The South Carolina Court of Appeals has affirmed a $12.5 million judgment against Amazon Services LLC (“Amazon”) for taxes, penalties, and interest due on third-party sales on Amazon.com for the first three months of 2016.
The case involved third-party sales on the Amazon.com marketplace. Third-party sellers listed their products on Amazon.com and used Amazon payment processing services to complete sales. Amazon also offered optional order fulfillment services to third-party sellers.
The court concluded that Amazon was subject to tax as it was “in the business of selling” under S.C. Code Ann. § 12-36-910(A). The court rejected Amazon’s argument that the statute was ambiguous as applied to marketplaces. South Carolina’s statutory definitions of “seller,” “business,” and “sale” allowed the imposition of sales tax on a person engaged directly or indirectly in the sale of tangible personal property owned by others for profit. The definitions were sufficient to capture Amazon’s activities and were not ambiguous.
The court noted that Amazon was the only party a buyer encountered during the sales transaction. However, this discussion echoes current marketplace rules rather than the law in effect in the first quarter of 2016.
In reaching its conclusion, the court rejected several additional arguments offered by Amazon. Amazon claimed it was not a seller because a separate legal entity, Amazon Payments, received sales proceeds and remitted those to third-party sellers. Amazon’s contract with third-party sellers indicated the two entities were operating as a single unit. South Carolina’s Sales and Use Tax Act allowed multiple entities acting as a unit to be treated as a single “person.” Thus, Amazon could still be viewed as a seller even when a separate, related legal entity received the sales proceeds.
The court also rejected Amazon’s argument that later amendments specifically referencing marketplaces precluded earlier application of the Sales and Use Tax Act to marketplaces. The court took the position that the amendments clarified existing law. The law in effect in the first quarter of 2016 covered Amazon’s activities.
Amazon’s due process and equal protection arguments were also rejected.
The court claimed that its reading of the statutes was broad but unambiguous. However, this may be called into question with the court’s analysis of the definition of “sale.” A sale normally requires a transfer of title or possession. The court acknowledged that Amazon may not have ever had either title or possession of items sold on its marketplace. The court found Amazon “effected” sales by contractually requiring third-party sellers to either send items to purchasers or provide a refund.
This broadening of the definition of “sale” has troubling implications for payment processors and could lead to ambiguity in the law’s application. Any company that processes payments may be viewed as a seller when its contracts with merchants require a customer refund if the merchant fails to perform. Such a clause may be construed as “effecting” sales under the court’s decision.
South Carolina’s marketplace rules serve a vital purpose in avoiding these sorts of ambiguities by listing additional, specific activities required before a person is responsible for sales tax. One such requirement is listing or advertising products for sale on a marketplace. This requirement was not present in the statutes in the first quarter of 2016. By providing a legal path to bypassing the listing or advertising requirement, the court may be introducing ambiguities not otherwise intended by the legislature.
Please contact Ryan tax professionals for further information.
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