Amazon Servs. v. S.C. Dep't of Revenue

• Docket Number: 6047,Appellate Case 2019-001706
• Decision Date: 24 January 2024
• Parties: Amazon Services, LLC, Appellant, v. South Carolina Department of Revenue, Respondent.
• Court: South Carolina Court of Appeals

1

Amazon Services, LLC, Appellant, v. South Carolina Department of Revenue, Respondent.

No. 6047

Appellate Case No. 2019-001706

Court of Appeals of South Carolina

January 24, 2024

Heard February 14, 2023

Appeal From The Administrative Law Court Ralph King Anderson, III Administrative Law Judge

John C. Von Lehe, Jr. and Bryson Moore Geer, both of Nelson Mullins Riley & Scarborough, LLP, of Charleston; Neil H Conrad and Robert N. Hochman, both of Sidley Austin LLP, of Chicago, Illinois; Constantine L. Trela, Jr., of Chicago Illinois; and Benjamin J. Razi, Sean Akins, and Carter G Phillips, all of Washington, D.C., all for Appellant.

Tracey Colton Green, Chad Nicholas Johnston, and John William Roberts, all of Burr & Forman LLP, of Columbia; Jason Phillip Luther, of the South Carolina Department of Revenue, of Columbia; and Lauren Acquaviva, of Viva Law Firm, of Charleston, all for Respondent.

Steve A. Matthews, of Haynsworth Sinkler Boyd, PA, of Columbia, for Amici Curiae Chamber of Commerce of the United States of America, Business Roundtable, Internet Association, South Carolina Chamber of Commerce, and Greater Columbia Chamber of Commerce.

Joshua Madison Tyler Felder, of Parker Poe Adams & Bernstein LLP, of Greenville; and Kay L. Hobart, of Parker Poe Adams & Bernstein LLP, of Raleigh, North Carolina, for Amicus Curiae Council on State Taxation.

Robert T. Bockman, of University of South Carolina School of Law, of Columbia, for Amici Curiae Tax Law Professors Tessa R. Davis and Clinton G. Wallace.

M. Dawes Cooke, Jr., Justin P. Novak, and John William Fletcher, all of Barnwell Whaley Patterson & Helms, LLC, of Charleston; and R. Gregory Roberts, of Roberts Law Group, PLLC, of White Plains, New York; all for Amicus Curiae Institute for Professionals in Taxation.

Edward Raymond Moore, III, of Murphy & Grantland, PA, of Columbia, and Alicia Pilar Mata, of Washington, D.C., both for Amicus Curiae Tax Executives Institute.

Samantha K. Trencs, of Eversheds Sutherland (US) LLP, of Washington, D.C.; Eric S. Tresh, Maria M. Todorova, and Chris R. Lee, all of Eversheds Sutherland (US) LLP, of Atlanta, Georgia; all for Amicus Curiae The South Carolina Manufacturers Alliance.

Jennifer Butler Routh, of McDermott Will & Emery, of Washington, D.C., for Amicus Curiae National Retail Federation.

VINSON, J.

In this contested case, Amazon Services, LLC (Amazon Services) appeals the decision of the Administrative Law Court (ALC) affirming the South Carolina Department of Revenue's (the Department's) determination assessing it approximately $12.5 million in taxes, penalties, and interest for the period of January 1, 2016, to March 31, 2016. Amazon Services argues that (1) as an online marketplace operator, it owed no duty to collect and remit sales tax on products sold on its marketplace by third parties under the Sales and Use Tax Act (the Act)^[1]in effect during 2016; (2) the statute in effect in 2016 could reasonably be read not to impose the obligation to collect and remit sales tax for third-party sales upon online marketplace facilitators such that the statute is ambiguous and must be construed against the Department; and (3) imposing a sales tax obligation on it for third-party sales during the relevant period violates the United States and South Carolina constitutional guarantees of fair notice and equal protection. We affirm.

BACKGROUND

Amazon Services, a subsidiary of Amazon.com, Inc. (Amazon), operates the Amazon.com website (the Marketplace). Amazon Services is registered in South Carolina as a retailer for the purposes of the Act. Amazon's business model includes the retail sale of products through the Marketplace. There are three primary sources of products listed for sale on the Marketplace: Amazon, Amazon affiliates,^[2] and third-party sellers.

In 2011, the legislature passed the Distribution Facility Sales Tax Exemption (the Moratorium), primarily to encourage Amazon's investment in South Carolina. See § 12-36-2691. The Moratorium provided a sales tax exemption for the five-year period from January 1, 2011, until December 31, 2015, for companies that built a distribution facility in South Carolina, provided certain conditions were met. Id. In 2011 and 2012, an Amazon subsidiary built two distribution facilities in South Carolina. At the time, the dormant Commerce Clause of the United States Constitution allowed the State of South Carolina to impose sales tax only upon third-party sellers that had a physical presence in the state. See Nat'l Bellas Hess, Inc. v. Dep't of Revenue of the State of Ill., 386 U.S. 753 (1967) (suggesting a business was required to have a physical presence in the taxing state to form the requisite nexus to the state); Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (requiring, pursuant to the dormant commerce clause, a physical presence for a business to have a substantial nexus with a taxing state such that it would be subject to that state's sales and use tax). Thus, by building distribution facilities in South Carolina, Amazon established the physical nexus required for the imposition of sales tax.^[3] Upon expiration of the Moratorium, Amazon Services began collecting and remitting sales tax for the retail sales of Amazon and its affiliates rather than all of the sales occurring on the Marketplace.

The Department conducted an audit and assessed Amazon Services $12,490,502.15 in taxes, penalties, and interest for the first quarter of 2016. Amazon Services protested the proposed assessment. The Department issued a determination, concluding Amazon Services was a "person in the business of selling tangible personal property at retail, and the Department properly included all the proceeds from [its] online sales in the tax base." Specifically, the Department found Amazon Services owed sales and use tax in relation to the sale of products by third-party sellers occurring on the Marketplace.^[4] Amazon Services requested a contested case hearing before the ALC. The ALC held the contested case hearing in February 2019, after which it issued an order affirming the Department's determination.^[5] This appeal followed.

FACTS AND PROCEDURAL HISTORY

At the time of the contested case hearing, there were about 2.5 million third-party sellers on the Marketplace. An Amazon Services' employee, Christopher Poad, testified at the hearing and described Amazon's business model with respect to its own retail sales and sales of products by third-party sellers. He explained any third-party seller wishing to list its products for sale on the Marketplace must create an account and agree to the terms of Amazon's Business Solutions Agreement (the BSA). The BSA governs the relationship between Amazon Services and the third-party sellers as well as Amazon subsidiaries, including Amazon Payments, Inc. and Amazon Fulfillment Services, Inc.^[6] Poad testified Amazon Payments, Inc. provides payment processing services to third-party sellers. Amazon Fulfillment Services, Inc. operates Amazon's warehouses and provides optional fulfillment services to third-party sellers, referred to as Fulfillment by Amazon, including storage, packaging, shipping, and delivery.

The BSA provides that Amazon Payments acts as the third-party seller's agent for purposes of processing payments, receiving and holding sales proceeds on the seller's behalf, remitting sales proceeds to the seller's bank account, charging the seller's credit card, and paying Amazon and its affiliates amounts the seller owes pursuant to the BSA and related services. The BSA states, "We will also receive all Sales Proceeds on your behalf for each of these transactions and will have exclusive rights to do so . . . ." The seller must agree "that buyers satisfy their obligations to you for [y]our [t]ransactions when we receive the [s]ales [p]roceeds." The BSA further provides the seller's sales proceeds will be held in an account with Amazon Payments and that prior to disbursing the funds to the seller, Amazon Payments may combine such proceeds with the funds of other sellers, invest them, or use them for other legally permissible purposes. According to the BSA, Amazon Services will "remit to [the seller] on a bi-weekly (14-day) (or at our option, more frequent) basis . . . any sales proceeds received by us or our Affiliates" less the fees the seller owes to Amazon Services. The BSA expressly disclaims the existence of an agency relationship between the third-party sellers and Amazon Services, except for Amazon Payments' role as a payment processing agent. With regard to tax collection, the BSA requires third-party sellers to agree to be responsible for the collection, reporting, and payment of all taxes. Amazon Services will collect sales tax if a third-party seller chooses to pay for its tax collection service, but this service is only available to professional sellers or Amazon Webstore sellers-not individual sellers. However, even if a third-party seller uses this tax collection service, Amazon Services collects the tax from the customer and then remits those funds back to the third-party seller to pay to the taxing authority.

Under the BSA, a seller may set any price it wishes for its product except that the seller must offer the price that is at least as favorable to Amazon site users as any price it offers such product through any other sales channel. In addition, third-party sellers must pay Amazon Services fees to sell their products on the Marketplace. These fees include "Referral Fees," which are calculated based on the sales price and Amazon's categorization of the type of product sold. These fees range from six to forty-five percent, with a median fee of fifteen percent.

With regard to a third-party seller's communications...