The $500 Million Battle Over Amazon's Sales Tax in South Carolina
Seven years after the Supreme Court Wayfair decision, Amazon is facing off against South Carolina and the third party sellers on its own platform.
In South Carolina, a tax case is set before the State Supreme Court that will test the limits of corporate responsibility for sellers on their platform. The case (Amazon Services vs South Carolina), focuses on third party sellers and their tax liability in Q1 2016. The state of South Carolina has argued that Amazon owes more than $16 million dollars in back sales tax due to its physical presence in the state. In turn, Amazon has argued that individual sellers must pay for their tax bill in these situations, not the company. The success of South Carolina in this case will add to the series of conflicting legal cases that have become part of the fight over sales tax since South Dakota v Wayfair.
This case is particularly striking because it hinges on who bears the sales tax ownership on ecommerce platforms. Before Wayfair, the standard for sales tax collection was based on physical presence of a company in each state, which was established in Quill Corp vs North Dakota. In the case of South Carolina, Amazon established its first facility in the state in 2011, which would require the company to collect sales tax based on the standard set under Quill. However, the legislature granted a five year exemption from collecting sales tax that expired on December 31st, 2015. Beginning January 1st 2016, Amazon began to collect sales tax on some items, but not all items that were being sold by individual sellers. An investigation by the South Carolina Department of Revenue established that Amazon was liable for more than $16 million dollars in uncollected sales tax during Q1 of 2016. After the South Carolina Court of Appeals affirmed Amazon’s obligation to pay these taxes, the case advanced to the South Carolina Supreme Court, which will hear arguments in May 2025.
How South Carolina v. Amazon Ties Back to Wayfair
South Dakota vs Wayfair (2018) established that all companies must pay sales tax, overruling the standard of “physical presence” established by Quill vs North Dakota in 1992. Shortly after this ruling, all states that have sales tax passed Marketplace Facilitator laws requiring third party websites like Amazon to collect sales tax on behalf of their sellers.
The remarkable nature of the South Carolina case is that it is retroactive, and pre-dates the implementation of the Marketplace Facilitator Law. The court of appeals ruling hinges on interpretating the Marketplace Facilitator Law as “further informing” previous legislation, meaning that Amazon always had a responsibility to account for third party sellers that was neglected by the company. Amazon, or its sellers, must pay these taxes in some form because Amazon had a physical presence in the state of South Carolina, aligning with the standard set by Quill, which was still in effect at the time.
What are the implications of this case for Amazon?
The state argues that Amazon owes at least $16 million in back taxes. However, if this case is successful, that number could exceed $500 million dollars for additional sales taxes that were unpaid while the legal battle dragged on.
What are the tax implications of this case?
The effect of this case depends on how the Supreme Court rules and if Amazon is able to appeal to the US Supreme Court. As this case hinges on legislation specific to South Carolina, the impacts could be limited to just the state. In a similar case in Louisiana, the Louisiana Supreme Court ruled in 2020 that Walmart was not a “dealer” and did not need to collect sales tax prior to the Marketplace Facilitator Law being on the books.
Other states have also not rushed to collect for sales taxes that are owed prior to the facilitator laws being on the books. This is true even though some states have extended look-back periods that would make this feasible if they mounted a legal challenge similar to South Carolina. This may be due to logistical and administrative constraints facing state tax agencies. The case in South Carolina is a large undertaking and if the state Supreme Court sides with Amazon, it is unclear how South Carolina will identify and collect sales taxes from individual sellers.
Another angle to view this case is based on the Supreme Court decision in Wayfair. Given that Amazon could face over $500 million dollars in liability, they have every incentive to appeal a ruling against the company to the Supreme Court. In the opinion released by the court, there are several references to “retroactive” application of sales tax laws, and one specific passage in which a reference is made to “congress deciding” the “troubling question” of whether the new laws will have any “retroactive effect.” Is this enough for the court to take up the case? If the lower court ruling is affirmed by the high court, will other states follow South Carolina’s lead to collect sales taxes that pre-date the Marketplace facilitator laws? These questions will follow whatever happens in the Columbia courtroom next month.