South Carolina: Pre-Wayfair sales taxes must be collected

On Jan. 24, 2024, the South Carolina Court of Appeals held that Amazon Services, a marketplace facilitator, was required to collect and remit sales tax for third-party sellers in 2016 prior to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.¹ and the state’s enactment of marketplace facilitator legislation.² In 2018, the Court held in Wayfair that a physical presence is no longer required to establish substantial nexus for sales tax purposes. In affirming the South Carolina Administrative Law Court (ALC), the South Carolina Court of Appeals agreed that Amazon Services had a duty to collect and remit sales tax for third-party sellers under the law in effect in 2016 because it was a business engaged in selling tangible personal property and had a physical presence in the state. Also, the court held that the imposition of tax on Amazon Services did not violate its constitutional due process or equal protection rights.

Background

Amazon Services, LLC, a subsidiary of Amazon.com, Inc. (Amazon), operates the Amazon.com website (the Marketplace). The business model includes the retail sale of products through the Marketplace from three primary sources: Amazon, Amazon affiliates, and third-party sellers. In 2011, South Carolina enacted legislation primarily designed to encourage Amazon to invest in the state. Specifically, the legislation provided a sales tax exemption for the five-year period from Jan. 1, 2011, through Dec. 31, 2015, for companies that built a distribution facility in South Carolina. In 2011 and 2012, an Amazon subsidiary built two distribution facilities in the state that established the physical nexus required for a state to impose sales tax prior to Wayfair. Upon expiration of the temporary statutory exemption, Amazon Services began collecting and remitting sales tax for the retail sales of Amazon and its affiliates but did not collect tax on sales of products by third-party sellers on the Marketplace.

Third-party sellers who wanted to list their products on the Marketplace were required to create an account and agree to the terms of Amazon’s Business Solutions Agreement (BSA). Under the BSA, Amazon Payments, Inc. provided payment processing services to third-party sellers. Amazon Services periodically remitted the sales proceeds to the sellers, less fees due to Amazon Services for access to the Marketplace. The BSA required third-party sellers to be responsible for the collection, reporting, and payment of all taxes. Amazon Services would collect sales tax for third-party sellers for a fee but did not provide this service to individual sellers. If this optional tax collection service was purchased, Amazon Services collected the tax from the customer and then remitted the funds back to the third-party seller to pay the taxing authority.

The South Carolina Department of Revenue conducted an audit and assessed Amazon Services for more than $12 million in taxes, penalties, and interest for the first quarter of 2016. The Department found Amazon Services owed tax on sales of products by third-party sellers through the Marketplace. Amazon Services requested a contested case hearing before the South Carolina ALC.

ALC affirms assessment

The ALC determined Amazon Services was responsible for collecting and remitting sales tax for the third-party sales because it was in the business of selling tangible personal property at retail.³ According to the ALC, Amazon Services indirectly retained a share of the profits from each sale through the fees that it retained. Amazon Services acted as a retail seller under South Carolina law because it functioned as a consignee that controlled the flow of money, communication, and shipping between the customer and the merchants. Finally, the ALC determined that no constitutional violations occurred. The imposition of the tax collection and remittance obligations did not violate the Due Process Clause or Amazon Services’ equal protection rights. Amazon Services appealed this decision to the South Carolina Court of Appeals.

Appellate court agrees with tax collection obligation

In affirming the ALC, the South Carolina Court of Appeals held that the evidence supported the finding that 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 the third-party transactions. Amazon Services unsuccessfully argued that, as an online marketplace operator, it had no duty to collect and remit sales tax because it was not the “seller” of third-party products. Also, Amazon Services contended that the sales tax statutes were ambiguous and as such, must be construed against the Department because they could reasonably be read not to impose the sales tax obligation on marketplace facilitators for third-party sales.

No statutory ambiguity

The court reviewed the relevant sales tax statutes that were in effect in 2016. Under South Carolina law, sales tax “is imposed upon every person engaged or continuing within this State in the business of selling tangible personal property at retail.”⁴ “Business” includes “all activities, with the object of gain, profit, benefit, or advantage, either direct or indirect.”⁵ “Retailer” and “seller” include, in relevant part, every person “selling or auctioning tangible personal property whether owned by the person or others.”⁶ A “sale” and “purchase” mean “any transfer, exchange, or barter, conditional or otherwise, of tangible personal property for a consideration.”⁷ The court interpreted these definitional statutes as not ambiguous, and therefore, the court was not required to resolve any substantial doubt in Amazon Services’ favor. These definitions informed the court’s conclusion that there was no substantial doubt that the statutory definitions include Amazon Services and its activities.

Amazon Services further argued that statutory ambiguity was demonstrated by the fact that the legislature amended the sales tax statutes in 2019 to expressly include marketplace facilitators.⁸ According to Amazon Services, the Department testified before the legislature that the statutory amendment was necessary to clarify that the sales tax obligations applied to marketplace facilitators. Amazon Services argued that this testimony confirmed the statute needed to be amended to impose sales tax obligations on marketplace facilitators. In rejecting this argument, the court explained that the statute was unambiguous and did not require consideration beyond the plain meaning of the statutory language. A portion of the title of the legislation was telling: “to further inform marketplace facilitators of their requirements.” This language indicated that the sales tax statute already applied to marketplace facilitators. The court held that because the statutes were not ambiguous, there was no substantial doubt that would require resolution in Amazon Services’ favor.

Affiliates treated as one entity

Amazon Services unsuccessfully argued that the actions of Amazon Payments should not be attributed to it because they were separate entities. While Amazon Payments was the entity that received the payments and remitted these funds to the third-party seller, the court rejected this form-over-substance argument and determined there was no justification for “piercing the corporate veil.” South Carolina sales tax law provides “any group or combination acting as a unit” is a “person” for purposes of the law.⁹ Also, the BSA agreement treated the entities as a single business. The court held that the ALC did not err in treating the actions of Amazon Payments as the actions of Amazon Services.

Statutory definitions for imposing tax satisfied

After determining that the statutes imposing the sales tax and defining the relevant terms should be interpreted broadly, the court held that Amazon Services was subject to the sales tax collection and remittance requirements for third-party sales.¹⁰Amazon Services met the definition of “business” because its activities in connection with third-party sales on the Marketplace were intended to achieve a profit or advantage. Specifically, the court noted the third-party sellers paid a fee to Amazon Services for each item sold and the restrictions placed on them in the Marketplace gave Amazon Services an advantage over other sales channels.¹¹ Also, the court decided that Amazon Services satisfied the definition of “seller” because it was the only party a buyer encountered during the sales transaction. Amazon Services, through Amazon Payments, processed the transaction, held the funds, and remitted those funds less its fees to the seller. The court explained that the items sold may be owned by the third party, but the statutory definition of “seller” does not require the seller to own the goods sold. Finally, the court held that the transactions constituted “sales” under the law because Amazon Services received payment in exchange for the items even if the items were not in its physical possession.

Court rejects taxpayer’s other arguments

The court also disagreed with other arguments raised by Amazon Services. First, the court rejected Amazon Services’ argument that it was merely a service provider and not a seller of tangible personal property. Substantial evidence supported the ALC’s finding that Amazon Services was a service provider only with respect to its relationship with third-party sellers. Also, the court rejected Amazon Services’ argument that the ALC erred by finding it had a “consignment-type” relationship with the third-party sellers. The court opined that consideration of these concepts was not necessary in determining whether Amazon Services was in the business of “selling” under South Carolina law. Because the ALC considered these concepts for purposes of illustrating the sales occurring on the Marketplace, the ALC’s application of these concepts did not require a reversal of its decision. Finally, the court was not persuaded by Amazon Services’ reference to the marketplace facilitator legislation enacted by other states. Amazon Services argued that none of these states concluded a marketplace facilitator had a duty to collect and remit tax prior to the enactment of these laws. The court noted that Amazon Services failed to identify if any of these states had statutes substantially similar to the South Carolina statutes in effect prior to the enactment of the marketplace facilitator laws. Amazon Services cited a case, Normand v. Wal-Mart.com USA, LLC, in which the Louisiana Supreme Court held that an online marketplace was not a “dealer” required to collect and remit sales tax on third-party sales.¹² The South Carolina Court of Appeals distinguished that case on the basis that the Louisiana statutes at issue had different language than the applicable South Carolina statutes.

No constitutional violations

Amazon Services unsuccessfully argued that the requirement for it to collect sales tax on third-party sales in 2016 violated its constitutional due process and equal protection rights. First, Amazon Services contended that the Department’s assessment was an attempt to retroactively apply the 2019 marketplace legislation in violation of its right to fair notice under the Due Process Clause. In rejecting this argument, the court determined there was no evidence that the Department attempted to retroactively apply the new sales tax law or policies to Amazon Services. The court decided that the Department applied the sales tax law that was in effect at the time. Therefore, the court affirmed the ALC’s conclusion that the Department did not violate the fair notice requirement. The court also found that Amazon Services failed to show an equal protection violation, as it did not present any evidence specifically identifying other online marketplaces that constituted similarly situated persons, or that any similarly situated persons received disparate treatment. Accordingly, the court sustained the ALC’s finding that Amazon Services failed to show the Department committed any constitutional violations.

Commentary

This is a significant decision concerning a marketplace facilitator’s duty to collect and remit sales tax from third-party sellers prior to Wayfair and South Carolina’s enactment of marketplace facilitator legislation. However, there are certain distinctions in this particular litigation that may set it apart from fact patterns involving other marketplace facilitators in other states prior to Wayfair. First, Amazon Services satisfied the nexus requirement before the Wayfair decision by actually having a physical presence in South Carolina due to its distribution facilities in the state. Thus, there was no question that Amazon Services had nexus with South Carolina from its physical presence in the state during the first quarter of 2016. The decision primarily was based on the court’s interpretation of the key terms of “business,” “seller,” and “sale” required for a sales tax collection and remittance obligation in 2016. The court’s determination that Amazon Services and its activities satisfied these statutory terms under South Carolina’s statute may not be as relevant to states that have different statutory terminology and requirements. In fact, the court distinguished the Louisiana Supreme Court’s holding in Wal-Mart.com that an online marketplace was not a “dealer” required to collect and remit sales tax for third parties because the statutory language in the two states differed. Thus, the specific language in a state’s sales tax laws must be carefully considered in determining a marketplace facilitator’s tax collection duties.

This decision also is interesting because the court determined that the South Carolina marketplace facilitator legislation enacted in 2019 was merely a clarification rather than a new statutory obligation for marketplace facilitators to collect and remit tax. By making this determination, the court rejected the argument that the Department was trying to retroactively apply the 2019 legislation, and potentially supports the notion that certain marketplace facilitators could have had nexus obligations in a pre-Wayfair environment. Considering the significance of this decision, one would expect Amazon Services to appeal this decision to the South Carolina Supreme Court.¹³

1 138 S. Ct. 2080 (2018).
2 Amazon Services, LLC v. South Carolina Department of Revenue, South Carolina Court of Appeals, No. 2019-001706, Jan. 24, 2024. In 2019, South Carolina amended its sales tax statutes to expressly include marketplace facilitators. Act 21 (S.B. 214), Laws 2019.
3 South Carolina Administrative Law Court, No. 17-ALJ-17-0238-CC, Sep. 10, 2019. At the time of the contested case hearing in 2019, there were approximately 2.5 million third-party sellers on the Marketplace.
4 S.C. Code Ann. § 12-36-910(A) (emphasis added by court). Note that the statutory language discussed and quoted in this paragraph continues to be included in the cited statutes as currently in effect.
5 S.C. Code Ann. § 12-36-20 (emphasis added by court).
6 S.C. Code Ann. § 12-36-70 (emphasis added by court).
7 S.C. Code Ann. § 12-36-100.
8 Act 21 (S.B. 214), Laws 2019.
9 S.C. Code Ann. § 12-36-30.
10 The court considered a decision, Travelscape, LLC v. South Carolina Department of Revenue, 705 S.E.2d 28 (S.C. 2011) that the ALC used to support its decision. In Travelscape, the South Carolina Supreme Court ruled that an online travel company offering reservations on a travel marketplace website was responsible to collect and remit sales tax because it was engaged in the business of furnishing accommodations to customers for consideration. In the instant case, the court determined that “Travelscape provides only limited guidance” to the extent that the sales tax statute was subject to broad interpretation.
11 For instance, a third-party seller must offer its items at a price at least as low as it offers the item through any other sales channel. This is intended to ensure the buyer purchases the item from the Marketplace.
12 340 So. 3d 615 (La. 2020).
13 On Feb. 8, 2024, Amazon Services filed a petition for rehearing with the South Carolina Court of Appeals.