I went back and tried a few scenarios. If any NPCs were nearby, my rep dropped. Never had the merchant cower, though. Then I tried poisoning a merchant with two guards looking. My rep dropped a little more substantially, but the guards didn't react. When I poisoned one of the guards, however, all hoo-ha broke loose.
Interesting note: if you simply walk up and poison a merchant, you only get their money. If you look at their inventory first, you can get everything they have. Just make sure you can get to where the merchant's body might fall. Some booths can't be walked through.