Amazon sales taxes: South Carolina says pay up

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A high-stakes legal battle is heating up over whether Amazon (AMZN) is shirking its legal obligations to collect sale taxes on merchandise sold by independent sellers on its site.

Earlier this month, the South Carolina Department of Revenue asked an administrative law judge to force the Seattle-based e-commerce giant to begin collecting sales tax on merchandise sold by outside sellers by Nov. 18. Failing to act "poses an immediate threat to the state's fiscal health and economic well-being," according to a Nov. 8 court filing. 

The state estimates it could lose out on $500 million in sales tax revenue over the next five years if Amazon isn't compelled to act. The company's national tax liability could top $10 billion by 2022, according to South Carolina.

"The implications are enormous," said Chris McCabe, a former Amazon executive who now advises third-party merchants. "I don't know exactly what Amazon legal is pursuing behind the scenes here, but I'm sure they are discussing what their batting average will be on some of these decisions and what will happen in other states."

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South Carolina filed suit against Amazon in June for failing to collect sales tax on products sold by independent merchants, which paid the company $8 billion in fees during the most recent quarter. At the time, Amazon argued the case was without merit and vowed to fight it "vigorously." After conducting an audit, South Carolina estimates Amazon's sales tax tab from 2016 at $57 million.

A spokesperson for Amazon didn't respond to a request for comment.   

Meanwhile, Amazon recently announced that it would begin collecting sales tax from third-party sellers in Washington state.  A state law that goes into effect in January requires that marketplace operators either collect sales tax from merchants that use their sites or comply with state use tax notice and reporting requirements. Minnesota passed a similar law earlier this year.

According to tax attorney Paul Rafelson, Amazon is getting a sweet deal from officials in its home state of Washington, the first where it has agreed to collect tax for independent sellers.

"This perpetuates a fiction that because Amazon only becomes responsible for the tax on Jan. 1, it must have been the sellers' [responsibility] beforehand," wrote Rafelson, also an adjunct professor at the Pace University School of Law, in an email. "This makes it really hard for Washington state to now pivot and pursue the back taxes from Amazon because Amazon can now argue that the law was ambiguous."

Moreover, Washington is losing out on at least $100 million in revenue by allowing Amazon to start complying the law after the holiday season, its busiest time of year. That gives the e-commerce giant an unfair advantage over brick-and-mortar rivals such as Nordstrom (JWN), a struggling, family-owned chain that's also based in Washington. Critics of Amazon, including President Donald Trump, have made similar claims for years.

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"If I were Nordstrom or a small boutique based out of Bellevue, Washington, I'd be [livid] that Washington state is letting Amazon get another sales tax-free holiday present," Rafelson wrote.

Officials from the Washington State Department of Revenue countered that finding a solution to the sales tax problem isn't easy.

"The state Legislature recognized that state and local government is losing billions of dollars a year in sales tax from out-of-state businesses selling to Washington residents," writes Anna Gill, a department spokeswoman, in an email. "This is money that would otherwise go to support public education, healthcare, infrastructure and other vital public services."

Amazon has argued for years that the independent merchants are responsible for remitting and collecting all taxes on their own sales. Roughly half of the merchandise sold on Amazon's site comes from sellers who use the company's Fulfillment by Amazon Service, which packages their products and ships them to customers. South Carolina discovered through an audit that Amazon was remitting sales tax on only a part of its sales in the state.  

In a recent Securities and Exchange Commission filing, Amazon said the South Carolina case could result in it being "subject to significant additional tax liabilities." 

The state's court filing argues that it might have to compete against other states to recover Amazon sales tax revenue. Indeed, other states are targeting Amazon sellers. A judge in Massachusetts recently ordered Amazon to identify all the third-party sellers who "stored any tangible personal property in any location in Massachusetts that is, or was, owned or leased by Amazon Retail LLC or any other affiliated entity" since 2012.  According to The New York Times, sellers have been contacted by California tax officials

For years, Amazon argued that it didn't need to collect sales taxes because a 25-year-old Supreme Court case known as the Quill decision found states could collect the levy only from companies with a presence or nexus in their jurisdiction. Amazon, however, began to collect sales tax in April nationwide, having built an extensive network of fulfillment centers across the country, including one in South Carolina.

Sellers and their allies say Amazon is far better equipped to deal with complications associated with collecting and remitting sales taxes in multiple jurisdictions. The company announced earlier this month that it was slashing prices on products sold by third-party sellers.

'Why go after the million-dollar sellers, of which there are tens of thousands, when you can go after the bigger business, which is Amazon, which has all the cash?" said Jordan Goodman, a Chicago tax attorney who worked on the Quill case and now represents Amazon sellers.