South Carolina DOR Goes After Amazon Services For Unreported Sales/Use Tax On Third-Party Transactions

Companies that operate online marketplaces should be aware of a recent determination issued by the South Carolina Department of Revenue upholding an assessment of uncollected sales tax against Amazon Services LLC (“Amazon Services”)  the entity that operates the website at www.amazon.com (the “Amazon website”), through which sales are made by both Amazon affiliates and non-affiliated “third-party” sellers.  Although Amazon Services considers itself a service provider to the other companies that act as retailers of the goods sold through its website, the South Carolina DOR concluded that, under South Carolina law, Amazon Services itself is the retailer of the products sold on the Amazon website and was thus obligated to collect sales tax on all such transactions.  The Department assessed Amazon Services over $9.5 million in sales tax for just the first three months of 2016, plus interest and penalties.   A copy of the Determination is available HERE as part of the appeal taken by Amazon Services to the South Carolina Administrative Law Court.

It is the third-party sales that lie at the center of the dispute between the company and South Carolina.  As most of us probably know, Amazon.com LLC (“Amazon.com”), the primary Amazon retail entity that sells through the Amazon website, has agreed over the course of the past few years to begin collecting and remitting sales and use tax in every state that has a transaction-based tax.  As part of that campaign of initiating sales tax collection, Amazon.com started collecting South Carolina tax on sales to customers through the Amazon website as of January 1, 2016.  However, Amazon Services also makes the Amazon website available to third-party retailers that wish to sell products on www.amazon.com.  Those third-party retailers make their own decisions about where to report and remit sales/use tax, and many of them do not report sales/use tax in all states, including South Carolina.  More to the point for present purposes, Amazon Services also does not collect or remit sales tax on such third-party sales through the Amazon website.

The details of the manner in which Amazon Services operates the Amazon website are central to the Department’s determination that Amazon Services is a retailer subject to South Carolina sales tax collection obligations.  According to the Department, all sellers offering products for sale through the Amazon Website—whether Amazon affiliates such as Amazon.com or non-affiliated, third-party sellers—contract with Amazon Services to handle such sales.  The Department’s determination explains the ways in which Amazon Services acts (in the Department’s view) like a retailer taking goods on consignment from other sellers, and then marketing and selling such products.

As set forth in the Determination, Amazon Services is responsible for not only administration and operation of the Amazon website, but also for all order and payment processing of sales through the site and for various fulfillment and customer service functions (with some variation, depending upon what the product vendor has requested).  Amazon Services in turn contracts with Amazon Payments, Inc. (“Amazon Payments”) to handle payment processing for sales through the website and with Amazon Fulfillment Services, Inc. (“AFS”), to provide warehousing, picking, packing, and shipping services for those product vendors that elect to obtain such services.  According to the Department, the product vendors themselves do not have contracts with either Amazon Payments or AFS.  Instead, only Amazon Services enters into such contracts.  Furthermore, to the extent that sales/use taxes are collected on sales through the Amazon website, the Department indicates that Amazon Services (presumably relying on AFS) collects and remits those taxes to the product vendors for filing with the relevant states.

The Department in the Determination undertakes a careful review of the relevant statutory provisions of South Carolina law regarding what entities have an obligation to collect and remit South Carolina sales and use taxes.  According to the Department, Amazon Services—despite its claim that it is merely  a service provider for other companies that act as the true retailers of the products sold on the Amazon website—is itself a “person engaged … in the business of selling tangible personal property at retail” under S.C. Code Ann. § 12-36-910(A) and/or a “retail seller” responsible for collecting use tax on property purchased for storage, use, or consumption in the state under S.C. Code Ann. §§ 12-36-1340 and 12-36-1350.   See Determination at 7.  The Department concludes that “the totality of the taxpayer’s activities clearly demonstrates that the Taxpayer is in the ‘business of selling tangible personal property at retail’ within the meaning of § 12-36-910(A).”  Id.  The Department builds its case Against Amazon Services based on certain other South Carolina statutory provisions and court decisions, the proper interpretation of which is likely to be vigorously contested by Amazon Services as the case moves forward on appeal before the Administrative Law Court.

The Department also rejects arguments advanced by Amazon Services in response to the assessment under the Commerce Clause and Due Process Clause of the U.S. Constitution and the Internet Tax Freedom Act (“ITFA”).  With regard to the company’s Commerce Clause “nexus” defense, the Department notes that AFS, with which Amazon Services contracts for fulfillment services, has three fulfillment centers located in South Carolina.  The Department concludes that AFS thus conducts activities in the state on behalf of Amazon Services that assist it to make a market for sales in South Carolina, creating the necessary “physical presence” required under the Commerce Clause for the Department to assert tax collection obligations against Amazon Services.  The Department further finds that Amazon Services received adequate notice under South Carolina law that its activities would subject it to a tax collection obligation, so that no Due Process violation exists. Finally, the Department rejects the company’s ITFA argument because it concludes that traditional, offline consignment vendors are required to collect sales tax, eliminating any potential discrimination in asserting tax collection obligations against an online consignment operation.

Other marketplace providers should be aware of the Amazon Services case to determine how it may affect their businesses.  To the extent that a marketplace may have nexus in a state, but does not collect sales tax on behalf of third-party sellers making sales to customers in the state, the provider should review state law and compare its activities with those of Amazon Services to evaluate the strength of an argument that the state may have for asserting a statutory obligation to collect tax against the marketplace provider.  In addition, marketplace providers should keep a close eye on the Amazon Services appeal in South Carolina to determine whether the argument that a marketplace provider can itself be deemed to be a retailer for third-party sales gains traction.  We will provide updates on any important developments in the case.