Amazon found liable for marketplace sales tax in South Carolina … again

The long wait is over. The Court of Appeals of South Carolina has found Amazon liable for unpaid sales tax on third-party sales from 2016, plus interest and penalties.

Amazon and South Carolina had a pretty good thing going 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. Then 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, and on September 10, 2019, the South Carolina Administrative Law Court (ALC) found in favor of the South Carolina Department of Revenue, upholding the $12.5 million assessment. (Amazon Services, LLC v. South Carolina Department of Revenue, Docket Number 17-ALJ-17-0238-CC.)

While the ALC was deliberating the case, South Carolina clarified sales tax obligations for marketplace facilitators. Under Senate Bill 214, which took effect April 26, 2019, a marketplace facilitator or provider that has nexus with the state must collect and remit sales or use tax on all sales made through the platform.

At the time, there was a great deal of speculation as to whether Amazon would appeal the ALC decision. In February 2023, it did.

Amazon argued that:

1. As a marketplace operator, it had no duty to collect and remit sales tax on third-party sales under the Sales and Use Tax Act in effect in 2016.

2. The statute in effect in 2016 was ambiguous and could reasonably be read to not require marketplace facilitators to collect and remit sales tax for third-party sales.

3. Imposing a sales tax obligation on Amazon for third-party sales during the relevant period violates the United States and South Carolina constitutional guarantees of fair notice and equal protection.

Another wait began.

On January 24, 2024, the Court of Appeals of South Carolina affirmed the ALC decision — and the $12.5+/- million assessment on Amazon for the period of January 1, 2016, to March 31, 2016.

The Court of Appeals found that “the ALC did not err in determining Amazon Services was engaged in the business of selling tangible personal property at retail and was therefore responsible for collecting and remitting sales tax on sales of tangible personal property owned by third parties occurring on the Marketplace.” Moreover, “the statues at issue were not ambiguous and therefore do not require us to resolve any substantial doubt in Amazon Services’ favor.”

The Court rejected Amazon’s argument that it’s merely a service provider. “Amazon Services is the only party a buyer encounters during the sales transaction,” the opinion held, and Amazon profits from its third-party sales by charging sellers a referral fee on each item. The Court also noted that under South Carolina sales tax law, “‘retailer’ and ‘seller’ include every person … selling or auctioning tangible personal property, whether owned by the person or others.”

As for the constitutional issues, the Court of Appeals concluded “the ALC did not err by finding Amazon Services has failed to show any constitutional violations.” The South Carolina Department of Revenue did not retroactively apply subsequent legislation to Amazon’s action: Amazon had a physical presence in the state in 2016, so the state had the authority to require Amazon to collect and remit South Carolina sales tax.

You can find more details in the decision on Amazon Services, LLC, v. South Carolina Department of Revenue (Appellate Case No. 2019-001706). It’s an interesting read. 

A lot has happened since the battle between Amazon and South Carolina first 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 45 states with a general sales tax have adopted economic nexus since the Wayfair ruling, as have Washington, D.C., Puerto Rico, and Alaska (which allows local sales taxes). Economic nexus laws base a sales tax collection obligation solely on a remote seller’s economic activity in the state. South Carolina began enforcing economic nexus on November 1, 2018.

All sales-tax states have also adopted marketplace facilitator laws that require marketplace facilitators like Amazon to collect and remit tax on third-party sales. As noted above, a marketplace facilitator law took effect in the Palmetto State on April 26, 2019.

The 2018 Wayfair decision and subsequent economic nexus and marketplace facilitator laws have greatly clarified the sales tax obligations of remote sellers and marketplaces. Yet there are still unresolved issues. For instance, can/should a state hold marketplace sellers liable for unpaid sales tax if the seller had marketplace inventory in the state prior to the effective date of a marketplace facilitator law? 

In January 2024, the Washington State Court of Appeals held that two out-of-state sellers were responsible for Washington sales tax and business and occupation (B&O) tax on sales made through the Fulfillment by Amazon (FBA) program before economic nexus and marketplace facilitator laws took effect in the state. 

In 2023, the Supreme Court of the United States refused to hear a case challenging California’s right to collect back taxes from nonresident marketplace sellers. As a result, California may go after FBA sellers for back taxes for periods predating the state’s marketplace facilitator law, which took effect October 1, 2019.

Pennsylvania has taken a similar stance as California and Washington, with different results. In 2022, the Commonwealth Court of Pennsylvania determined FBA inventory is not sufficient to establish a sales tax collection requirement for nonresident FBA sellers. 

So clearly, uncertainty remains, and the potential ramifications are considerable: Marketplace inventory creates sales tax nexus for marketplace sellers in more than 20 states.

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. 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.

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. With that kind of money at stake, Amazon may appeal to the South Carolina Supreme Court.

Learn more about state nexus laws and sales tax collection requirements for retailers and marketplace facilitators.

This post has been updated. It originally published September 19, 2019.