Amazon Tax Ruling Expands Pre-Wayfair Liability

The South Carolina Supreme Court ruled in an appeal brought by Amazon against a tax assessment issued by the South Carolina Department of Revenue (SCDR) for the first quarter of 2016. The decision in this case is significant, as it could have broader implications: authorities may expand the assessment to other periods and apply similar reasoning to other marketplace platforms for pre-Wayfair years, potentially increasing historical tax exposure across the industry.

Facts of the Case and the Supreme Court's Decision

In 2011, South Carolina enacted the Act encouraging online sellers, including Amazon Services, to establish sales and distribution facilities in the state. Under this act, a temporary sales tax exemption was provided for businesses and their affiliates that built qualifying facilities. That same year, Amazon’s affiliate, Amazon Fulfillment Services, constructed a fulfillment center in the state, qualifying for the exemption. As a result, Amazon Services and its affiliates did not pay sales tax on sales in the state from 2011 through 2015.

In January 2016, Amazon began collecting and remitting sales tax on products it and its affiliates sold on Amazon.com, but did not collect sales tax on products sold by third-party sellers. Roughly around 2.5 million third-party sellers were active on Amazon at that time, accounting for about half of all transactions on the platform. 

After conducting an audit of these sales, the SCDR concluded that Amazon Services was legally obligated to collect and remit sales tax on third-party transactions and issued an assessment totaling nearly USD 12.5 million for unpaid taxes, penalties, and interest. Amazon challenged this tax assessment before the Administrative Law Court, which upheld the SCDRs' assessment. This resulted in a proceeding before the South Carolina Court of Appeals, which reaffirmed the decision.

All of this led Amazon to appeal to the South Carolina Supreme Court, which affirmed the Court of Appeals’ decision, ruling that Amazon Services was engaged in the business of selling under the state law. Moreover, the Supreme Court stated that the responsibility to collect and remit sales tax applied even though Amazon did not own or directly sell the goods involved in third-party transactions.

Conclusion

Estimates are that the ground South Carolina Supreme Court took in this case could result in Amazon owing more than USD 277 million tied to two separate cases, which had been put on hold pending this ruling. Additionally, given the key point of the dispute and the case's outcome, it will be interesting to see how other US states react, as the period at issue predates the US Supreme Court's 2018 Wayfair decision.

Source: South Carolina Supreme Court - Amazon Services, LLC v. S.C. Dept. of Rev.