South Carolina goes after Amazon marketplace sales tax revenue

Amazon made headlines last spring by deciding to collect and remit tax in Washington, D.C. and all 45* states with a general sales tax, even those where it lacked the physical presence normally needed to trigger a tax obligation. The news was widely celebrated; Amazon isn’t the only online ecommerce seller that hadn’t been collecting tax in many of these states, but it is the largest.

Yet technically, Amazon isn’t the seller for about 50 percent of its sales. Instead, it functions as the marketplace for third-party sellers, often called marketplace sellers. Although Amazon now collects and remits tax on its sales in all sales tax states, it doesn’t apply tax to third-party sales unless a marketplace seller asks it to. When it does, it charges a fee (2.9 percent of the sales tax collected) — and the marketplace seller has to remit the collected taxes to the appropriate tax authority itself.

Marketplace sales have largely flown under the radar of state tax authorities. However, a small but growing number of states are now looking to tax them.

Arizona, Rhode Island, Minnesota, Virginia, and Washington have all made rulings or passed laws that tax sales by third-party sellers whose sole connection to the state is through a larger marketplace provider, such as Amazon or eBay. These states maintain that having inventory in a warehouse or fulfillment center creates nexus, a physical connection to a state substantial enough for the state to tax an out-of-state business. New York and Texas have considered similar laws.

Details vary from state to state. For example, Minnesota’s law holds marketplace providers (e.g., Amazon) liable for the tax on its third-party sales, while the marketplace seller is liable under Virginia’s law. What these states share is an appetite for more sales tax revenue and a willingness to go after it.

When news broke earlier this week that South Carolina wants Amazon to pay more than $12 million in uncollected taxes, interest, and penalties on marketplace sales from the first quarter of 2016, many tax wonks were surprised.

Unlike Alabama, Minnesota, South Dakota, Washington, and many other states, South Carolina has not aggressively sought to tax out-of-state internet sellers. Although the legislature considered taxing certain remote sales in 2014 and again earlier this year, both measures failed.

But now South Carolina’s Department of Revenue (SCDOR) is holding Amazon “responsible for collecting taxes on behalf of businesses that used the marketplace to sell products to residents of that state” (CBNC). SCDOR is basing its assessment on existing South Carolina laws.

Amazon has distribution centers in South Carolina and has collected South Carolina tax on its sales since Jan. 1, 2016. As in other states, Amazon only taxes its own sales, not marketplace sales (unless a marketplace seller asks it to). It’s unclear why the assessment is limited to Q1 2016.

What’s not a surprise is Amazon’s decision to fight the assessment. The company’s most recent quarterly report says “the assessment is without merit. If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities. We intend to defend ourselves vigorously in this matter.” Amazon has already submitted a request for a contested case hearing (hat tip to Bloomberg BNA for tracking this document down).

The eventual outcome of the dispute between Amazon and South Carolina is almost certain to affect other state attempts to tax marketplace sales. Marketplace providers and sellers should therefore follow the case closely.

The news from South Carolina coincides with a unique opportunity for qualifying online marketplace sellers to participate in the Online Marketplace Seller Voluntary Disclosure Initiative, a sales tax amnesty program running in 24 states from Aug. 17 to Oct. 17, 2017. South Carolina isn’t participating.

*Alaska, Delaware, Montana, New Hampshire, and Oregon don’t have a general sales tax.