Amazon Services LLC and the South Carolina Department of Revenue have filed final opening briefs in the state’s ongoing marketplace facilitator litigation, but court delays caused by the COVID-19 pandemic are pushing back scheduling of the case.
The South Carolina Court of Appeals is only now starting to reschedule for September those arguments that were initially set to be heard in April, according to the clerk’s office. Amazon Services LLC v. South Carolina Department of Revenue (Case No. 2019-001706) has not yet been assigned, and it will likely be several months before staff attorneys recommend whether the case should be submitted on the briefs or there should be oral argument.
The parties filed three final opening documents with the court on June 11. Amazon Services — the affiliate that operates Amazon.com’s online marketplace platform — filed both its final opening brief and its final reply brief, while the DOR filed its final opening brief.
Amazon Services is asking the appeals court to reverse the administrative law court’s September 10, 2019, order and decision that under long-standing South Carolina tax law, the retailer is responsible for collecting and remitting sales and use tax on third-party sales in the state over its marketplace. Both parties repeat now-familiar arguments in the case and devote about a quarter of the newly filed documents to reviewing Amazon’s business structure and its contractual arrangement with third-party marketplace sellers.
However, at the appellate level, Amazon Services is also highlighting the argument that its interpretation of South Carolina tax law prior to 2019 — the year the state enacted marketplace facilitator collection requirements — “was reasonable and that alone warrants reversal.”
“The evidence here overwhelmingly establishes that Amazon Services reasonably read the statute prior to 2019 not to require it to collect and remit tax on third-party sales,” Amazon’s lawyers said in the filings. “A taxpayer cannot be held liable when a reasonable interpretation of the statute excludes the taxpayer from the tax obligations.”
The DOR in June 2017 determined that under long-dormant state law, Amazon Services is the legally liable retailer and assessed the entity $12.5 million in taxes, penalties, and interest for the first quarter of 2016. Total uncollected tax, penalties, and interest continued to accumulate through April 2019, when the state enacted marketplace facilitator language, and is estimated to be in the $185 million range.
Amazon’s lawyers laid out what they called ample evidence that the company’s interpretation of prior law was reasonable. This included citing statements made by DOR officials during the development of the 2019 marketplace facilitator legislation that the state’s existing statutory language “contained a ‘gap’ with respect to online marketplaces.” The lawyers also cited an October 2018 report issued by the Legislative Oversight Committee saying that “unless the statute were changed” the DOR could not force online marketplaces to collect and remit tax on third-party sales.
“These statements were not surprising; numerous states had already decided that, because marketplace facilitators are not sellers, the only way to impose sales-tax obligations on them was to change the law,” Amazon’s lawyers said. At the least, the 2019 enactment of marketplace facilitator collection requirements established that the state’s preexisting statutory language “was at best ambiguous as to marketplace facilitators” — although Amazon argued that the changes “did in fact change the law with respect to third-party sales.”
Amazon Services also disagreed with the administrative law court’s “point of sale” approach, arguing that the construct “has no basis in law” and that Chief Administrative Law Judge Ralph King Anderson III “created an entirely new concept to resolve this case.”
The DOR countered that this is not true.
The administrative law court correctly focused on the point of sale, the DOR said in its brief, adding that the concept “is not a new theory of sales and use taxation and is not ‘completely foreign to South Carolina sales-tax law.’” In the 2011 case Travelscape LLC v. South Carolina Department of Revenue, the state supreme court “applied nearly identical statutory provisions to a substantially congruent factual scenario and held that the entity offering items owned by third-parties for sale on its website and accepting payment directly from customers for those items was responsible for collecting and remitting the taxes owed,” the DOR said in its brief.
Customers follow the same purchasing process for all products sold on Amazon’s website and interact only with Amazon, the DOR said, adding in a footnote that customers “cannot make payments directly to Third-Party Merchants, and the Third-Party Merchants are expressly prohibited by Amazon from requesting any payments from customers.” Given this inability to directly request payments from customers and the fact that Amazon collects tax only when third-party merchants pay for the service — Amazon then forwards the tax payment to the seller after taking a fee — many third-party sellers “had no way to collect sales and use tax for sales transactions involving products listed by that Third-Party Merchant on the Website.”
“At bottom, Amazon’s argument is based on its effort to artificially separate the parts of a sale, never mind that all sales and payments occur through the Website,” the DOR argued.