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Jamie C. Yesnowitz
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On Sept. 10, 2019, the South Carolina Administrative Law Court (ALC) ruled that Amazon Services, LLC (Amazon), an online marketplace facilitating sales for third-party merchants, was required to collect sales tax on sales made to South Carolina customers in the first quarter of 2016.1
The ALC found that Amazon acted as a retail seller under South Carolina’s sales and use tax law because it functioned as a consignee that controlled the flow of money, communication and shipping between the customer and the merchants. In part because the sales at issue predated the U.S. Supreme Court’s decision in South Dakota v. Wayfair2
and South Carolina’s subsequent adoption of marketplace facilitator rules, Amazon plans to appeal the ALC’s decision to the South Carolina Court of Appeals.
Under a sales and use tax audit completed in June 2017, the South Carolina Department of Revenue issued a determination that Amazon owed nearly $12.5 million in sales and use tax, in addition to penalties and interest, for the Jan. 1, 2016, through March 31, 2016, audit period. The Department contested that Amazon was a retail seller responsible for sales and use tax on certain retail sales of merchant products through its online marketplace. Amazon appealed the assessment to the court in July 2017 and a hearing was held at the ALC in February 2019.
During the course of the Amazon
litigation, the U.S. Supreme Court decided Wayfair
, finding that a physical presence is no longer required for a state to impose a sales and use tax filing and collection requirement on out-of-state sellers. After Wayfair
, the Department issued a revenue ruling announcing an economic nexus standard of $100,000 in gross revenue for remote sellers and marketplace facilitators making sales into South Carolina, with an effective date of Nov. 1, 2018.3
In April 2019, South Carolina enacted legislation codifying the Department’s marketplace facilitator provisions announced in administrative guidance.4
Under South Carolina’s marketplace facilitator law, sellers operating as marketplace facilitators with economic nexus are required to obtain a retail license and collect and remit sales tax on sales of all products sold through its marketplace.
At issue in the case were sales of third-party merchant products sold on Amazon’s online marketplace. As a retailer seller of its own products and products sold by Amazon affiliates, Amazon is registered as a retailer for purposes of South Carolina sales and use tax. Amazon’s Business Solutions Agreements (BSA) with merchants generally required the merchants to be responsible for the collection, reporting and payment of taxes. However, Amazon would collect sales tax on behalf of professional sellers if the merchant agreed to pay for tax collection services. In this case, Amazon would collect the value of the tax owed, but would transmit that amount to the merchant, which would then be required to remit the tax to the appropriate state.
The Department argued that under existing South Carolina sales and use tax law, Amazon was a “retailer” with respect to the sales it facilitated for third-party merchants and was therefore required to collect and remit sales and use tax on sales to South Carolina customers through its marketplace.5
Amazon argued that the merchants are in fact the sellers responsible for the collection of sales and use tax because they are identified as the sellers on Amazon’s website, they own the product that is being sold and exercise control over the products listed on the marketplace. Additionally, Amazon contended that South Carolina’s sales and use tax law as it existed at the time contained no reference to marketplace facilitators such as Amazon, and therefore could not apply to online marketplaces at the time without fair notice, in violation of the Due Process Clause of the U.S. Constitution. Amazon also argued that it was singled out by the Department for imposition of tax at the neglect of other e-commerce sites or online marketplaces, thus creating an equal protection violation.
The ALC began with an analysis of the South Carolina sales and use tax statute, noting that sales tax is imposed on persons engaged in the business of selling tangible personal property at retail.6
The ALC noted that tax is calculated based on the “gross proceeds of sales,” which includes proceeds from the sale of property sold on consignment by the taxpayer.7
The ALC disagreed with Amazon’s argument that it could not be the seller of merchant products because it did not hold title to the products and could not transfer title. Instead, the ALC found that a “sale” as defined under South Carolina law merely required the transfer of tangible personal property for a consideration and did not require both the transfer of possession and title.8
The ALC concluded that as a consignee, Amazon was a seller under the sales tax statute because it sold the tangible personal property of others. In the case of a consignment sale, the ALC found that Amazon was responsible for the collection of sales tax because it accepted money for the product, even though it passed on the consideration to the merchant.
Application of Travelscape decision
The ALC next considered the case of Travelscape LLC v. South Carolina Department of Revenue
in which the South Carolina Supreme Court ruled that an online travel company offering reservations on Expedia.com was responsible to collect and remit sales tax because it was engaged in the business of furnishing accommodations to customers for consideration. Travelscape facilitated the sale of third-party hotel rooms to the public at negotiated discounted rates on its website, charging the customer a discounted room rate, facilitation fee, service fee and a tax recovery charge for any customer that booked a room through Expedia.com. The Supreme Court determined that while Travelscape did not physically provide sleeping accommodations to customers, it was still “in the business” of furnishing accommodations under the sales tax law because it accepted money in exchange for supplying hotel reservations.
The ALC found the Travelscape
case to be instructive due to the similarities between the businesses of Travelscape
and Amazon. As such, the ALC distilled several important principles from Travelscape to determine whether Amazon was in the business of selling under South Carolina law: (i) an “intermediary” sales facilitator is not immune from sales tax; (ii) the person accepting money in exchange for a product is responsible for sales tax; (iii) the person who the customer interacts with at the point of sale is presumed to be the seller; (iv) an agency relationship between the sales facilitator and sellers is not necessary to create sales tax liability on the part of the facilitator; (v) a person does not have to own the product to sell it; (vi) the customer’s awareness that the seller is not the owner does not impact the seller’s sales tax liability; and (vii) the South Carolina sales tax statue is interpreted broadly to incorporate all persons engaged in the business of furnishing or selling, whether directly or indirectly. The ALC addressed each of these principles in turn.
First, the ALC determined when the “point of sale” occurs in the case of a third-party merchant transaction. Amazon argued that a sale to the customer is not complete until the product ships to the customer and Amazon completes the charge to the customer’s credit card. However, the ALC determined that title to the property transfers to the customer before the product is shipped and the credit card is charged because the customer enters their credit card information at the time the order is placed. At this point, Amazon obtains pre-authorization from the credit card company to ensure funds are available to complete the order. Accordingly, the ALC found that the point of sale occurs not upon the transfer of funds or shipment, but when the customer places the order and the credit card is secured.
Next, the ALC determined that Amazon was acting as more than merely an intermediary or conduit for money exchanged between customers and merchants in its sales facilitator role. Under the ALC’s analysis, it was Amazon’s website and functionality that are used to consummate customer sales, not the merchant’s. The ALC found compelling that the customer interacted only with Amazon during the course of the transaction, suggesting that the actions of collecting money in exchange for the product were more than the actions of a simple payment processor, but the actions of someone in the business of selling property. The fact that Amazon accepted money in exchange for the transfer of the merchant’s product to a customer meant that Amazon directly received consideration for a customer’s purchase, even if a portion of the consideration was retained as service fees.
Amazon further argued that it was not engaged in the business of selling tangible personal property in South Carolina because the fees it charged did not represent any form of profit-sharing. Looking to the language of the sales tax statute, the ALC noted that the term “business” is defined as “all activities with the object of gain, profit, benefit, or advantage, either direct or indirect.”10
The ALC noted that Amazon indirectly retains a share of the profits from each sale by charging a referral fee to the merchant on each transaction. By charging this fee, the ALC reasoned, Amazon was in the business of indirectly making a profit from tangible personal property sold on its marketplace.
Implied agency relationship
The ALC next addressed Amazon’s argument that there was no formal agency relationship between Amazon and the third-party merchants under the BSA, thus creating no sales tax collection obligation. Amazon argued that the relationship between itself and the merchants was that of an independent contractor, adding that nothing in the BSA created an agency relationship between the parties. In response, the ALC noted that a legal agency relationship is not necessary to impose a sales tax collection obligation under the facts of the case. The ALC returned to the fact that Amazon is the party accepting money in exchange for the product at the point of sale and that it indirectly receives a profit or benefit from the sale of the merchant property. Under the sales tax law, the ALC reasoned, Amazon functions like a consignee because it provides a service to the owner of the product, retains a percentage of the sales price as a referral fee and processes the transaction on behalf of the merchant. Although the ALC recognized the lack of a formal agency relationship between Amazon and the merchants, the ALC nonetheless implied one based on the “true nature” of the relationship.
Further, the ALC was unconvinced by Amazon’s argument that the disclosure of the merchant’s identity to the customer as the actual seller relieved Amazon of a sales tax collection requirement as consignee. Additionally, Amazon’s overall control over its online marketplace and product pricing further indicated that Amazon was in the business of selling under the sales and use tax statute. In particular, Amazon controls the flow of money between the customer, itself and the merchants, while it is also responsible for the unwinding of the sale. Amazon also restricts communication between merchants and customers in most instances, suggesting that it controls many aspects of the sales transaction process to create a unified customer buying experience. Finally, while merchants ultimately set the price of their products on the online marketplace, Amazon has the ability to influence the price of those products in order to cover the cost of its service fees.
Due process and equal protection arguments
Next, the ALC addressed Amazon’s due process and equal protection arguments. With respect to its due process claim, Amazon argued that it was not given fair notice of the Department’s change in tax policy based on its interpretation of an impermissibly vague or ambiguous sales tax law. The ALC disagreed, finding that Amazon’s facts and circumstances reflected an existing tax scheme being applied to the newer business model of an online marketplace. Finding no due process violation, the ALC concluded Amazon was not immune from existing tax obligations “simply because the existing statutory scheme does not specifically incorporate the new business model.”
Amazon finally argued that it was singled out for tax imposition in violation of the Equal Protection Clause, contending that the Department had not audited any other online marketplace or e-commerce businesses. The ALC disagreed with this claim, noting that Amazon offered no specific evidence regarding whether the Department assessed similarly situated online marketplaces or if it failed to do so. Thus the ALC found no evidence that the Department purposefully singled out Amazon for intentional discrimination by imposing tax. The fact that Amazon was the first business to challenge the Department’s position in this instance was not enough to demonstrate disparate treatment.
The ALC’s 53-page decision took pains to pinpoint and examine the exact business relationship between Amazon and the third-party merchants in order to show that Amazon was engaged in the business of selling tangible personal property at retail under South Carolina sales tax law. The ALC found Travelscape
to be instructive due to factual similarities between Travelscape as an online travel company and Amazon as an online marketplace. Although the South Carolina Supreme Court in Travelscape
considered the question of who was engaged in the business of furnishing accommodations for consideration, the ALC analogized “furnishing” to “selling” in order to elicit several major principles from Travelscape
that the ALC then applied to Amazon. The ALC drew many comparisons from this case, including the fact that both businesses provide an online platform to facilitate the sale of third party products, interact with the customer at the point of sale, process the customer’s payment, accept money in exchange for products, charge a service or referral fee, and then remit the sales proceeds from the sale to the owner.
The ALC’s decision presents several important issues in the era of modern marketplace transactions. One issue that the ALC did not address is whether the South Carolina sales and use tax law was intended to apply to marketplace facilitators at the time of its enactment, or whether the Department attempted to impose a retroactive sales tax collection responsibility on a marketplace facilitator, given that the assessment period pre-dates the enactment of South Carolina’s marketplace facilitator law. One lingering question is how the existing sales tax statute can be reconciled with a newer marketplace law that provides straightforward and simplified sales tax collection rules for marketplace facilitators. Interestingly, the ALC made no mention of Wayfair
in its entire decision. This begs the question of whether the ALC intentionally avoided bringing attention to the case in order to emphasize that the South Carolina sales and use tax statute applied to Amazon before Wayfair
and the rise of state marketplace facilitator provisions in response to the decision.
It remains to be seen how broadly this case may apply beyond South Carolina to tax periods preceding Wayfair
and the widespread enactment of marketplace facilitator laws. The question is whether other states will seek to impose a sales tax collection obligation to other third party sales on Amazon or other online marketplaces for tax periods that remain open under the statute of limitations. At the same time, the decision may have limited applicability to other online marketplaces given the structure of their agreements with third-party sellers and the fact-specific analysis involved. Additionally, the ruling may carry limited persuasive authority being decided by the ALC, a trial-level court, but would likely gain more attention if affirmed on appeal.
Given the significant tax liability at issue for the three-month period audited by the Department, and the possibility of an overall sales tax liability that could easily exceed $100 million for tax periods between the beginning of 2016 and the enactment of the South Carolina marketplace facilitator statute, it is not surprising that Amazon recently decided to appeal the ALC’s ruling to the South Carolina Court of Appeals.11
Amazon did so on the basis that the ALC’s decision was inconsistent with the applicable sales tax law in effect at the time.12
In a recent quarterly report filed with the Securities and Exchange Commission, Amazon maintained that the sales tax collection obligation for the period at issue falls on third-party remote sellers, and that the Department’s assessment is “without merit.”13
In addition to Amazon’s principal argument that the third-party merchants were responsible for the collection of sales tax as the sellers of property under existing law, it will be interesting to see whether Amazon’s due process and equal protection arguments receive greater attention before the state court of appeals.
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