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.

UPDATE: On January 24, 2024, a South Carolina appeals panel ruled that Amazon Services LLC (Amazon) was required to collect and remit sales tax on products sold on its marketplace for the period January 1, 2016, to March 31, 2016. At issue in the appeal was whether the Administrative Law Court erred in concluding that Amazon, a registered retailer in South Carolina having physical presence through distribution facilities built in 2011, had a duty to collect and remit sales tax on products sold on its marketplace by third-party sellers under the Act in effect in 2016, whether the statute in effect in 2016 was ambiguous, and whether imposing the tax on Amazon for these sales violated constitutional provisions of fair notice and equal protection.

Approximately a year after the panel listened to arguments in the case, Judge Jerry Vinson issued an opinion affirming the decision of the South Carolina Administrative Law Court. This decision upheld the tax assessment of around $12.5 million imposed by the South Carolina Department of Revenue back in September 2019. The administrative law judge determined that Amazon met the criteria of being engaged in the selling as outlined in the state’s sales and use tax Act and found the statutes at issue were not ambiguous further finding that Amazon failed to show evidence of constitutional violations on behalf of the Department of Revenue. Consequently, Amazon was deemed liable for taxes on third-party sales made by merchants on its platform.

Amazon had physical presence in South Carolina. Following the Moratorium expiration for the five-year exemption of sales tax for businesses that met certain conditions in building a distribution facility in the state, Amazon began collecting sales tax on its retail sales and affiliates’ sales. At question in this assessment were the sales of third parties on its marketplace on which Amazon did not collect sales tax in 2016. Taxpayers doing business in South Carolina should evaluate their physical, economic, and marketplace nexus to understand their sales tax registration and collection obligations. South Carolina enacted economic nexus (remote seller) legislation effective November 1, 2018, and subsequently issued S.C. Revenue Ruling #18-14 which addresses retailers without a physical presence. On April 26, 2019, S.B. 214 was signed by the governor clarifying the existing sales tax collection obligations for marketplace facilitators. With marketplace nexus, marketplace facilitators are now required to collect and remit sales taxes on behalf of the sellers on their platforms. (Amazon Services LLC v. South Carolina Department of Revenue, case number 2019-001706, Opinion No. 6047, South Carolina Court of Appeals, January 24, 2024)

UPDATE: On March 18th, 2024, the South Carolina Court of Appeals denied Amazon Services LLC’s petition for a rehearing on the basis that no material facts or principles of law were overlooked in the original ruling.

Posted on March 21, 2024