Amazon Services LLC owes South Carolina sales tax on third-party merchant products sold on its website, because the relationship between Amazon and the third-party merchants functioned as a consignment-type relationship regardless of an agreement that said it was not.
The ruling from an administrative law court applies to the first quarter of 2016. (Amazon Services LLC v. S.C. Dep’t of Revenue, No. ALJ-17-0238-CC (S.C. Admin. L. Ct. 9/10/19)).
Since the hearings in this case, the South Carolina General Assembly passed “Wayfair” legislation amending the Sales and Use Tax Act to specifically add “marketplace facilitators” to the statutory scheme. See 2019 S.C. Act No. 21 (effective April 26, 2019). However, with respect to prior open years, for which Amazon Services did not collect and remit sales tax from customers, the court’s decision opens the door for assessments of the type the court upheld here.
Amazon Services LLC was an Amazon.com Inc. subsidiary that operated the website amazon.com “Marketplace”, which listed various products for sale, including products of third-party merchants. The three primary sources of products listed for sale on the Marketplace were: (1) Amazon, (2) Amazon affiliates, and (3) third-party merchants. At issue in the case were the sales and use taxes due on retail sales of third-party merchant products on the Marketplace.
Amazon Payments processed payments for products listed for sale on Amazon.com. Amazon Fulfillment offered fulfillment services to merchants (i.e., storage, packing, shipping, and delivery). At the time of the hearings, there were approximately 2.5 million active merchants listing products on the Marketplace.
To utilize the Marketplace, merchants were required to create an online seller account with Amazon Services and pay Amazon Services various fees. To create an account, a Merchant had to agree to the Amazon Services Business Solutions Agreement, which was the governing contract between the Merchant, Amazon Services and several Amazon entities.
Amazon Services handled all communications related to order confirmation, cancellation confirmations, and notices of auto-renewal for certain programs. Once a customer purchased a product on the Marketplace, it was Amazon Services, and Amazon Services alone, that sent the customer an order confirmation via email. A customer on the Marketplace could purchase Merchant product without ever interacting with the merchant.
Once a customer purchased a merchant product, the order was shipped to the customer in one of two ways. First, the merchant could ship the product itself. Second, merchants could, for an additional fee, use Amazon Fulfillment’s Fulfillment By Amazon program to pack and ship their products. When a purchase was made, it had to be made directly through Amazon Services’ website. Amazon Services, therefore, conducted the “point of sale” for any product sold on the Marketplace.
Amazon Services controlled the flow of funds between customers, Amazon Services, and merchants. Amazon Services received customer payments for merchant products and then remitted the proceeds to merchants on a bi-weekly basis (or more frequently at Amazon Services’ option). Merchants did not receive interest on any sales proceeds held on their behalf. Amazon Services charged a referral fee for each merchant product sold. Referral fees were charged by product category and were based, in part, on the expected gross margin of the product. If a merchant subscribed to Amazon Services’ tax collection service, then Amazon Services charged the customer the sales tax and remitted that amount back to the merchant. Thus, Amazon Services collected the sales tax due at the point of sale, but placed the responsibility upon the merchant to disburse the sales tax to the relevant state.
Amazon Services challenged a final determination of the South Carolina Department of Revenue in which the department assessed Amazon Services for a total of $12.5 million in taxes, penalties, and interest for the first quarter of 2016. The department found that Amazon Services is a “retail seller” who owes sales tax on certain retail sales involving merchants’ products on the Marketplace. Amazon Service appealed to the South Carolina Administrative Law Court, which agreed with the department.
‘Engaged in the Business of Selling Tangible Personal Property at Retail’
In South Carolina, the court noted, a sales tax equal to 5% of the gross proceeds of sales is imposed upon (i) every person, (ii) engaged or continuing within this State, (iii) in the business of selling tangible personal property, (iv) at retail. See South Carolina Code Section 12-36-910A. A person is “engaged in the business of selling” if the object of the activity is to achieve a profit, benefit, or advantage, by either a direct or indirect means, whether the property is owned by the person or others. A sale, the court noted, does not require the transfer of title and possession.
The sales tax is calculated based upon the “gross proceeds of sales.“ “Gross proceeds” also includes the proceeds from the sale of property sold on consignment by the taxpayer, according to the statute. Recognizing consignees as sellers for purposes of the Sales and Use Tax Act is consistent with the statutory definition of ”seller,“ which includes persons selling or auctioning the tangible personal property of others, the court said.
The parties agreed the transactions at issue were “retail sales” that were subject to tax. They disagreed, however, as to who owed the tax. Amazon Services argued that it could not be the seller of merchant products (and therefore responsible for the tax) because it did not hold title to merchant products and could not transfer title. However, the court noted, “Amazon Services erroneously interprets a sale as requiring the transfer of title and/or possession when this is merely one type of sale.”
The basic definition of a sale under S.C. Code Section 12-36-100 only “requires a transfer of tangible personal property for consideration.” A sale does not require the transfer of title and possession nor is a sale limited to the transfer of title or the transfer of possession, the court said. The court had to determine whether the object of Amazon Services’ business activity was “to achieve a profit, benefit, or advantage by either direct or indirect means from the sale of property owned by Amazon Services or others on the Marketplace.” The court answered that question in the affirmative.
‘Travelscape’ Is Controlling
In Travelscape LLC v. S.C. Dep’t of Revenue, the South Carolina Supreme Court upheld the same lower court’s determination that Travelscape, an online travel company offering hotel reservations on Expedia.com, was responsible for remitting sales tax because “it was engaged…in the business of furnishing accommodations to transients for consideration.” Travelscape facilitated the sale of third-party hotel rooms to the public at negotiated discounted rates on its website, Expedia.com.
Comparatively, the court noted, “the factual positions of Travelscape and Amazon Services are very similar.” Both provide an online platform where they facilitate the sale of other persons’ products. Both are the sole entity that interacts with the customer at the point of sale, processes the customer’s payment, accepts the customer’s consideration, takes a fee, and then remits the proceeds from the sale to the owner. In the court’s view, Travelscape stands for the following:
(1) an “intermediary” sales facilitator is not immune from sales tax;
(2) the person accepting money in exchange for a product is responsible for sales tax;
(3) the person who the customer interacts with at the point of sale is presumed to be the seller;
(4) an agency relationship between the sales facilitator and the seller/provider is not necessary to create sales tax liability on the part of the former;
(5) a person does not have to own the product to sell it;
(6) the customer’s awareness that the seller is not the owner of the product does not impact the seller’s sales tax liability; and
(7) the tax imposition statute is interpreted broadly to incorporate all persons engaged in the business of furnishing/selling, whether directly or indirectly.
This summary of the teachings of the Travelscape decision made it readily apparent that the court was going to hold Amazon Services responsible for the sales tax properly imposed on merchant sales. In short, Amazon Services was, as a matter of South Carolina law, the “seller” of merchants’ products. Amazon’s arguments to the contrary were each methodically refuted.
Amazon argued that the all-important point of sale occurs when a sale is complete, and in this case the sale was complete only after the product had been shipped and Amazon Payments completed the credit card charge. The court disagreed. In its view, the point of sale occurred when the customer placed the order and Amazon Services confirmed the order after encumbering the customer’s card, thereby insuring its receipt of funds. This concept—that the transfer of the funds is not as significant as the agreement to receive the funds—is illustrated in (and consistent with) Travelscape.
Amazon Services argued that “it merely facilitates sales” and Amazon Payments was only a “conduit” for money exchanged between customers and merchants. However, the state Supreme Court determined that Travelscape was not merely an “intermediary,” but was inextricably “in the business of furnishing” hotel rooms for consideration, which suggested a similar inference here. It was, the court noted, Amazon Services’ website and functionality, not that of the merchants’, which were used to consummate the sales at issue.
When Amazon Services sent the order confirmation email to the customer, the merchant was not even mentioned in the email. Contrary to Amazon Services’ contention, it was not just facilitating sales, it was consummating them. In fact, during the entire transaction, the customer only interacted with Amazon Services. Amazon Services was the party present at the consummation of the sale who accepted money from the customer in exchange for the product. Amazon Services’ actions were not the actions of a simple payment processor, but were the actions of someone who was, within the meaning of S.C. Code Ann. Sec. 12-36-910(A), “in the business of selling.”
The application of the Travelscape “factors” leads inexorably to the conclusion that Amazon Services was in the business of selling for purposes of the Sales and Use Tax Act. As was the case in Travelscape, Amazon Services accepted money from customers in exchange for the promise that the merchant (or the hotel) would transfer her/its product to the customer. Amazon Services received the money and eventually remitted a portion of the proceeds—minus its fees—from the sale to the merchant. Both Amazon Services and Travelscape initially accepted consideration/money in exchange for another person’s product that was being sold to the customer, suggesting Amazon Services was similarly responsible for the sales tax.
Referral Fee Is Particularly Damaging
The sales tax, the court observed, was imposed upon the person engaged in the business of selling tangible personal property, and the term business means “all activities, with the object of gain, profit, benefit, or advantage, either direct or indirect.” Amazon Services contended the fees it charged for its myriad services did “not represent any form of profit-sharing.“ The court disagreed.
Instead of simply providing a service and charging merchants a fee based upon the operating cost of listing products on a website and processing payments, Amazon Services indirectly retained a share of the profits from each sale through the referral fee. Amazon Services therefore profited from every product that is sold upon its website—its profits were simply set by a fee structure. (The referral fee is based upon a percentage of the sale price of each product depending upon the category of product sold and the typical profit margin for that product).
Further, like Amazon Services’ other fees, the referral fee was not reimbursed to Amazon Services after the merchant received her funds; rather, it was withheld by Amazon Services before the merchant’s funds were disbursed. Amazon Services’ collection of the referral fee showed, in the court’s estimation, it was “engaging in the business of selling,“ because business included all activities, with the object of gain, profit, benefit, or advantage, either direct or indirect. The referral fee, the court found, was charged for selling the product.
Point of Sale Dynamics
The court placed a great deal of emphasis on what was happening at the “point of sale.” Amazon Services, it noted, was “the only party present at the point of sale accepting money from customers,” and this created an inference that Amazon Services was in the business of selling. The person who was present with the customer at the point of sale is indicative of who is “in the business” of selling the product under the Sales and Use Tax Act. A customer only interacted with Amazon Services at the point of sale, and all communications about the order and shipment went through Amazon Services.
Amazon Services argued that it could not be the seller of merchant products because it did not own the products and thus could not transfer title to them. This issue, of course, was addressed in Travelscape. The Supreme Court had no difficulty determining that Travelscape “was in the business of furnishing hotel rooms” even though it did not own or physically furnish them to its customers.
Therefore, it followed that Amazon Services could be, and in fact was, “in the business of selling Merchant products,” even though it did not own or physically transfer such products, the court said. A “person who lawfully sells a product he or she does not own, but has been granted the authority to do so, may be found to be the seller under the sales tax laws.” The evidence established that merchants grant Amazon Services the authority under the Business Solutions Agreement to permit Amazon Services to sell their products on their behalf.
Agency and Consignment Analogy
Amazon Services noted that Travelscape contracted with the hotels to allow it to sell rooms at a discounted rate as the hotels’ agent, whereas no agency relationship exists between Amazon Services and merchants. The Amazon Services agreement explicitly stated that the relationship between Amazon Services and merchants was that of independent contractors and “nothing in this Agreement will create any…agency…relationship between us.” The court, however, found that an actual agency relationship between Amazon Services and merchants was not necessary to impose sales tax liability. “Rather, as demonstrated by Travelscape, the most important consideration is who is accepting money in exchange for the product at the point of sale.“
Amazon Services, the court noted, “functions like a consignee for purposes of the Sales and Use Tax Act.” Amazon Services, like a consignee, provided a service to the owner of a product that directly facilitated the sale of that product. Like a consignee, Amazon Services retained a percentage of the sales price as a fee, i.e., the referral fee. Amazon Services was the person who processed the transaction, just as a consignee would.
The state’s Supreme Court’s decision in Travelscape highlighted the broad application of the “in the business of” language. Someone who (merely) facilitates or consummates a sale as a putative “service provider” could be “in the business of selling” for the purposes of the Sales and Use Tax Act.
Amazon Services, the court found, was engaged “in the business of selling tangible personal property at retail” for the purposes of the Sales and Use Tax Act. Additionally, while it is true that Amazon Services and merchants had not legally entered into a consignment relationship, for the purposes of the Act the relationship between Amazon Services and merchants functioned as a consignment-type relationship. Indeed, it would be an oddity to deem a merchant as a seller when”:
(1) a purchase was often completed through Amazon Services’ website without any sort of interaction between the customer and the merchant;
(2) the merchant is barred from accepting payment from the customer;
(3) Amazon Services sends the order confirmation to the customer;
(4) Amazon Services notifies the customer when an order has been received or shipped; and
(5) Amazon Services is the only party that provides a receipt for the products purchased.
It is, the court concluded, the actor “present at the point of sale and accepting money in exchange for the transfer of the product who is responsible for the sales and use tax under our tax laws. This is especially true under the circumstances of this case.“ At the end of the day, Amazon Services was unequivocally in the business of selling for the purpose of the Sales and Use Tax Act and was therefore to be held responsible for sales tax on the sale of third-party merchant products on the Marketplace.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robert Willens is president of the tax and consulting firm Robert Willens LLC in New York and an adjunct professor of finance at Columbia University Graduate School of Business.