Amazon Fights $12.5M Tax Bill on Third-Party Marketplace Sales

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Andrew M. Ballard

South Carolina’s effort to collect from Amazon Services, LLC taxes on third-party sales facilitated through its marketplace platform has significant financial implications for the retail behemoth and other marketplace providers.

The South Carolina Department of Revenue informed the Amazon.com, Inc. subsidiary in June that it owes almost $12.5 million in uncollected taxes, penalties, and interest.

Amazon is challenging the assessment, claiming it’s unconstitutional and violates state and federal law. The company filed a request for a contested case hearing July 21 with the South Carolina Administrative Law Court.

Amazon may incur significant tax liability in South Carolina should the state prevail—however, the case also has implications in other jurisdictions seeking to boost tax revenues, said Max Behlke, director of budget and tax for the National Conference of State Legislatures (NCSL) in Washington, D.C. Behlke told Bloomberg BNA Aug. 16 that other marketplace providers such as eBay Inc., Etsy Inc., and Alibaba.com also could be impacted.

The court hasn’t set a hearing date, Jana Shealy, the administrative law clerk, told Bloomberg BNA Aug. 16. She said a hearing could be weeks away, as judges generally allow for additional information and scheduling input from the parties after a request is filed.

Third-Party Vendors

Amazon began collecting sales tax for South Carolina last year. As of April 1, the retail behemoth has been collecting sales and use taxes in each state that imposes collection obligations at the state level.

However, according to the state Department of Revenue, the company failed to collect and remit about $9.6 million in taxes during the first quarter of 2016. In addition to the taxes, the DOR also seeks almost $3 million in penalties and interest that continue to accrue.

The DOR argues that because Amazon is transferring goods purchased from other vendors through its website, the company is making sales under South Carolina law and is a “seller” or “retailer” who must remit sales taxes, Bonnie Swingle, a DOR spokesperson told Bloomberg BNA Aug. 16. “Any person who transfers goods for consideration, regardless of whether the person owns the goods or not, is a seller under South Carolina law,” she said.

Broad Implications

Several states—including Minnesota, Rhode Island, and Washington—have pursued taxing such third-party sales. Minnesota and Washington this year became the first states to enact laws requiring marketplace providers to collect tax on third-party marketplace transactions. Many practitioners predict they will trigger legal challenges.

However, Jamie Yesnowitz, state and local tax practice and National Tax Office leader for Grant Thornton LLP in Washington D.C., told Bloomberg BNA that the South Carolina case “appears to be the first time that a state is claiming that its existing sales and use tax laws are enough to require a marketplace provider to collect and remit on transactions between other parties that occur on its platform.”

“The implications of what happens could have a ripple effect across the country,” Behlke told Bloomberg BNA. About half of Amazon’s sales are through third-party vendors and they represent a significant amount of tax revenue, he said.

Were South Carolina successful, additional states would likely pursue such a strategy and other online marketplace companies would likely be impacted, Behlke said. He added that online sales are growing and represent a significant revenue stream for states with a sales tax.

It’s “too early to tell” whether the South Carolina DOR is likely to be successful as there are many factors at play, Behlke told Bloomberg BNA. “This is forging a different and new path out there,” he said.

‘Significant’ Liabilities

Jill Shatzen Kerr, Amazon’s public relations manager for public policy in Washington, D.C., told Bloomberg BNA Aug. 16 that it was long-standing company policy to not comment on regulatory matters.

However, in a quarterly financial report (10-Q) filed in July with the U.S. Securities and Exchange Commission, the company said it believed the assessment was “without merit” and it would “vigorously” defend itself against the levy. “If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities.”

Amazon is being represented in the matter by Burnet R. Maybank III, an attorney with Nexsen Pruet, LLC in Columbia, S.C., who also served as the South Carolina DOR director from 1995 to 1999 and 2003 through 2005. Maybank didn’t immediately respond to requests for comment.

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C. at aballard@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

Documents filed in Amazon's challenge are at http://src.bna.com/rI4.

Amazon's July 10-Q is at http://src.bna.com/rJF.

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