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To Tax, or Not to Tax, Amazon Snarled in a South Carolina Nexus

Nov 15th 2017
Founder/CEO CWSEAPA PLLC
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Amazon recently filed a brief against the state of South Carolina, which in 2011 saw the passing of the “Distribution Facility Sales Tax Exemption” by the South Carolina Assembly. This was an effort to incentivize Amazon to build a fulfillment center in the state.

The South Carolina legislation gave retailers like Amazon, which satisfied certain requirements, a special five-year exemption from sales and use tax on the retailer’s online retail sales to the state’s customers. In the same year, the company opened a facility in Lexington, South Carolina, thereby giving the retailer a presence in the state.

On January 1, 2016, Amazon registered as a South Carolina retailer and began collecting and remitting sales tax — but only on the retail sales of Amazon Prime sales. Amazon stated that it acted as a place for third-party resellers to sell their products on Amazon’s platform, for which Amazon had no control.

Just like any other online platform, Amazon left the collection and the reporting of the taxes for these outside retailers on the outside retailers. South Carolina audited Amazon’s sales and determined that the company owed more than $12 million from these sales. Amazon appealed this ruling and in its brief, asked for an injunction against the state collecting the taxes on these outside sales.

The fulfillment center in South Carolina is set up for the sales of Amazon products, which are sold to Amazon Prime members. For sales tax to be paid to their certain states on the other sales from third-party outlets, even if drop shipped to their center, it is up to the outside salesperson.

If you sold items on eBay or Etsy, both companies state that you are responsible for the sales tax in your jurisdiction, and not the platform for which you sell the product. For example, if I am a Florida resident and I sell socks, I am responsible for the sales tax on the socks that I sell in Florida. If I drop-ship those socks to South Carolina, there is no sales tax owed by me, nor the platform that I used to sell my wares.

The facts are that Amazon has a fulfillment center in South Carolina. It appears that before signing the deal in 2011, South Carolina didn’t know the business plan of Amazon.

Amazon sells its wares. The reasoning for the fulfillment centers is to get the products to the customer sooner than if it was coming from its home base in Silicon Valley. This fulfillment center has created a nexus in the state for sales and corporate taxes.

However, for any product that Amazon sells that is not their product, the fulfillment center in the state is just used as a drop shipper. The sale occurs in the state not using the fulfillment center; thus, there is no nexus that is created on those sales because Amazon does not control them.

If a seller on Amazon is domiciled in a state where Amazon has a fulfillment center, then — just because there’s a fulfillment center in the state — that does not make the sale subject to sales tax, as Amazon only gets a small percentage of the sale. It is acting simply as a platform for the other seller.

It is easier and less costly for states to go after Amazon, so that is why they are proceeding in this manner.

However, the actual sales nexus had been created by the seller, not the platform, of the product.

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