German politicians widely condemned the decision last September by the Stuttgart court to fine Juergen Kamm, 32, who distributed the material via a mail order service and a website.
Judge Wolfgang Kuellmer had ordered the seizure of 16,500 pieces of merchandise, two palettes of brochures and about 8,400 flyers bearing the logo - a red circle with a line across it superimposed on the Nazi emblem.
'Foolish act'
In the original ruling convicting him, Kuellmer said that the purpose for using the symbols was not the issue, but rather that there was a "basic taboo" against reproducing them.
"The danger of familiarisation [of the symbols] is ever-present," he said.
Several politicians, including Claudia Roth the Green party leader, expressing solidarity with Kamm by reporting themselves to investigators for having worn anti-Nazi T-shirts and badges that included the banned symbols.
Volker Beck, a Green politician, said: "They criminalised a scene which plays an important role in confronting fascists and Nazis.
"It's good that this foolish act of the Stuttgart court is now off the books."
In its ruling, the Karlsruhe appeals court said Kamm had not violated the intent of the law, and that it could not conceive of the items being misused by neo-Nazi groups.
"The court is convinced of the fact that members of extreme-right organisations would never make use of items that make a mockery of their 'holy' symbols," the court said in its opinion.
Winkler ordered that Kamm be compensated for his legal costs and damages for goods that were confiscated.