Immediately after the U.S. Supreme Court’s Wayfair
The vendors, referred to as third-party sellers, can leverage the vast horizon of the sales platforms to reach potential customers far more efficiently and successfully than they could on their own. Amazon
To capture these sales, states created a class of taxpayers termed “market facilitators,” i.e., the third-party sales platforms. Legislation requiring these entities to collect and remit sales tax on behalf of participating remote vendors was quickly passed and implemented, and market facilitators began collecting sales tax on a prospective basis.
States were unable to collect back taxes from the marketplace facilitators because before Wayfair, states lacked the constitutional authority to require them to collect and remit sales taxes, at least in those states where the marketplace facilitators had no physical presence.
However, states had another option for collecting back taxes, and they took it. Acting on information obtained from market facilitators, vendors nationwide, including Amazon third-party sellers, began receiving letters from state revenue agencies demanding payment of the sales taxes due on the vendors’ sales into the states before the marketplace facilitator laws became effective, on grounds that the vendors’ inventories stored in the states established nexus.
Using Amazon as an example, to take advantage of Amazon’s third-party seller’s platform called “Fulfilled by Amazon” (FBA), a vendor proposes a sales price to Amazon for their products. Amazon, in its sole discretion, may accept or reject the vendor’s proposal, including the merchandise and price.
If the merchandise is accepted for sale, Amazon, again in its sole discretion, determines the price of the vendor’s merchandise, which might not be the price the vendor proposed. Amazon controls the editorial content for the product’s listing on its website, as well as its placement — that is, what a potential customer sees while searching.
After Amazon accepts a vendor’s product, the vendor is instructed to ship its merchandise to the Amazon warehouse of Amazon’s choosing. Amazon may either keep the product in the chosen warehouse or move it to another warehouse, which might not be in the state where the product was shipped and may also break up a lot of a vendor’s product that was shipped.
Upon a customer’s purchase of the vendor’s product, for which Amazon collects payment, Amazon selects the warehouse from which a vendor’s product will be withdrawn, then packages and ships the product to the customer.
In the event an identical product belonging to another vendor is in a warehouse that is closer to the customer’s shipping address, Amazon will ship that product to the customer and give the first vendor credit for the sale. If the product is relocated to another warehouse, the vendor has no say in where it is moved, and Amazon does not notify the vendor if or where its product has been relocated.
Under the agreement the vendor has with Amazon, if the customer has an issue, Amazon is the point of contact, not the vendor, and in most cases, the vendor is forbidden to have contact with a customer.
Under these circumstances, it seems unfair for a remote vendor that uses Amazon’s sales platform to be pursued by a state for unpaid sales tax on sales made in the state when the vendor, probably in most circumstances, did not know Amazon stored its inventory there.
Unfair as it may be, there is little question that these remote vendors having inventory stored in a state, whether they were aware of the location or not, satisfied the physical presence requirement for establishing commerce clause nexus; thus, the state’s action is undoubtedly constitutional.
Yet satisfaction of the commerce clause requirement is not the end of the story. There is a real question whether remote vendors can claim protection under the due process clause.
The Case for Due Process
In general, a remote vendor’s store of inventory in a state satisfies both commerce clause and due process nexus.
If a remote vendor has property in a state, he knows (or should know) that its presence is enough to subject him to the state’s power to tax the sales of his product to in-state customers and can require him to register for a sales tax license or permit, and he is aware of his potential liability to pay income tax on profits earned in the state.
He also knows his property’s presence subjects him to the state’s jurisdiction under the due process clause and that he can, for example, be summoned to appear before that state’s courts.
Yet what if, as in the case of Amazon third-party sellers, a remote vendor does not know, and has no way of knowing, the whereabouts of his inventory because once his property is in Amazon’s custody, he loses control over it? Further, what of the fact that Amazon handles customer payments and other inquiries and the vendor is, in most cases, forbidden from contact with his customer?
In other words, Amazon’s arrangement with remote vendors means that if a customer purchases a vendor’s product, the vendor has no means of knowing the identity of the customer who made the purchase, the state in which the customer resides, or to which state the package is shipped.
There is little doubt, under the commerce clause, the presence of the third-party seller’s inventory in a state establishes nexus, regardless of whether he knows the whereabouts of his inventory.
However, is the remote vendor’s property in the state enough to establish due process nexus? Before the Court’s decision in Quill, when the analyses for commerce clause and due process nexus were intermingled, the answer was most likely yes.
However, Quill bifurcated the nexus analysis, drawing a clear distinction between what is required for commerce clause nexus with a state and what is required for due process nexus. Due process nexus does not turn on a remote vendor’s physical presence in a state. Rather, due process nexus is established when a remote vendor purposefully directs his activities to potential customers in a state because that vendor’s systematic, widespread solicitation gives him “fair warning that [his] activities may subject [him] to the jurisdiction of a foreign sovereign.”
Under a post-Quill due process analysis, at first glance it may seem the answer is clear, yet a closer look reveals it is not.
Once Amazon took custody of the vendor’s product, it had full control over not only the product but how it was advertised and where it would appear on Amazon’s sales pages. Because a third-party seller is prohibited from having contact with a customer, the vendor will be aware that a transaction has occurred but will have no idea of the customer’s whereabouts.
Moreover, if a second third-party seller’s identical product is substituted for the first vendor’s product and the sale is credited to the first vendor, not only is he unaware the switch occurred but he also remains unaware of the customer’s location.
Can it really be said that, in this case, the remote vendor himself engaged in widespread solicitation of customers in a state such that he had fair warning that he could be subject to the state’s due process jurisdiction?
The counterargument, of course, is that the third-party seller knew that once Amazon took custody of his product, Amazon, through its advertising of his product, delivering his product to customers after its sale, and then remitting the proceeds to him, was acting as his agent.
Moreover, the vendor knew Amazon had a presence in the 50 states and the District of Columbia — after all, that is why he engaged with FBA — and knew the potential that his product would be sold in as many states as customers reside.
It has long been understood that if an out-of-state person “purposefully avails [himself] of the benefit of an economic market” in another state, that person’s physical presence is not required in the state for it to exercise due process jurisdiction.
That is what Amazon’s third-party seller is doing in this case: taking advantage of every state’s economic market by working with FBA. It is also well understood that a person’s physical presence for due process purposes can be established through another acting on his behalf.
Selling a third-party vendor’s products and then delivering them to the customer after the sale is the very essence of an agency relationship in that the vendor has granted Amazon the legal authority to act in his stead for both activities. Because Amazon is the third-party seller’s agent, it does not matter that the vendor has no knowledge of a customer’s identity or location.
By the same token, it also does not matter that the vendor is unaware of where his inventory may be located at any given time because, by engaging with FBA, he has granted Amazon, as his agent, the legal authority to transport his property. Moreover, it is presumed that the agreement does not require Amazon, as the vendor’s agent, to inform him of his property’s whereabouts.
Before a court, which argument would prevail? The Online Merchants Guild, a nonprofit trade organization representing Amazon third-party sellers, is asking this very question.
In recent months, it has filed lawsuits against California, Kentucky, and Pennsylvania in federal district court, alleging these and other state and federal statutory violations.
To hazard a guess on the allegations of unconstitutionality regarding due process nexus, it appears the theory that Amazon is the third-party sellers’ agent is the more valid one. That, however, is for the courts to decide.
Before Wayfair, marketplace facilitators, as they are now known, strongly resisted states’ attempts to require them to collect sales tax on behalf of third-party sellers whose products were sold in the state.
After Wayfair, resistance was no longer tenable, and marketplace facilitators began to collect, but only prospectively. To recover the unpaid sales taxes, many states, acting upon information obtained from marketplace facilitators, began contacting third-party sellers to demand payment of the tax.
Most third-party sellers have resisted payment, and a representative organization has challenged the states’ actions on constitutional, federal, and state law grounds.
On the constitutional issue, there is a question whether third-party sellers have nexus with the states under the due process and commerce clauses. While there is little question that third-party sellers with inventory in a state have commerce clause nexus, whether they have due process nexus is not so clear.
If the courts find that third-party sellers have due process nexus with the states, the states’ actions may seem unfair, but they are within the bounds of the law.