On January 24, 2024, a South Carolina Appeals Court affirmed that Amazon Services LLC was required to collect and remit sales tax on products sold on its marketplace for the period January 1, 2016, to March 31, 2016, totaling approximately $12.5 million. The case underscores the need for taxpayers doing business in multiple states to evaluate their sales tax obligations, especially marketplace facilitators.
The appeal centered around whether the Administrative Law Court erred in determining that Amazon, a registered retailer in South Carolina with a physical presence via its distribution facilities, was obligated to collect and remit sales tax on products sold by third-party sellers on its marketplace under the Sales and Use Tax Act effective in 2016. Third-party sellers used Amazon.com for product listing, payment processing and (optionally) order fulfillment.
The key issues considered were whether the 2016 statute was ambiguous and whether imposing taxes on Amazon for these third-party sales violated constitutional provisions of fair notice and equal protection, among other arguments. Amazon believed the earlier provisions of the Act did not express a clear definition for the inclusion of marketplace sales. Amazon explained the sales were completed through a separate legal entity, Amazon Payments; therefore, the selling entity would be responsible for collecting sales tax, not Amazon.
The Court concluded Amazon met the criteria for being engaged in selling under the state's Sales and Use Tax Act. They found no ambiguity in the statutes and determined Amazon failed to provide evidence that the Department of Revenue violated the constitution. Consequently, Amazon had indeed displayed a physical presence in South Carolina and was deemed liable for taxes on third-party sales made by merchants on its platform during the 2016 period in question.
After the original Amazon case, South Carolina’s governor signed S.B. 214 in April of 2019, clarifying the existing sales tax collection obligations of marketplace facilitators. The legislation requires them to collect and remit sales taxes on behalf of the sellers on their platforms, henceforth holding marketplaces like Amazon, Walmart and others responsible.
As states continue to clarify and pursue sales tax obligations from businesses, this case serves as a warning to those conducting business or selling in multiple states. Be diligent in evaluating physical, economic and marketplace nexus to understand the evolving sales tax registration and collection obligations. State registration requirements may consider marketplace sales in nexus threshold calculations for both third-party sellers and marketplace facilitators.
If considering offering a separate business unit to list and process third-party sales, it is important to realize many states may require all sales be reported, including those of affiliates, and therefore creating nexus. Additionally, as a third-party seller it is important to understand the facilitators’ tax policies before entering into any potential agreements. For example, some facilitators, such as Shopify, calculate and collect sales tax on behalf of the seller; however, they do not file or remit these sales tax to the respective states. The reporting obligation rests with the seller.
It is also important to note when a company fails to collect and remit sales tax filings in jurisdictions it has nexus, there is no lookback limitation on assessing and collecting taxes, interest and penalties. Tax courts retain the authority to retrospectively examine businesses, which could lead to substantial financial obligations upon audit.
If your business has sales into multiple states, continue to stay current on state-by-state regulations impacting your company, and speak to your tax adviser if you think you may have a nexus issue.
Contact Mike Fink or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.