South Carolina Department of Revenue invites Amazon third-party sellers to collect sales tax

The South Carolina Department of Revenue (SCDOR) is inviting Amazon third-party sellers to register to collect and remit South Carolina sales tax. Why?

Marketplace sales comprise a growing amount of internet sales. In 2016 alone, total online marketplace sales in the United States surpassed $1 trillion. While those sales weren’t all made through the Amazon marketplace, Amazon is the largest online seller in the United States, and third-party sellers now make up more than half of the company’s total sales.

Unfortunately, it’s not always clear which party is responsible for collecting and remitting sales tax on marketplace transactions; it could be the actual seller (e.g., Joe’s Pizza Cutters), or it could be the marketplace provider (e.g., Amazon or Etsy). Currently, many of these sales go untaxed in many states.

So, who is liable for tax on Amazon third-party sales? Amazon itself? Or the third-party seller? As is often the case with sales tax, the answer depends on the state. Some states, like Virginia, hold the owner of inventory liable (the third-party seller). Other states, like Washington, hold the marketplace provider liable.

South Carolina considers Amazon to be the responsible party — a stance underscored by its use of the term third-party suppliers instead of third-party sellers. The state believes these businesses are simply supplying products to Amazon’s online store so that Amazon can sell them, rather than selling them through a marketplace themselves.

To understand why the state would suggest third-party suppliers register to do business in South Carolina while holding Amazon liable, we have to look back. 

South Carolina v. Amazon: The back story

Amazon and South Carolina made a deal in 2011: In exchange for building distribution centers and creating jobs in South Carolina, the state temporarily waived Amazon's obligation to collect sales tax. The grace period ended December 31, 2015, and  Amazon began collecting and remitting South Carolina sales tax on January 1, 2016. However, it only collects tax on Amazon Prime retail sales, not sales by third-party sellers. 

Last summer, SCDOR told Amazon that it owed the state more than $12 million in uncollected taxes, penalties, and interest on marketplace sales from the first quarter of 2016. (It’s unclear why the assessment period is limited to just one quarter.) Amazon refused to pay it, maintaining “the Department’s assertions … are without merit” and the assessment is “contrary to law.” The case is set to go to trial in November 2018.

In the meantime, the state has suggested Amazon collect tax on these sales and hold it in trust. SCDOR worries that if the state prevails, and similar actions prevail in other states, Amazon could go bankrupt. It told the Administrative Law Court that “Amazon’s continued refusal to collect and remit sales and use tax puts South Carolina’s tax base at risk.”

Yet Amazon isn’t collecting tax on its South Carolina marketplace sales while the issue is unresolved. Consequently, South Carolina is now encouraging Amazon third-party suppliers to collect and remit sales and use tax themselves.

Marketplace sellers invited to collect

According to a departmental news release, the invitation to collect was triggered by a request for guidance from several third-party suppliers who wish to know if they’ll be liable for the tax on these sales if the court rules against the state and in favor of Amazon Services, LLC.

SCDOR says it’s accepting applications from Amazon third-party suppliers “to give these retailers the ability to collect and remit the appropriate sales and use tax for these sales until the current legal matter between SCDOR and Amazon Services, LLC is resolved.” For additional information, see the news release.

What’s a marketplace seller to do?

If the court sides with Amazon and holds third-party suppliers responsible for collecting and remitting tax on their Amazon.com sales, South Carolina could conceivably go after these businesses for past tax liability. Whether South Carolina would do that is unclear; however, the state is actively seeking tax revenue from past sales.

Marketplace sellers who do business in South Carolina should prepare for all possible outcomes. Avalara Professional Services can help you understand your options and determine a course.