South Carolina Overreaches In Its Attempt to Grab More Amazon Dollars

South Carolina Overreaches In Its Attempt to Grab More Amazon Dollars
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South Carolina is currently engaged in a legal battle with Amazon over the scope of a tax deal made back in 2011. However, this squabble between a state and an industry giant could end up becoming far more should the courts come down on the wrong side.

Before the Supreme Court definitively stated in South Dakota v. Wayfair that states could compel sellers to collect and remit sales taxes based on economic nexus standards, Amazon made voluntary collection deals with many states. One such deal, with South Carolina, came in 2011, with South Carolina deferring collection and remittance obligations until 2016 (two years before the Wayfair decision) in return for Amazon investments in the state.

When 2016 came, Amazon began collecting and remitting sales tax as required by the terms of the deal. Yet just after this began, South Carolina argued that Amazon was also liable for remitting sales tax for third-party marketplace sales, where a business or individual uses the Amazon website to reach customers for its own items. Now, South Carolina is trying to collect $12.5 million in marketplace sales taxes, including interest and penalties, that the state alleges Amazon owes for these third-party sales.

South Carolina won in administrative court, but Amazon has now appealed to state court, and it has a case. Though not precisely an example of retroactive taxation, as South Carolina’s stance has remained the same since day one, the legal environment surrounding the case has undergone a seismic shift between when the dispute arose and now. In large part, that’s due to the Wayfairdecision.

When South Carolina and Amazon first made their deal in 2011, and when Amazon began collecting and remitting sales taxes in 2016, no states enforced tax collection obligations on marketplace sales because there wasn’t a legal basis to do so. Since Wayfair was decided in 2018, 38 of the 45 sales tax states have enacted some marketplace facilitator law in order to make clear that it’s the responsibility of platforms like Amazon or eBay to collect tax for such sales, rather than the business or individual making the actual sale.

In fact, South Carolina itself passed one in April of 2019, indicating that state legislators effectively agreed with Amazon’s position that previous law didn’t require collection on marketplace sales. This is why upholding South Carolina’s attempt at enforcing taxes on such sales back in 2016 could embolden other states that have pursued similar aggressive strategies. As just one example, after passing its marketplace facilitator law late last year, California began pursuing “overdue” sales tax from third-party sellers dating back to 2012, using a deal made with Amazon as justification.

Doing so effectively expects businesses to have foreseen the drastic shifts in the sales tax landscape that would take place in later years. If a state attempts to enforce a standard with little legal basis at the time, the existence of a Supreme Court case on a related issue does not retroactively justify the state’s past actions. Attempting to hold businesses responsible for not paying taxes that they had every justification to expect they were not legally responsible for at the time is deeply unfair.

If courts choose to side with South Carolina and California’s state governments, and others like them, they would be rubber-stamping these weak justifications. Courts should instead protect taxpayers and hold state tax bureaucrats accountable when they overreach.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy education and analysis at all levels of government.


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