Amazon found liable for marketplace sales tax in South Carolina
Amazon and South Carolina had a pretty good thing going there 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. Not long after, 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 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. On September 10, 2019, a South Carolina administrative law judge (ALJ) disagreed with Amazon’s view of the facts, finding in favor of the South Carolina Department of Revenue.
The ALJ concluded that Amazon “owes sales and use tax on the sale of third-party product sold on the Marketplace for audit period at issue.” More details are available in the opinion, Amazon Services, LLC v. South Carolina Department of Revenue, No. 17-ALJ-17-0238-CC (click on the link and search for this docket number); it's an interesting read.
Marketplace facilitators collecting more sales tax nationwide
A lot has happened since the battle between Amazon and South Carolina began. Most significantly, on June 21, 2018, the Supreme Court of the United States authorized states to tax remote sales. Prior to the decision in South Dakota v. Wayfair, Inc., states could only tax sales by businesses with a physical presence in the state.
All but two of the 45 states with a general sales tax have adopted economic nexus since the Wayfair ruling. Economic nexus laws base a sales tax collection obligation solely on a remote seller’s economic activity in the state.
A majority of states have also adopted marketplace facilitator laws that require marketplace facilitators like Amazon to collect and remit tax on third-party sales.
South Carolina began enforcing economic nexus on November 1, 2018. A marketplace facilitator law took effect in the Palmetto State on April 26, 2019.
The final assessment
The $12.5 million assessment that launched the lawsuit between Amazon and South Carolina may turn out to be a drop in the bucket of what Amazon eventually owes the state. Back in 2017, SCDOR estimated that Amazon could end up owing the state as much as $500 million if litigation continued for five years and the state won.
Now that the case has been decided, SCDOR is tasked with calculating “the specific amount of tax owed on the sales at issue in this case.” The final amount could be considerable if the department bills Amazon for uncollected tax from January 1, 2016, through April 29, 2019, when Amazon began complying with South Carolina’s new marketplace facilitator law.
Tax may already have been collected on some of those sales. In early 2018, the department invited Amazon third-party sellers to voluntarily register to collect and remit South Carolina sales tax. This was in response to requests for guidance from marketplace sellers who were concerned they might be held liable for the tax if the court ruled against the state. It may take SCDOR some time to determine the final amount.
In the meantime, Amazon has a decision to make. Amazon spokesperson Jill Kerr told Bloomberg Tax “that the company had not yet decided whether to appeal the ruling.”
Learn more about state nexus laws and sales tax collection requirements.
The 2021 sales tax changes report: midyear update
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