How your inventory can trigger sales tax obligations

Because marketplace facilitators are required to collect and remit sales tax on behalf of third-party sellers, marketplace sellers may assume they’re free from sales tax obligations. But that’s not necessarily so. Having inventory in the state — even inventory managed by a marketplace facilitator — may create unexpected sales tax liabilities for a business.

• Inventory can create sales tax nexus, a connection that gives a state the authority to require a business to collect and remit sales tax. Physical presence in a state is one of the most common nexus triggers.
• Storing inventory in a state, including inventory managed by a marketplace facilitator, can give a business sales tax nexus and an obligation to register for sales tax in that state.
• More than 20 states specify that marketplace inventory creates physical presence nexus for the third-party seller. 
• Close to 10 states hold that marketplace inventory generally does not create a sales tax obligation.

More than 20 states indicate that holding inventory in the state — including inventory stored in a third party’s warehouse and controlled by the third party — can create physical presence nexus for the third-party seller. 

Marketplace sellers with inventory in one of the above states generally must register for sales tax if they sell directly to consumers in the state. Inventory gives a business a physical presence in the state and an obligation to collect and remit applicable taxes.

However, a state may not require a marketplace seller to register for sales and use tax or collect and remit sales tax if 1) the seller’s only tie to the state is marketplace inventory, and 2) they only sell through marketplaces that collect and remit sales tax on their behalf. 

The specific tax rules vary by state, as demonstrated by the following California, Michigan, and Washington guidance.

Inventory in California

The California Department of Tax and Fee Administration (CDTFA) is clear that “maintaining inventory” in California is a sufficient physical presence for sales and use tax nexus. 

Yet the CDTFA also states, “beginning October 1, 2019, you as a marketplace seller are not required to be registered with CDTFA for a seller’s permit or a Certificate of Registration — Use Tax if all of your retail sales of merchandise will be facilitated by a marketplace facilitator that is registered as a retailer with CDTFA.”

Inventory in Michigan

The Michigan Department of Treasury offers this example: “Company A’s only physical presence in Michigan is inventory it owns that is located in a marketplace facilitator’s warehouse. Company A does not control the inventory, as it is used by the marketplace facilitator to fulfill facilitated sales of Company A on a marketplace. Company A has nexus with Michigan.”

Inventory in Washington

Per the Washington State Department of Revenue:

• “Physical presence is a nexus standard that requires only more than the slightest presence.”
• Activities that create physical presence nexus include having “inventory held by a marketplace facilitator or another third-party representative.”

According to one Washington Department of Revenue ruling, “The fact that goods owned by the Taxpayer were physically stored in Washington until sale, even briefly via digital reassignment of ownership, is sufficient to establish substantial nexus.” Read more about digitally reassigning inventory and how it can affect nexus here.

Storing property in a marketplace or third-party warehouse generally does not establish physical presence or sales tax nexus for remote sellers in the following states if 1) the seller does not control the inventory, and 2) the inventory is strictly used to fulfill marketplace orders.

However, if any inventory held in the state is used to fulfill an out-of-state retailer’s direct sales in these states, the inventory will typically establish sales tax nexus for the out-of-state retailer. 

Whether the seller or the marketplace/distributor controls the inventory can also affect sales tax nexus rules. Guidance varies from state to state, as shown below.

Inventory in Arkansas, Iowa, Nevada, North Dakota, and Oklahoma

Arkansas, Iowa, Nevada, North Dakota, and Oklahoma are members of the Streamlined Sales Tax program, or SST, as are nearly 20 other states. As such, they’ve adopted uniform definitions for inventory controlled by third party and inventory seller controls.

Inventory that’s in a third-party’s warehouse and controlled by the third party usually doesn’t give a remote seller physical presence nexus in Arkansas, Iowa, Nevada, North Dakota, or Oklahoma. 

Iowa and Nevada will also treat a seller as a remote seller if the seller (rather than the marketplace) controls the movement of inventory held in a third-party’s warehouse. 

But in Arkansas, North Dakota, and Oklahoma, inventory held in a third-party warehouse generally does give a remote seller a physical presence if the seller controls the inventory’s movement.

Inventory in Arizona and Illinois

The Arizona Department of Revenue says “temporarily storing property with a third-party fulfillment center over which you have no control likely does not rise to the level of physical nexus” (emphasis mine). Yet a retailer would establish physical nexus in Arizona if it “maintains an inventory of products in Arizona at its direction and control.” 

According to the Illinois Department of Revenue, marketplace inventory held in Illinois does not create physical presence nexus for an out-of-state retailer “if the inventory is used strictly to fulfill orders made over the marketplace.” 

But if the inventory is used to fulfill marketplace orders and direct sales, or direct sales only, then inventory held in Illinois does create physical presence nexus for the retailer, and the retailer would need to register for sales tax.

Inventory in New York and Texas

New York law holds that “a person who is not otherwise a vendor who owns tangible personal property located on the premises of an unaffiliated person performing fulfillment services for such person” is not a vendor liable for sales tax.  

The New York State Department of Taxation and Finance published two advisory opinions in 2024 that are related to marketplace inventory in the state: TSB-A-24(45)S and TSB-A-24(52)S. Each petitioner is located out of state but has inventory in New York in facilities owned and operated by a third-party fulfillment provider. The department concluded that neither retailer is required to register for New York sales tax based on the presence of their marketplace inventory. 

The Texas Comptroller explains that “a remote seller who is below the $500,000 safe harbor threshold and has tangible personal property temporarily stored in Texas at a marketplace provider’s facility does not need to obtain a permit and does not have a collection obligation if the marketplace provider has certified it will assume the duties of a seller.” 

A remote seller with more than $500,000 in annual sales in Texas has economic nexus and therefore “must obtain a tax permit and collect tax” on their sales. 

The Comptroller also notes that a remote seller that is a taxable entity and has inventory in a marketplace provider’s facility in Texas has a Texas franchise tax obligation. 

States are sometimes sympathetic to the plight of retailers who develop a sales tax obligation through inventory stored in a third-party or marketplace warehouse.

In 2017, the Multistate Tax Commission ran a tax amnesty program for marketplace sellers whose marketplace inventory had created physical presence nexus in one or more states. About 25 states participated, and most waived past taxes without limitations for businesses whose only connection to the state was marketplace inventory. The remaining states provided more limited amnesty.

In 2019, California provided temporary relief for marketplace sellers who were “engaged in business” in the state solely because they used a marketplace facilitator to facilitate sales of their merchandise for delivery in California and the marketplace facilitator stored their inventory in California. 

In 2021, Pennsylvania offered limited tax amnesty to unregistered remote sellers that held inventory in the commonwealth. The program limited the lookback period and penalty relief for eligible, participating businesses that took the required steps to become sales tax compliant.

Illinois will offer tax amnesty for Illinois retailers in the fall of 2025 and tax amnesty for remote retailers in 2026. The legislation doesn’t mention marketplace inventory. We’ll have to see if the Illinois Department of Revenue offers any additional guidance on this matter.

Additional states could offer amnesty to remote sellers with inventory in the state in the future, but the more time passes, the less likely that seems. 

States pursue marketplace sellers for back sales tax based on inventory

California, Pennsylvania, and Washington have pursued remote sellers for back sales tax based on inventory and inventory alone — with mixed results. Overall, California and Washington have been more successful than Pennsylvania. 

Courts side with California

California started requiring marketplace facilitators to collect and remit sales tax on behalf of third-party sellers in October 2019, but the CDTFA has continued to seek sales tax from third-party Fulfillment by Amazon (FBA) sellers for periods prior to that date. The state’s efforts were challenged by the Online Merchants Guild, an ecommerce trade group, but the courts repeatedly sided with California — in 2021, 2022, and again in 2023. 

The Supreme Court of the United States refused to hear the case, so unless a different type of challenge proves effective, California can hold marketplace sellers that had inventory in the state liable for back sales tax and applicable penalties. Fortunately, for affected marketplace sellers, the CDTFA will only hold them liable for periods between April 1, 2016, and March 31, 2019.

Court sides with Washington

Washington has also been challenged for holding marketplace sellers liable for sales tax based on their marketplace inventory. As in California, taxpayer arguments generally haven’t been successful.

On January 23, 2024, an appellate court found two out-of-state sellers liable for both sales tax and business and occupation (B&O) tax for sales made through the FBA program prior to January 1, 2020, when Washington’s marketplace facilitator law took effect. 

The court made a few interesting observations in its opinion, including:

• The Amazon Services Business Solutions Agreement (BSA) reads, “You understand and acknowledge that storing Units at fulfillment centers may create tax nexus for you in any country, state, province, or other localities in which your units are stored, and you will be solely responsible for any taxes owed as a result of such storage.”  
• Amazon’s BSA reads that it will not collect and remit sales tax on behalf of a merchant unless the merchant elects for Amazon to do so.
• “Ignorance of the law excuses no one.”

Additionally, the court determined that marketplace sellers may be liable for B&O tax obligations even if the marketplace facilitator collects and remits sales tax on the sellers’ behalf. Businesses are required to report B&O tax if they have a physical presence in Washington or economic nexus with the state (i.e., if they have more than $100,000 in Washington sales annually).

Pennsylvania loses in court

Like their counterparts in California and Washington, the Pennsylvania Department of Revenue holds that marketplace inventory establishes physical presence for marketplace sellers. Pennsylvania tried to collect back taxes from thousands of Amazon’s FBA sellers based on their inventory in the state, but affected remote sellers fought back (Online Merchants Guild v. C. Daniel Hassell).

In September 2022, the Pennsylvania Commonwealth Court sided with the taxpayers. Finding in part that FBA merchants have no control over their merchandise once Amazon receives it, the court ruled that FBA inventory is not sufficient to establish sales tax nexus for nonresident FBA sellers.

If you have inventory scattered throughout the country, either in marketplace facilities or other third-party distribution or storage facilities, you may have nexus. 

Taking a sales tax risk assessment can help you identify where your business may need to register for sales tax. Assess your sales tax obligations with the Avalara Sales Tax Risk Assessment.

Marketplace inventory FAQ

What is nexus?

Nexus is a connection between a business and a taxing jurisdiction that enables the jurisdiction to impose a tax obligation on the business.

How do you create nexus?

Physical presence and economic activity in a state are the most common ways for a business to create sales tax nexus. Nexus can also be created through in-state referrals or ties to in-state affiliates.

What is inventory nexus?

Inventory nexus is a type of physical presence nexus. It occurs when a business stores inventory for sale in a state.

Does marketplace inventory create nexus?

In some states, marketplace inventory can establish sales tax nexus for the marketplace seller.

This post has been updated; it was originally published on August 25, 2022