South Carolina: Department of Revenue’s injunction asks the court to require Amazon to pay up

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At the end of August, we posted an article addressing the tax dispute between the South Carolina Department of Revenue (DOR) and Amazon Services, LLC, an affiliate of, Inc. In June, the DOR sent a letter to Amazon alerting the internet retailer that it owed the state $12.5 million in unpaid sales and use taxes, plus penalties and interest, for its sales through third party vendors.

Fast forward a few months, and the DOR has filed a motion for injunctive relief, asking the Administrative Law Court to “require Amazon to collect taxes owed on all of its South Carolina retail sales (including sales of third-party owned items)-the same taxes owed by every retailer that makes retail sales in South Carolina.” The Nov. 8, 2017 motion concedes that Amazon pays some of its tax obligations, but not those on sales of “third party owned items.”

The motion, which Bloomberg posted online, also asks the court for an expedited hearing, necessary because “the irreparable harm…increases every day the tax at issue goes uncollected.”

To set the stage, the DOR cites Business Insider and U.S. Securities and Exchange filings for the following statements:

  • The Amazon business enterprise is the world’s largest online retailer.
  • Nearly 43 percent of all online retail sales in the United States went through Amazon in 2016.
  • Last year, Amazon’s online sales revenue exceeded $135 billion.
  • The DOR projects that Amazon’s online sales revenue for 2017 will exceed $170 billion.

The DOR further asserts that part of Amazon’s growth strategy rests in its tax avoidance schemes. Using data from The Capitol Forum, whose services include investigative news and analysis, the state contends that Amazon failed to pay approximately $1.9 billion in sales and use taxes nationwide, and that liability is expected to reach $10 billion in the next five years.


The motion explains that in 2011, South Carolina lawmakers gave Amazon a “Distribution Facility Sales Tax Exemption” to encourage the online retailer to build a distribution facility in the Palmetto state. This suspended Amazon’s responsibility for collecting and remitting sales and use taxes until Jan. 1, 2016.

As of that date, Amazon began collecting and remitting sales taxes, but only for sales through Amazon Prime. Amazon takes the position that it is the sellers of third party owned items that are responsible for taxes on those sales because Amazon’s service, for those sales, is limited to the provision of the website, a nontaxable operation.

The DOR takes a different view: Amazon is the entity selling those third party owned items, and that its failure to pay taxes on those sales, plus interest and penalties, amounts to the above-mentioned $12.5 million figure for the first quarter of 2016.

Legal arguments

The DOR must prove, among other things, that it is likely to succeed on the merits once the court considers the substance of the matter. The DOR says that Amazon’s tax responsibilities are legitimate because state law imposes a 7 percent sales tax “on every person or entity engaged in the business of selling tangible personal property at retail;” and because Amazon satisfies this description. Likewise for the 7 percent use tax on the “storage, use or other consumption in [South Carolina] of tangible personal property purchased at retail...”

The crux of the dispute lies in how Amazon defines itself. As noted above, Amazon argues that “its sales of property owned by third parties are not sales made by Amazon,” which precludes it from paying taxes on those sales. The DOR, however, calls these kinds of sales consignment sales, which are subject to the state’s tax laws.

Ultimately, the DOR contends, these facts qualify Amazon as a retailer:

  • Amazon hosts its website so customers can select from a variety of items.
  • Amazon sells property owned by its affiliates and third parties through its website.
  • Amazon controls where and to whom the property is sent and effects that actual transfer of property to its customers.
  • Amazon accepts payment for this property and holds the funds in escrow for later disbursement of a portion thereof to third parties.
  • Amazon controls transaction details, like customer service and returns.

The DOR also argues that it will suffer irreparable harm if the court does not grant its injunction. The motion projects that if Amazon is allowed to refuse to pay its tax obligations, it could owe South Carolina $500 million by the time the litigation concludes, in excess of five years “if the case is appealed to the Supreme Court.”

The DOR concedes that if it wins, “other states are expected to follow” its lead, resulting in more large tax obligations for Amazon. That South Carolina would not necessarily be at the top of the list for payment represents an additional risk. It thus asks the court to eliminate this danger by requiring Amazon to collect the taxes and hold them in trust.

Beyond these problems, the DOR’s motion points to the disadvantage that retailers who comply with the state’s tax laws face, which will put them out of business and further erode the South Carolina’s tax base. Currently, about 36 percent of total tax revenues come from sales and use tax revenue.

The DOR is requesting the preliminary injunction for the pendency of the action. As of this writing, a hearing on the merits is scheduled for Nov. 5, 2018.

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