Court tells Amazon to give South Carolina information about marketplace sales

South Carolina appears to have won a skirmish in its battle with Amazon over uncollected sales tax. On June 13, 2018, an administrative law judge ordered Amazon to comply with a request for information from the South Carolina Department of Revenue (SCDOR).

Last summer, the SCDOR presented Amazon with a bill for more than $12 million in uncollected sales tax, interest, and penalties for the first quarter of 2016. That’s what the state estimates Amazon owes for not collecting tax on its third-party, or marketplace, sales.

Amazon established a physical presence in The Palmetto State in 2011. Ordinarily, this physical presence would give a company nexus, the obligation to collect and remit sales tax in the state. Yet Amazon and South Carolina agreed to postpone the sales tax obligation until January 1, 2016.

When that day arrived, Amazon began collecting and remitting South Carolina tax on its own sales. However, it did not — and does not — collect tax on its third-party (marketplace) sales in South Carolina. The Department Determination states that shortly after January 1, 2016, the SCDOR “began receiving emails and phone calls from [Amazon’s] South Carolina customers who reported that ‘Amazon charged them sales tax on some purchases but not others.’” (hat tip to Bloomberg BNA for the document).

Seller or service provider?

Amazon “doesn’t dispute that tangible personal property is sold at retail on [its] website to users or consumers in South Carolina. Rather, [it] disputes who sells the tangible personal property on [its] website.” Amazon isn’t the seller in these transactions, it says, but rather the provider of a non-taxable service. It maintains the marketplace or third-party seller should collect and remit tax on these sales.

South Carolina takes a different view. According to the SCDOR, “The third parties are suppliers and/or consignors of tangible personal property, and the Taxpayer [Amazon] is the seller and/or consignee of tangible personal property.”

June 2018 Determination: Turn over information

The South Carolina Administrative Law Court has given Amazon 20 days from the issuance of the court order (June 13) to provide the SCDOR with an organizational chart detailing the corporate structure of Amazon’s business as it relates to the following:

• The ownership and operation of the www.amazon.com website
• The sale of tangible personal property on the www.amazon.com website by Amazon’s business affiliates, or third parties
• Any services provided by Amazon or any Amazon affiliates in connection with the operation of the www.amazon.com website

Within 15 days from receiving that information, the department must give Amazon a list of what it “believes it needs to discover additional information.”

Within 15 days of receipt of that information from the SCDOR, Amazon must give it a list of “the names of all managers and supervisors with decision making authority in each category and a list of witnesses who can testify regarding each category, as well as a summary sufficient to inform the department of the important facts known to or observed by each manager, supervisor, or witness.”

To read the determination, visit the South Carolina Administrative Law Court and search Docket No. 17-ALJ-17-0238-CC.

What does this mean for Amazon marketplace sellers?

South Carolina is aggressively seeking tax revenue from Amazon’s marketplace sales, which should raise an alarm for marketplace sellers.

As evidenced by the legal proceedings, the department holds Amazon responsible for the tax, not the marketplace sellers. The state even filed a motion to compel Amazon to collect and remit the tax during the legal dispute, but it was denied.

However, South Carolina is also inviting third-party sellers to voluntarily collect and remit. It explained its reason for doing so in a February 2018 news release: “Following the court’s denial of the motion, several third-party suppliers requested guidance from the SCDOR regarding their potential tax liability if the court ultimately rules in favor of Amazon … and finds that third-party suppliers — rather than Amazon… — are the retailers responsible for collecting and remitting sales and use tax on goods sold on Amazon.com. As a result, the SCDOR will now accept retail sales tax applications and allow third-party suppliers to remit sales and use tax for their products sold on Amazon.com.”

Should the court eventually find in favor of Amazon, the presence of Amazon fulfilment centers in South Carolina (and the third-party seller inventory stored within them) could help the state make the case that marketplace sellers with inventory in a South Carolina fulfillment center have a physical presence in South Carolina, and therefore, an obligation to collect and remit sales tax.

Who should collect tax on marketplace sales?

Marketplace sales now comprise about half of Amazon’s retail sales in the United States, so the question of who should collect tax on these sales is an important one. It’s a large and growing space that includes eBay, Etsy, and the Walmart Marketplace.

A few states have passed laws requiring these marketplace facilitators to collect and remit the tax, and Amazon and some other marketplaces are complying with these laws in Pennsylvania and Washington. Several other states, including Connecticut and Oklahoma, have passed similar laws that take effect later this year. In Virginia, however, the storage of inventory in the commonwealth creates sufficient nexus to require an out-of-state seller (not marketplace facilitator) to collect and remit Virginia tax.

Other states, including Massachusetts, New York, and Rhode Island have asked Amazon to identify its third-party sellers to the tax authorities. After initially refusing, Amazon has complied with these requests; it called the Massachusetts request a “valid and binding legal demand.” South Carolina hasn’t indicated whether it will seek this information if it’s unable to compel Amazon to tax its marketplace sales.

Learn more about state efforts to tax remote sellers at Avalara Sales Tax 360.