In the days leading up to the Amazon marketplace facilitator trial in South Carolina, the chief administrative law judge issued orders containing his overview of the disputed issues — including positions filed under seal — controlling resolution of the case.
Chief Ralph King Anderson III on January 29 denied cross-motions for summary judgment in a 21-page order identifying remaining factual disagreements between Amazon Services LLC — the subsidiary that operates Amazon.com Inc.’s online marketplace — and the Department of Revenue, and justifying the full administrative hearing in the case one week later.
“The facts in this case appear to be relatively straight forward even if the transactions at issue are complicated and consist of several components,” Anderson wrote. “However, although the facts underlying the transactions at issue appear to be relatively straight forward, summary judgment is generally not appropriate when ‘there is dispute as to the conclusion to be drawn from those facts.’”
Throughout his analysis, Anderson repeatedly made statements like “the facts are relatively clear” but then denied summary judgment because of an unresolved factual point he wished to flesh out at trial. According to Anderson, the parties dispute the legal conclusions to be reached by the facts in the following areas:
whether Amazon is a retailer liable for collecting use tax on sales made by third-party vendors over its marketplace platform;
whether Amazon is a consignee;
whether Amazon is “engaged in the business of selling” under South Carolina law;
whether Amazon is liable for collecting tax under the “efficient administration” clause of South Carolina’s sales and use tax statute;
whether Amazon is a service provider; and
whether South Carolina’s attempt to require Amazon to collect tax as the marketplace facilitator before pending marketplace facilitator legislation has been enacted violates constitutional due process.
Two days later, on January 31, Anderson also issued an order confirming that Amazon Services bears the burden of proving it doesn’t owe the taxes and penalties assessed in this case. Amazon Services had filed a flurry of motions before the February 4 start of the trial, including one seeking to confirm that the burden of proof has shifted to the DOR.
Specifically, Amazon Services alleged that the DOR — in its December 2018 motion for summary judgment — had abandoned its "consignment sale" theory and had advanced new legal positions after discovery was closed.
The main contents of the DOR’s motion for summary judgment are not publicly available because the DOR filed its supporting memo and exhibits under seal, stating that Amazon Services had designated portions of those materials as containing protected information. But according to the burden of proof motion filed by Amazon Services, “the Department abandoned consignment and instead asserted for the first time that Amazon Services owes sales tax for third-party sales because (1) of ‘the nature of [its] interaction and bargain with’ visitors to Amazon.com, (2) Amazon Services is the ‘point of sale’ or ‘point of contact’ for third-party sales, and (3) the Department should be allowed to construe Amazon Services as the ‘seller’ of third-party products under the Tax Act’s ‘efficient administration’ provision.”
The DOR replied that its “’theory’ in this case is — and has always been — that the plain language of the South Carolina Sales and Use Tax Act . . . requires Amazon to remit sales and use tax with respect to sales of tangible personal property taking place on its Website.” The June 2017 determination letter assessing tax on Amazon Services explains that Amazon is liable for sales and use tax because it is a retailer or seller under the act, and because it is "engaged . . . in the business of selling tangible personal property at retail,” the DOR said.
In addition to confirming that Amazon Services still bears the burden of proof, Anderson disagreed that the DOR raised new legal theories, with one key exception related to DOR arguments that Amazon Services is liable for the tax under the state’s efficient administration clause. His discussion on this point dovetails with analysis contained in his earlier order on cross-motions for summary judgment.
However, Anderson said that overall, a close review of the DOR’s original determination letter “clearly shows that although the Department certainly analogized the transactions at issue to consignment sales at certain points, the Department was also relying on the nature of the transactions and interactions between the parties as part of its theory” that Amazon Services was “in the business of selling tangible personal property at retail” under South Carolina law. He added that this is the primary issue presented in the case, not whether Amazon Services is a consignee.
The trial itself lasted from February 4 through February 6. Once the court reporter provides the parties with the transcript, which typically takes several weeks, the sides will have 30 days to file proposed orders, and then another 15 days to file responses. That puts the time frame for a decision in mid-April at the earliest.
The proceedings arise from the DOR’s June 2017 determination that Amazon Services owed $12 million in taxes, penalties, and interest for the first quarter of 2016 on the grounds that under South Carolina law, Amazon Services is the retailer legally liable for taxes on third-party sales made into the state through its online marketplace. The amount of uncollected tax continues to accumulate, with the DOR estimating that Amazon will owe the state $500 million by the end of the litigation. Amazon Services argues that it does not engage in sales but provides services to the third-party sellers, who are responsible for collecting the tax.
Relationship With Sellers
While Amazon collects and remits tax on its own sales, it does not do so on third-party sales unless a state has enacted legislation putting the collection obligation on the marketplace facilitator. More than half of Amazon’s annual U.S. sales are now by third-party sellers using the online marketplace.
In his order on cross-motions for summary judgment, Anderson described Amazon’s relationship with its third-party sellers, writing that the sellers fall into one of two categories: About half fulfill the orders themselves — though even with this group, an Amazon affiliate will process the customer’s credit card after the seller ships the product — while the other half participate in the Fulfillment by Amazon (FBA) program, under which “Amazon stores, packages, and ships the products when they are sold.”
Amazon’s relationship with all of the marketplace sellers is set forth in what the court documents refer to as the Business Solutions Agreement (BSA). “The BSA states that the relationship between Amazon and Merchant is an independent contractor relationship ‘and nothing in this Agreement will create any partnership, joint venture, agency, franchise, sales representative, or employment relationship,’” Anderson wrote.
However, Anderson said that “Amazon acknowledges it does act as an agent” for all third-party sellers for the limited purposes of processing and collecting payments from customers. In a footnote, he said Amazon makes money by investing these sales proceeds before they are distributed to the third-party sellers — a point he raised later in the order as potentially significant.
“Furthermore, although Amazon disclaims any agency relationship, the BSA includes many limitations on how Merchants participate in the Marketplace transactions,” Anderson wrote, and provided several examples.
Amazon is compensated for its services to third-party sellers through referral fees, closing fees, monthly “Selling on Amazon” subscription fees, and more. “The referral fees vary based upon the product being sold and range from 45 percent of the total sale value for ‘Amazon Device Accessories’ to 6 percent for personal computers,” Anderson wrote.
Anderson said South Carolina’s relevant sales and use tax law is S.C. Code Ann. section 12-36-70(1)(a). “A ‘retailer’ and ‘seller’ includes, in relevant part, every person ‘selling or auctioning tangible personal property whether owned by the person or others,’” he wrote, adding that section 12-36-70 also includes the sales and use tax law's efficient administration clause. The South Carolina clause allows the DOR to “treat the dealer, distributor, supervisor, employer, or other person as a retailer” for purposes of the chapter “regardless of whether they are making sales on their own behalf,” he wrote.
Is Amazon a Retailer?
“At the heart of this case is a disagreement between the parties as to whether Amazon is a ‘retailer’ or ‘seller’ or ‘in the business of selling’ such that Amazon owes sales and use tax on certain retail sales involving third-party Merchants participating on Amazon’s online sales platform known as the Marketplace,” Anderson wrote.
In its motion for summary judgment, Amazon Services argued that it cannot be the seller or retailer because it “does not have title to the products sold on the Marketplace, does not transfer possession of the products, and does not receive consideration in exchange for those products,” Anderson wrote. But the DOR countered that Amazon Services is the seller “because it offers products to the public for sale and accepts payment in exchange for those products, essentially transferring tangible personal property for consideration,” Anderson wrote. “The Department further argues that Amazon’s self-identification as a service provider belies its true role in these transactions, over which it exercises subtle, but extensive, control.”
“Underlying this larger issue are several sub-issues that control the resolution of this case and illustrate how the parties disagree about the conclusions to be drawn from the facts in this case,” Anderson said.
Here he again referred to Amazon’s practice of charging customers and receiving and holding payment for up to two weeks before transmitting payments to third-party sellers, less Amazon’s fees. The DOR argues “that when Amazon receives these payments from customers, it is receiving consideration in exchange for the transfer or a product,” reflecting a sale under section 12-36-100 of South Carolina’s sales and use tax law, Anderson wrote. Amazon Services argues that the payments do not constitute consideration but are payments received “on behalf of Merchants,” and that “there is no bargained-for consideration between Amazon Services and the customers,” Anderson wrote. In other words, Amazon describes itself as essentially a payment servicer, he said. “Nevertheless, if contractual ‘consideration’ is an issue in this case, the determination of the extent to which a sale consists of a profit or benefit accruing to Amazon is, in part, a factual one.”
Another key subissue in dispute is who transfers title or possession of the purchased goods. “Again, the facts are relatively clear,” Anderson wrote, saying the disagreement about the requirements of section 12-36-100 is an issue of statutory construction. But he did not resolve the issue in the order on motions for summary judgment. “The Court finds the transfer of title is not irrelevant to a sale, but it is not a prerequisite either,” Anderson said. “However, the Court withholds judgement beyond this observation at this time.”
“The parties also disagree about what constitutes an ‘interaction’ between Merchants, Amazon, and customers during these transactions,” Anderson wrote. The DOR argues that a customer can go through every aspect of finding and buying a product on the Amazon marketplace “without ever interacting with the Merchant,” he said.
“The Department asserts Amazon is the ‘point of contact’ for the sale and argues that the customer’s lack of interaction with the Merchant in this scenario shows that Amazon is the true seller," Anderson wrote. "The Department also maintains that any interaction between Merchants and customers is so heavily controlled by Amazon that the Merchant is not able to meaningfully participate in transaction at any point to calculate, charge, and collect sales and use tax from the customer.”
Among the counterarguments raised by Amazon Services is its claim that “whether the Merchant and customer interact has no legal significance because the South Carolina Sales and Use Tax Act does not require ‘actual contact’ between two parties for those parties to be considered a seller and a customer.”
According to Anderson, one unresolved factual issue before the Administrative Law Court is thus whether the types of interactions between the third-party sellers and customers “are meaningful enough” to truly be called interactions. He added that this will also involve “an evaluation of whether a sale requires interaction between Merchants and customer or can be completed without it.”
Is Amazon a Consignee?
The DOR analogizes the third-party marketplace transactions to consignment sales under South Carolina law, in part because “under the current statutory scheme, sales and use tax is intended to be collected at the point of sale, and Amazon is functioning as the point of sale in these transactions,” Anderson wrote.
“Amazon argues that it is undisputed that it is not a consignee in the transactions at issue,” Anderson wrote, later adding that Amazon Services and the third-party sellers “specifically disclaim any form of agency between them in the BSA.”
“The Court finds that further clarification of the facts is necessary to construe whether Amazon is functioning as a consignee or not,” Anderson wrote. “Specifically, the Court does not find Amazon’s argument that the BSA disclaims any agency or consignment relationship to be compelling. A person cannot contract away their obligations under the South Carolina tax laws to prevent the Court from engaging in a factual analysis of the true nature of the relationship between the contractual parties.”
He continued, “Furthermore, since Amazon contends that there is a sale in the Marketplace of items it does not own, Amazon opens the door to the factual inquiry of whether those sales could be construed as consignment sales or a joint venture between Amazon and the Merchants. Accordingly, whether the facts of this case imply Amazon is engaged in consignment sales or a joint venture with third parties, despite Amazon disclaiming such a relationship in the BSA, is a potential factual issue in this case."
There also is genuine dispute regarding whether Amazon Services is a service provider, Anderson said.
“Amazon contends it merely provides ‘listing and advertising services,’ ‘order fulfillment or distribution services,’ and ‘payment processing services,’” Anderson wrote, later adding, “On its face, Amazon’s BSA indicates it is a service provider.”
“However, the Department has sufficiently raised a factual issue regarding Amazon’s practices and control over the retail sales of Merchant products to warrant inquiry into whether the provision of services is the true nature of the transactions at issue,” Anderson said. He cited the DOR’s assertion that Amazon Services doesn’t just charge a fee for its “listing and advertising” services but “also takes a portion of the profit via a sliding scale based on the type of item sold.”
Efficient Administration Clause
Aside from whether Amazon Services itself is the retailer, the parties dispute whether it is liable for South Carolina tax on third-party marketplace sales because it is “engaged in the business of selling” tangible personal property at retail under state law. This discussion segued into another DOR argument under seal: that even if the court does not find Amazon Services to be the retailer, Amazon Services should be construed as a retailer under the efficient administration clause of the state's sales and use tax statute.
According to Anderson, the DOR again pointed to Amazon’s exclusive right under the BSA to receive the customers’ payments to show that Amazon Services is in the best position to collect tax as the point of contact for the sale. But Amazon Services argues that the DOR is improperly trying to invoke the efficient administration clause retroactively.
Here Anderson wrote that if — in asserting that the DOR has advanced new legal positions — Amazon Services is implying the DOR failed to comply with the court’s rules for “setting forth with particularity” the issues in a pre-hearing statement, “then it has a point.” Amazon Services contends that the DOR thus waived its ability to make this argument.
“Nevertheless, since filing its Pre-Hearing Statement, the Department has clearly set forth its position that the efficient administration clause should be an issue considered by this court,” Anderson wrote. “Furthermore, in light of that contention, whether this argument is waived must be evaluated at the conclusion of the [proceeding] and not at its initial stage.”
Anderson addressed this further in his order on burden of proof, saying that if the DOR genuinely raised new issues, the remedy would not be to shift the burden of proof but for the DOR to amend its pre-hearing statement to include the new issues. The DOR’s assertion of liability under the efficient administration clause is one such issue, he said. “If the Department fails to amend its Prehearing Statement, then, in fairness to Amazon, this Court will not address issues that are not properly raised,” Anderson wrote.
At press time, the DOR had not filed an amended pre-hearing statement.
Constitutional Issues
Amazon Services also argues that the DOR failed to give express notice under the state constitution of its intent to use the efficient administration clause to require Amazon Services to collect tax. On this point, Anderson wrote that “the Court wishes to inquire into the facts to determine whether this provision requires notice of its retroactive utilization or whether it imposes an obligation to the taxpayer to inquire into their tax collecting responsibilities based upon the nature of their business.”
Also, Amazon Services argues that the DOR is violating constitutional due process by attempting to prospectively apply pending legislation “to place a legal obligation on Amazon that does not exist under the current tax scheme,” Anderson wrote.
Specifically, South Carolina lawmakers have introduced a measure (S. 214) that would define a marketplace facilitator and “further inform” marketplace facilitators of their existing obligation to collect tax on third-party sales into the state. “Amazon maintains it ‘could not have had ‘fair notice’ that it was subjecting itself to a sales tax when it provided services to third-party sellers,’” Anderson wrote, given the legislation is still pending.
But Anderson said the DOR has nowhere cited to the pending legislation in an attempt to apply it to Amazon Services, and rejected the argument that the DOR is seeking to impose the legislation retroactively.
“Rather, the Court finds that this case is more reflective of an existing tax scheme being applied to a relatively new business model (the online marketplace),” Anderson wrote. “Just because a new business structure is created does not mean that this new structure is immune from existing tax obligations simply because the existing statutory scheme does not specifically incorporate the new business model.”
Finally, in a related motion, Amazon Services sought to admit at trial statements made by DOR officials regarding the pending legislation.
“Although the Department is attempting to collect from Amazon Services the tax for third-party sales, the Department has repeatedly admitted that the third parties, and not Amazon Services, are the sellers under the Tax Act,” Amazon Services said, arguing that the DOR drafted and recommended adoption of legislation “to prospectively shift that tax responsibility to online marketplaces like Amazon.com.”
The DOR in its response called the statements made by officials to legislative committee members “both irrelevant and immaterial to the proceedings.” Amazon Services filed a reply brief on the day the trial started arguing that the statements it wanted to admit “are the Department’s interpretation of current law — not proposed legislation.”
Anderson ruled from the bench that he would allow a limited number of the comments made by DOR officials to be admitted at trial.