guild estimated the unpaid taxes were in the hundreds of millions of dollars.

  • In 2018 — around the time it was shopping for a second headquarters —  Amazon agreed to collect Pennsylvania taxes for FBA retailers going forward in exchange for being released from having to pay back taxes on FBA sales, according to Ceisler’s ruling.
  • The deal — which the guild described in court documents as a non-public settlement agreement — followed the 2017 passage of a state law clarifying tax liability for online sales.
  • “FBA Merchants, who were not parties to the 2018 Agreement, 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 messed up’ and failed to collect sales tax,” Ceisler wrote.
  • The state cranked up efforts to collect the back taxes in early 2021 by sending information requests to more than 11,000 retailers it believed might owe taxes, according to court documents.
  • The requests spurred a state lawsuit last year from the merchants guild.
  • The guild also filed a lawsuit in federal court, but that was dismissed pending the outcome of the state litigation.

What are the issues: The main one is whether participation in the FBA program was enough to trigger a tax liability for the retailers because Amazon stored their products in one of its many Pennsylvania warehouses.

  • The court essentially said no.
  • Ceisler noted that under the FBA program, Amazon controls the flow of goods in and out of its warehouses. 
  • The ruling also found the state’s requests for information were an overreach.
  • “Revenue’s power to examine a taxpayer’s records under Section 272 of the Tax Code does not extend to demanding business information from every participant in Amazon’s FBA Program, simply because Revenue suspects that person or entity ‘may be in violation of Pennsylvania’s tax laws,'” Ceisler wrote

The background: Pennsylvania is not the only state wrestling with the collections issue for FBA retailers.

  • Block said his firm has two cases pending in federal courts over California actions, he said. But because the Pennsylvania case is in state court, it has been closely monitored.
  • “It’s being decided on the merits by a state appellate court,” Block said.

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