Ruling by SC high court could result in Amazon owing $277M in back taxes

COLUMBIA — A nearly decade-old dispute over whether Amazon owes South Carolina millions in uncollected sales taxes goes before the state Supreme Court this week.

In question is whether the online retail giant should have collected state sales taxes on behalf of third-party sellers on Amazon’s website.

The case before the state’s high court Wednesday is specifically over what was owed in the first quarter of 2016, the months immediately after the expiration of a five-year sales tax exemption approved by the Legislature.

However, the ruling could result in Amazon owing more than $277 million tied to two separate pending cases, according to the state Department of Revenue.

The agency’s initial audit found Amazon owed more than $12 million in taxes, penalties, and interest for not collecting sales taxes from third-party vendors who sold products to South Carolinians in the first three months of 2016.

Amazon balked at that December 2016 assessment and disputed the bill in the Administrative Law Court, which hears challenges of actions by state agencies.

Amazon argued the state tax code was unclear, and that it was the responsibility of those independent sellers to collect taxes from customers and pay the tax bill.

The Administrative Law Court disagreed.

But before Amazon could appeal to the state Court of Appeals — which also sided with the state agency — it had to pay the tab in full. So, Amazon has actually already paid the money at the center of the case justices will hear, according to the state’s tax collection agency.

However, the unpaid tab kept growing until April 30, 2019, when Amazon started collecting sales taxes from third-party sellers and sending it to Revenue.

According to two other state audits, Amazon owes $277.2 million in back taxes and interest from April 1, 2016, through 2019. The second audit came as the Legislature debated a law on third-party sellers, signed by Gov. Henry McMaster on April 26, 2019.

The company has disputed both of those bills to the Administrative Law Court as well. Those cases are on hold pending the outcome of a ruling by the state Supreme Court, according to the Department of Revenue.

Lawyers representing Amazon declined to comment to the SC Daily Gazette on the pending litigation.

A tax deal

Prior to a U.S. Supreme Court ruling in 2018, which reversed an earlier decision, companies needed a physical location in a state to be required to collect and pay taxes from sales within that state.

For Amazon, that meant once it built a distribution center in a state, it would need to collect taxes from online shoppers living there — unless it received an exemption, which it pursued in states nationwide.

South Carolina obliged, promising in 2010 a five-year exemption in exchange for creating at least 1,249 full-time jobs with health benefits and investing $90 million. The deal struck by the administration of then-Gov. Mark Sanford was almost undone after Gov. Nikki Haley took office in January 2011 and attempted to cancel it.

Organizations representing brick-and-mortar retailers opposed the deal as giving Amazon an unfair advantage. After the deal appeared dead, the Legislature ultimately approved the exemption over Haley’s objections after Amazon upped the ante to at least 2,000 full-time jobs with a $125 million investment.

The law resulted in Amazon building its first two distribution facilities in the state in 2011 and 2012 — one in West Columbia and one in Spartanburg.

When the sales tax exemption ended Dec. 31, 2015, Amazon began collecting sales taxes on purchases sold directly by Amazon and its affiliates but not third-party sellers on the website.

Those sellers had the option to pay an additional $40 monthly fee to Amazon to collect the taxes for them. But Amazon still sent the money to the seller to forward to Revenue. Many sellers chose not to bother.

‘The flow of funds’

In his order, Chief Administrative Law Judge Ralph Anderson III compared Amazon to a consignment shop.

Like a consignment shop owner, Amazon collects various fees for its services, controlling “the flow of funds between customers” and therefore making the company responsible for tax collection, he wrote.

Judges in the Administrative Law Court and Court of Appeals also shut down arguments by Amazon that definitions in state law of a retailer left tax collection responsibilities open to interpretation.

Amazon claimed it’s operating an online marketplace — that it did not own the goods and was not the seller. Rather, it was simply providing a platform.

But lawyers for the state countered that Amazon “makes no meaningful distinction between sales of its own goods and those owned by third parties.”

“Only Amazon directly interfaces with the customer through the purchase transaction,” state Department of Revenue lawyers continued in written arguments. “Only Amazon accepts and processes customer payments, and Amazon is the only point of sale for all transactions on the website. Thus, only Amazon has the ability to collect sales and use taxes.”

A question of ambiguity

In its written argument filed with the state Supreme Court, Amazon suggests the high court should take its side because the previous rulings weaken a “longstanding protection for taxpayers against the overzealous enforcement of the tax laws.”

Amazon argues it’s a long-held practice that “a taxpayer receives the benefit of any reasonable interpretation of a tax statute.”

“This protection is recognized across the country, is essential for sound financial and business planning, promotes legislative accountability for tax burdens on the public, and makes tax enforcement uniform and fair,” the company’s lawyers wrote.

The U.S., state and Columbia chambers of commerce also have come to the defense of Amazon in briefs filed with the court saying certainty is essential to businesses’ hiring and operating decisions.

“To adopt successful business strategies and to make effective investments, businesses must be able to predict their tax obligations with accuracy. A lack of predictability in tax laws, in contrast, harms both the business community and the overall economy,” the groups wrote in court documents.

But lawyers for the state said “the mere fact that the parties disagree … does not mean that the statute is ambiguous or must be construed in favor of the taxpayer — it just means that one of the parties is wrong.”