Amazon owes South Carolina nearly $12.5 million in sales tax the state said it should have paid on products sold by third parties using its retail platform.
The South Carolina Supreme Court last week ruled against Amazon Services LLC, assessing millions in tax, interest and penalties from 2016 sales after a legal back-and-forth on the issue of when out-of-state sellers must collect and remit sales tax for online sales.
Amazon began its online sales business at a time when states could not tax sales by an out-of-state retailer unless that retailer had a physical presence in the state. This rule was the result of a 1992 decision by the U.S. Supreme Court in Quill Corp. v. N. Dakota, which upheld the notion that the U.S. Constitution’s Dormant Commerce Clause prevented North Dakota from taxing out-of-state catalog mail-order sales.
Quill was overruled in a 2018 case involving online sales by Wayfair into South Dakota, and since then the ability of a state to tax out-of-state retailers has depended on several factors, the most important of which is whether the retailer has a substantial nexus to the taxing state.
According to the nonpartisan Tax Foundation, 25 states tax out-of-state sellers based solely on meeting a minimum dollar threshold – for example, $200,000 – while others require the out-of-state seller to collect and remit sales tax if it meets either a dollar threshold or a minimum number of transactions in the state. Arkansas, for instance, taxes out-of-state sellers if total sales exceed $100,000 or 200 or more transactions into the state, the nonprofit group reports.
In 2011, South Carolina, in an effort to attract investment, passed Act 32, which provided a five-year sales tax exemption – from 2011-16 – for businesses that built facilities in the state.
Amazon took advantage of this incentive and, through its affiliate Amazon Fulfilment Services LLC, built a fulfilment center in South Carolina.
Despite its physical presence, which would have subjected it to sales tax, Amazon was exempted from collecting and paying sales tax for both its own sales and third-party merchant sales into South Carolina from 2011 through the end of 2015.
According to the South Carolina Department of Revenue, Amazon began collecting and remitting sales tax in January 2016 for products it sold into South Carolina through Amazon.com but did not collect and remit sales tax for products sold into the state by third-party merchants on the company’s platform.
A Department of Revenue audit determined that Amazon had failed to collect and remit taxes on third-party merchant sales during the first quarter of 2016 and assessed $12,490,502.15 in back taxes, interest and penalties.
An Administrative Law Court affirmed the Department’s assessment, a decision upheld by the Court of Appeals.
Before the South Carolina high court was whether Amazon was responsible for collecting and remitting taxes for third-party sales under the state’s Sales and Use Tax Act, which applies a 5% tax on “every person engaged… in the business of selling tangible personal property at retail.”
Amazon argued that such third-party transactions are not “sales” that would subject it to the Act, and that “[n]either Amazon Payments nor Amazon Services nor some imagined combination of the two received payment for the purchased product given the undisputed fact that the money held temporarily by Amazon Payments is held for the benefit of the third-party seller.”
That the Tax Act was amended in 2019 to add the term “marketplace facilitator” in the definition of “seller” was further evidence that Amazon’s activities were not taxable under the version of the law in effect in 2016, the company stated.
Amazon also asserted that it was not “in the business of selling” and that “[b]efore this case, no court or tax regulator had said that a marketplace—a business that engages in none of these selling activities—was ‘in the business of selling’ property it did not own.”
Ultimately, according to Amazon, its interpretation of the Tax Act was reasonable and it should be able to rely on long-running precedent that ambiguous tax rules that can be reasonably interpreted to exclude a person from taxation should be resolved in the person’s favor.
Amazon’s arguments were supported by a coalition of business groups, which included the U.S. Chamber of Commerce, the Business Roundtable, NetChoice and state and local chambers of commerce.
Of concern to the business groups was that the Court of Appeal’s ruling, if left to stand, would create uncertainty in the application of the tax law: “[A] core principle of tax policy is that ‘[t]ax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of a transaction.’”
The Supreme Court was unpersuaded by these concerns.
The issue “is not whether Amazon Services was a ‘seller,’ but whether Amazon Services was ‘engaged… in the business of selling,’” wrote Justice John Few, in a 3-2 opinion upholding the Court of Appeals’ decision.
On March 3, Justice Few abruptly dropped his bid to be re-elected to the court. His term ends July 31.
The Tax Act is “unambiguous,” the Court found, and “as applied to Amazon Services,” the company was “required to remit sales tax on third-party transactions.”
Amazon’s Due Process arguments also fell on deaf ears as the court reasoned that Amazon had sufficient notice of the Tax Act’s requirements in 2016.
Chief Justice John Kittredge filed a one-page dissent, joined by acting justice Courtney Clyburn Pope, arguing that both parties presented “reasonable interpretations of the statute” and, echoing arguments by Amazon and the business coalition, the Court should follow precedent that “requires us to rule in favor of Amazon” when a tax law at issue is ambiguous or subject to reasonable interpretation excluding a person from taxation.
