Amazon found liable for marketplace sales tax in South Carolina … again

The Supreme Court of South Carolina ruled in March 2026 that Amazon is liable for almost $12.5 million in sales tax, interest, and penalties for third-party sales made through its platform during the first quarter of 2016. A month later, the state Supreme Court denied Amazon’s petition for a rehearing. 

Amazon must pay up, and it could owe South Carolina even more for uncollected sales tax, interest, and penalties on third-party sales made between April 2016 and April 26, 2019, when Amazon began collecting tax on behalf of marketplace sellers as required under the state’s marketplace facilitator law. 

The decision highlights the potential ramifications of not collecting and remitting sales tax as required by law.

• Amazon started collecting and remitting South Carolina sales tax on January 1, 2016, but only for its direct sales. The ecommerce giant did not collect and remit sales tax for its marketplace sellers until April 26, 2019, when South Carolina’s marketplace facilitator law took effect. 

• Although Amazon established a physical presence in South Carolina in 2011, it wasn’t required to collect and remit sales tax until January 2016 per an agreement with the state. 

• Since South Carolina won its case against Amazon, it could hold the ecommerce giant liable for outstanding taxes (plus interest and penalties) on marketplace sales made April 1, 2016, through April 26, 2019.

Amazon and South Carolina had a pretty good thing for a while. In 2011, state lawmakers agreed to waive the company’s obligation to collect and remit sales tax for five years on the promise that Amazon would invest at least $125 million in the state and create 2,000 jobs. Thus, fulfillment centers were built, jobs created, and sales tax obligations were put on hold — for a time.

The agreement called for Amazon to start collecting South Carolina sales tax on January 1, 2016, and it did. Then the South Carolina Department of Revenue (SCDOR) began hearing from Amazon’s customers that the company had “charged them sales tax on some purchases but not others.”

During a subsequent audit of Amazon, SCDOR learned that although Amazon was diligently collecting and remitting tax on its own sales, it wasn’t taxing sales by unaffiliated third-party merchants selling through the Amazon marketplace (marketplace sellers). This wasn’t an oversight: Amazon insisted the marketplace sellers were liable for the tax.

Auditors took a different view and eventually handed Amazon a bill for approximately $12.5 million in unpaid sales tax, interest, and penalties for the first quarter of 2016. The inevitable lawsuit ensued, and on September 10, 2019, the South Carolina Administrative Law Court (ALC) found in favor of the South Carolina Department of Revenue, upholding the $12.5 million assessment. (Amazon Services, LLC v. South Carolina Department of Revenue, Docket Number 17-ALJ-17-0238-CC.)

While the ALC was deliberating the case, South Carolina clarified sales tax obligations for marketplace facilitators. Under Senate Bill 214, which took effect April 26, 2019, a marketplace facilitator or provider that has nexus with the state must collect and remit sales or use tax on all sales made through the platform.

At the time, there was a great deal of speculation as to whether Amazon would appeal the ALC decision. In February 2023, it did.

Amazon argued that:

1. As a marketplace operator, it had no duty to collect and remit sales tax on third-party sales under the Sales and Use Tax Act in effect in 2016.

2. The statute in effect in 2016 was ambiguous and could reasonably be read to not require marketplace facilitators to collect and remit sales tax for third-party sales.

3. Imposing a sales tax obligation on Amazon for third-party sales during the relevant period violates the United States and South Carolina constitutional guarantees of fair notice and equal protection.

Another wait began.

On January 24, 2024, the Court of Appeals of South Carolina affirmed the ALC decision — and the nearly $12.5 million assessment on Amazon for the period of January 1, 2016, to March 31, 2016.

The Court of Appeals found that “the ALC did not err in determining Amazon Services was engaged in the business of selling tangible personal property at retail and was therefore responsible for collecting and remitting sales tax on sales of tangible personal property owned by third parties occurring on the Marketplace.” Moreover, “the statutes at issue were not ambiguous and therefore do not require us to resolve any substantial doubt in Amazon Services’ favor.”

The court rejected Amazon’s argument that it’s merely a service provider. “Amazon Services is the only party a buyer encounters during the sales transaction,” the opinion held, and Amazon profits from its third-party sales by charging sellers a referral fee on each item. The court also noted that under South Carolina sales tax law, “‘retailer’ and ‘seller’ include every person … selling or auctioning tangible personal property, whether owned by the person or others.”

As for the constitutional issues, the Court of Appeals concluded “the ALC did not err by finding Amazon Services has failed to show any constitutional violations.” The South Carolina Department of Revenue did not retroactively apply subsequent legislation to Amazon’s action: Amazon had a physical presence in the state in 2016, so the state had the authority to require Amazon to collect and remit South Carolina sales tax.

You can find more details in the decision on Amazon Services, LLC, v. South Carolina Department of Revenue (Appellate Case No. 2019-001706). It’s an interesting read. 

Amazon appealed the appellate court decision, but the court determined that no material facts or principles of law had been overlooked in the original ruling and denied the request. So, Amazon appealed to the South Carolina Supreme Court, and in October 2024, the court agreed to hear the case.

The Supreme Court agreed with the lower courts that Amazon was obligated under the laws in effect in 2016 to collect and remit taxes for sales by third-party merchants. 

Per the ruling, “Amazon Services purposefully crafted a business model that made the involvement of Amazon Services integral to every third-party transaction.” It points out that the company’s Business Solutions Agreement in 2016 tightly controlled every third-party merchant transaction by, for example:

• Regulating a third-party merchant’s ability to set the price of a product listed on Amazon.com
• Establishing criteria for how third-party merchants listed products on Amazon.com  
• Controlling notification of third-party merchant products purchased on Amazon.com
• Notifying Amazon Payments, Inc. when to charge a customer for a particular transaction through the customer’s chosen payment method
• Notifying customers of order shipment
• Dictating how third-party merchants communicated with customers
• Handling returns involving third-party merchant products
• Dispersing funds from these transactions to third-party merchants after retaining any applicable fees

When Amazon requested a petition for a rehearing, the South Carolina Supreme Court denied the request: “After careful consideration of the petition for rehearing,” the order reads, “we are unable to discover that any material fact or principle of law has been either overlooked or disregarded and hence, there is no basis for granting a rehearing.”

So, Amazon must pay up.

A lot has happened since the battle between Amazon and South Carolina first began. Most significantly, the United States Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. freed states to tax remote sales, and every state with a general sales tax has enacted economic nexus and marketplace facilitator laws.

It’s critical for marketplaces and retailers to understand how economic nexus and marketplace facilitator laws shape sales tax obligations in every state, and to recognize that states may apply similar tax laws differently. 

Keeping physical nexus laws top of mind is equally important. Physical presence in a state created sales tax nexus before the Wayfair decision and continues to establish nexus for businesses today. 

While South Carolina holds Amazon responsible for collecting and remitting tax on behalf of its third-party sellers for periods before the state’s economic nexus and marketplace facilitator laws took effect, other states have reached different conclusions. 

For example, the California Department of Tax and Fee Administration (CDTFA) has held Fulfillment by Amazon (FBA) sellers liable for sales tax for periods before the state’s economic nexus and marketplace laws were in effect, based on the sellers’ FBA inventory in the state. 

California isn’t the only state to consider inventory a nexus trigger. Washington has also held out-of-state FBA sellers liable for sales tax and business and occupation (B&O) tax because their inventory was in the state before the state enacted economic nexus and marketplace facilitator laws.

In fact, having inventory in a state — including inventory controlled by a marketplace or third-party logistics (3PL) providers — can trigger a sales tax obligation for third-party sellers in more than 20 states.

As the Amazon-South Carolina case shows, failure to collect and remit sales and use tax as required can lead to a hefty bill. Back in 2017, the South Carolina Department of Revenue estimated that Amazon could end up owing the state as much as $500 million if litigation continued for five years and the state won. Since the dispute dragged on for nine years, the final tally could be even higher.

The most effective way for retailers to manage sales tax obligations across multiple states and channels is to implement an Agentic Tax and Compliance™ solution like Avalara. That’s what Thread Wallets did.

As Amazon became an increasingly important retail sales channel for Thread Wallets, the company’s sales tax compliance burden grew. “It’s very tedious and difficult to pull multiple tax reports from Amazon,” says COO Mitch Sanders. “Then there’s the very manual process of meshing them together and reconciling them for filing. That was a huge headache.” 

Thread Wallets was already using Avalara AvaTax and Shopify Plus to manage their direct ecommerce sales, so the company turned to Avalara to simplify compliance for their Amazon sales. 

With Avalara, Mitch no longer worries about the complexities and risks of managing sales tax from multiple channels in multiple jurisdictions. “Avalara has saved me tons of time and lots of headache,” he says. Mitch estimates he’s saving five to 10 hours per month just because Avalara keeps up with changing rates and rules for him. Read the Thread Wallets customer story for more insights. 

Why did the South Carolina Supreme Court hold Amazon liable for sales tax on third-party marketplace sales?

In the South Carolina Amazon sales tax ruling, the state Supreme Court ruled that Amazon Services was “engaged … in the business of selling” with its marketplace and liable for third-party sales tax because it purposefully crafted a business model that made the involvement of Amazon Services integral to every third-party transaction.

Are third-party marketplace sellers liable for back sales taxes in South Carolina?

The South Carolina Department of Revenue and the courts held the marketplace facilitator (Amazon) responsible for collecting and remitting uncollected sales tax on third-party sales during the audited period, rather than assessing individual marketplace sellers.  

However, tax authorities and courts in California and Washington have held FBA sellers liable for back sales tax for periods prior to marketplace facilitator laws when the seller held inventory in local fulfillment centers (creating physical nexus).

Does marketplace inventory establish nexus for marketplace sellers?

It can. In more than 20 states, having inventory in the state establishes a physical presence in the state and sales tax nexus. This includes inventory managed by a marketplace or 3PL provider. 

This article has been updated to provide new information.