Washington Court of Appeals Upholds Pre-Marketplace Facilitator Amazon FBA Seller Liabilities

In a ruling filed on January 23, 2024, the Court of Appeals of the State of Washington denied an appeal of an audit assessment made by the Department of Revenue on sales made by two Amazon sellers between 2011 and 2018. These sales were made prior to Washington’s marketplace facilitator legislation and were made by vendors participating in the Amazon FBA (Fulfillment by Amazon) program, where sellers send inventory to Amazon and allow Amazon to manage movement of that inventory between various warehouses for fulfillment. Because Amazon controls the movement of this inventory, inventory may create physical nexus in states where the sellers do not otherwise have a presence.

The appeals court denied the taxpayer’s argument that Amazon was the seller of the goods for the purposes of Business and Occupational tax on the basis of the state’s statutes defining the roles of a consigner and consignee. Under these statutes and under the Department of Revenue’s rules, sales made by a consignee, in this case Amazon, on behalf of the consignor are sales made by the consignor if the consignor is making sales identified under their own name in the state. Based on the nature of how the sellers’ information appeared on Amazon and the agreement between Amazon and the sellers, as well as the fact that Amazon did not purchase the product at wholesale, the sales are defined as sales made by the sellers, not sales made by Amazon.

In the statutes relating to retail sales tax and in supporting guidance, the state indicates that sales tax is generally collected and remitted by the consignee on retail sales, but clarifies the consignee is making sales in the name of the seller, the consignee may pass the tax collected to the seller to remit the retail sales tax. The court argued that the nature of the relationship between the sellers and Amazon does not specify in any agreement that Amazon is functioning as the consignee and responsible for tax, and that per the relationship between the two businesses, the sellers were required to instruct Amazon as to whether they needed to collect tax in Washington. Based on the relationship outlined in the FBA agreements and on the nature of the sales listings, the court agreed with the Department of Revenue that sales made through Amazon during the audit period were the responsibility of the sellers, and not of Amazon, for both retail sales and business and occupational taxes.

Additionally, the state pointed to the 2019 passage of Washington’s marketplace facilitator law, which came into effect January 1, 2020, as evidence that prior laws did not place the tax burden for marketplace sales on the marketplace facilitator. The fact that a law was passed to specify that the responsibility fell on the marketplace meant that the responsibility did not fall on the marketplace under the former statutes. The appeals court also specified that the seller’s lack of understanding of their potential sales tax liabilities under their agreement with Amazon did not excuse them from complying with the law.

Though all states with sales tax now have some form of marketplace facilitator law, states and taxpayers are still wrestling with who was liable for sales tax before these laws came into effect. Additionally, this case highlights an issue that was also argued in courts in California and Pennsylvania in recent years, whether or not inventory moved between warehouses by a third-party fulfillment service creates a presence and filing obligation for the owner of the inventory. As this case highlights, assumptions made by taxpayers and disclaimers in agreements with other parties can lead to taxpayers feeling blind sighted by more widespread tax compliance requirements than they expected. Because ecommerce businesses and related supporting services have made making sales across state lines easier and easier, ecommerce sellers should keep vigilant about how their operations could be creating tax obligations that they may not have anticipated. (Orthotic Shop Inc. and S&F Corporation v. Department of Revenue, Washington Court of Appeals, No. 39321-6-III (Jan. 23, 2024))

Posted on April 18, 2024