South Carolina Holds that Amazon Owes Tax on Pre-Wayfair Third Party Sales

An Administrative Law Judge (ALJ) has held that Amazon Services, LLC owes uncollected taxes, penalties, and interest on third-party sales made through the facilitator for pre-South Dakota v. Wayfair tax periods at issue. The assessment covered Q1 of 2016 only. Amazon Services had previously challenged the assessment by the South Carolina Department of Revenue (DOR). The ALJ held that Amazon Services is in the business of selling tangible personal property at retail under state law. The ALJ stated that the relationship between Amazon Services and third-party merchants functions as a consignment-type relationship, noting that Amazon is effectively handling all of the selling activities. The ALJ also noted that if Amazon didn’t collect sales tax at the point of sale, “it is unlikely the tax would ever be collected, which would not effectuate the legislative intent of the Sales and Use Tax Act.” If third-party merchants were deemed to be the sellers, Amazon would still need to collect the use tax when it was applicable since there is no opportunity for merchants to do so at the time of sale. The ALJ stated that “Customers meaningfully interact with Amazon Services to consummate the sales of Merchant products and no one else.” The ALJ dismissed Amazon’s argument that it was providing non-taxable services. The ALJ stated that “when two actors are both ‘engaged in the business of selling’ of a product, the Court finds it is the actor who is present at the point of sale and accepting money in exchange for the transfer of the product who is responsible for the sales and use tax under our tax laws.” As such, Amazon Services is responsible for sales tax on the third-party merchant sales for the periods at issue. The South Carolina statutes include certain provisions that led the court to its decision including its definition of retailer which includes “selling or auctioning tangible personal property whether owned by the person or others.”  The definition of gross proceeds also includes “the proceeds from the sale of property sold on consignment by the taxpayer”.  The definition of seller includes “persons selling or auctioning tangible personal property of others”.  These provisions were deemed to have clear direction that Amazon Services is the deemed retailer responsible for the collection of tax on sales of third party merchants’ products.

It is likely that the assessment will be expanded to cover additional periods.  Other marketplaces could also be found to be responsible for the collection of taxes for periods prior to the enactment of its marketplace facilitator legislation.  The Department of Revenue will now work to determine if any sellers had remitted the tax to finalize the assessment amount.  Amazon has not announced yet whether it will appeal this latest ruling.

For our previous news item on this case, see South Carolina Court Denies Request for Injunction to Make Amazon Collect Tax on FBA Sales.

Remote sellers should note that South Carolina has previously enacted economic nexus and marketplace nexus legislation. (Amazon Services, LLC vs. South Carolina Department of Revenue, Docket No. 17-ALJ-17-0238-CC)

UPDATE: In its most recent quarterly report filed with the U.S. Securities and Exchange Commission, Amazon Services LLC addressed South Carolina’s assessment, stating that “We intend to defend ourselves vigorously in this matter.” In the report, Amazon states, “We believe the assessment is without merit. If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities.” We will continue to monitor this case as it proceeds through the appeal process. (Amazon quarterly report filed with U.S. Securities and Exchange Commission)

UPDATE: On December 9, 2020, an amicus brief was filed on behalf of the Council on State Taxation (COST) in the Amazon Services, LLC v. South Carolina Department of Revenue case. The amicus brief argues that the Department of Revenue (DOR) is exceeding its statutory authority and that the DOR’s actions are contrary to the intent of the legislation. The brief argues that the imposition of the tax collection responsibility prior to the legislation’s effective date is not statutorily authorized and should be reversed. Additionally, the brief argues that the tax imposition in the absence of legislation contradicts two fundamental principles of good tax administration: notice and fairness. We will continue to monitor developments in this case and keep you updated.

Posted on October 31, 2019