South Carolina looks to tax out-of-state sales
Update 9.19.2018: The South Carolina Department of Revenue published Revenue Ruling #18-14 on September 18, 2018. It requires retailers without a physical presence in the state to collect and remit sales tax on South Carolina sales made on or after November 1, 2018 (unless a later date is otherwise provided in the advisory opinion), provided they meet the new $100,000 economic nexus standard (lower than the $250,000 threshold previously under consideration).
The $100,000 economic nexus standard for a remote seller includes total gross revenue from the following:
- "All sales of tangible personal property delivered into South Carolina, including all taxable retail sales, exempt retail sales, and wholesale sales of tangible personal property;
- All sales of products transferred electronically into South Carolina, whether or not the transfer of such product is subject to the South Carolina sales and use tax; and
- All services delivered into South Carolina, whether or not the service is subject to the South Carolina sales and use tax."
The Department of Revenue notes: "This advisory opinion reflects the Department’s official position at this time. Since developments in this area are taking place, any guidance is subject to change due to a future statute, regulation, court decision, or advisory opinion. Any change in South Carolina’s position as set forth in this document that is not the result of a court case or change in statute or regulation will be prospective. Any change that is the result of a court case will apply to all periods open under the statute unless the court states otherwise and any change in statute or regulation will be applicable as of the effective date established by the General Assembly."
Going against decades-old precedent, the Supreme Court of the United States determined that states can require out-of-state businesses to collect and remit sales and use tax. Already, the opinion of the court in South Dakota v. Wayfair, Inc. issued on June 21, 2018, has inspired numerous states to broaden their sales tax laws. South Carolina may be the next state to do so.
This would be groundbreaking. In recent years, more than 40 states have expanded their sales tax laws to capture more tax revenue from remote sales. The Palmetto State is not among them.
Yet now, the South Carolina Department of Revenue is seeking feedback on three proposed revenue rulings. If adopted, they would establish new reporting and filing requirements for many remote sellers, including online marketplace facilitators such as Amazon, eBay, and Etsy.
Economic nexus for remote sellers
The South Dakota economic nexus law behind the Supreme Court ruling requires an out-of-state business to collect and remit tax on South Dakota sales if, in the current or previous calendar year, it has at least $100,000 in gross sales of tangible personal property or services in South Dakota, or 200 or more sales of the same.
South Carolina Revenue Ruling #18- x [DRAFT- 8/10/18] would impose economic nexus on certain “retailers without a physical presence,” or remote sellers. It would apply to any “remote seller whose gross proceeds of sales of tangible personal property into South Carolina exceeds $250,000” in the current or previous calendar year. If enacted, remote sellers may have to begin collecting and remitting sales tax to the state starting October 1, 2018.
The $250,000 economic nexus standard would include:
- The total gross proceeds of all taxable retail sales, exempt retail sales, and wholesale sales of tangible personal property
- The total gross proceeds of all sales of tangible personal property by the remote seller, including sales of property owned by another person
However, it would not include the gross proceeds of sales of tangible personal property owned by the remote seller but sold by another person.
The draft proposal provides useful examples: A remote seller who makes $250,001 in South Carolina sales through its own website would be required to collect and remit tax on those sales. But if that same seller makes $200,000 in South Carolina sales through its own website and $75,000 through the Amazon marketplace, it would not be required to collect and remit tax on the $200,000 because it doesn’t meet the $250,000 threshold. The Amazon sales don’t apply.
However, the $75,000 sold through the marketplace would be taxed; the marketplace would collect and remit it. Additional details are provided in SC Revenue Ruling #18 – Draft DOC. 1.
Physical and economic nexus requirements for online marketplaces
According to this proposal, any person engaged in the business of selling tangible personal property at retail is required to obtain a retail license and remit sales and use tax to the South Carolina Department of Revenue, “regardless of whether such property is owned by the retailer or a third party, such as a consignment sale or an auction sale.”
The draft explains that online marketplaces are retailers engaged in the business of facilitating a retail sale of tangible personal property, which they do by:
- Listing or advertising, or allowing the listing or advertising of, the products of another person in any marketplace where sales at retail occur; and
- Collecting or processing payments from the purchaser, either directly or indirectly through an agreement or arrangement with a third party, regardless of whether the online marketplace receives compensation or other consideration in exchange for its services.
Consequently, the online marketplace must register to do business in the state and collect and remit South Carolina sales and use tax as required by law. According to the department, “The person who places his items in the [physical or virtual] consignment store to be sold by the store is not the retailer and is not liable for the sales and use tax on sales made through the consignment store.”
Most other states with similar collection requirements for marketplace facilitators, including Oklahoma, Pennsylvania, and Washington, encourage compliance by establishing use tax notice and reporting requirements for non-collecting sellers. These require non-collecting marketplace facilitators to share certain consumer information with the state (learn more about use tax reporting requirements for non-collecting sellers here). South Carolina's proposed rule is somewhat distinct because it doesn't provide use tax reporting as an alternative to collection.
South Carolina’s battle with Amazon
Amazon began collecting and remitting sales tax in South Carolina on January 1, 2016, but only on its own sales. It doesn’t collect tax on behalf of third-party sellers in South Carolina unless they ask it to (and pay for the service). Even then, it doesn’t remit tax for them.
In 2017, the South Carolina Department of Revenue presented Amazon with a bill for the uncollected tax on its marketplace sales. The state and online seller are now locked in legal battle: South Carolina maintains Amazon is liable for the tax. Amazon insists it is not.
It will likely take years for the case to be resolved. In the meantime, the draft ruling advises marketplace sellers to register with the state and collect and remit tax on their South Carolina sales to protect them from “incurring a large sales and use tax liability if the courts ultimately rule against the Department and in favor of Amazon.” It has offered the same advice to Amazon itself.
In other words, the department intends to get this tax revenue from someone. Additional information is provided in SC Revenue Ruling #18 – DOC 2.
The department is accepting feedback on these proposals and will issue further guidance once it has been established.
If the promulgated rules are adopted as proposed, sellers meeting the threshold during calendar year 2017, or from January 1, 2018 through August 31, 2018, would have to register with the state and start collecting on October 1, 2018.
Remote sellers who meet the economic nexus threshold on or after September 1, 2018, have a little more time. They’d have to collect and remit sales and use tax for all taxable sales made into the state beginning the first day of the second calendar month after economic nexus is established.
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