In a lengthy decision, an Administrative Law Judge (ALJ) for the South Carolina Administrative Law Court ruled that an online marketplace that facilitated sales for third-party merchants was required to collect sales and use tax on sales to South Carolina customers. The tax period at issue was January 1, 2016 through March 31, 2016, which pre-dated the Wayfair decision. The marketplace was also a retailer in its own right and was registered as a retailer in South Carolina. The marketplace’s agreements with sellers generally required the merchants to be responsible for the collection, reporting, and payment of taxes. However, the marketplace would collect sales tax on behalf of professional sellers if the merchant agreed to pay for tax collection services. In that case, the marketplace would collect “the value of the tax” owed, but would transmit that amount to the merchant who would then be required to remit to the relevant state. Individual sellers did not have the option of paying for tax collection services. The South Carolina Department of Revenue argued that the marketplace was a “retailer” with respect to the sales it facilitated for third-party merchants and was therefore required to collect and remit sales and use taxes on facilitated sales to South Carolina customers.
The ALJ concluded that the marketplace was in the “business of selling” tangible personal property at retail because it was a person accepting money in exchange for products. Key to this finding was the fact that customers meaningfully interacted only with the marketplace and payments were processed by an affiliate of the marketplace. While not a formal consignment relationship, the ALJ concluded that the relationship between the marketplace and the third-party merchants essentially functioned as such for purposes of the sales tax because a customer’s interaction was almost entirely with the marketplace (e.g., the marketplace processed payment, provided receipts, and updated the customer as to order status). The ALJ also noted that under the marketplace’s business model where the marketplace processed payments and provided receipts to customers, it would be almost impossible for a non-professional merchant to collect tax and to give customers a receipt at the time of sale as required under South Carolina law. After determining that the marketplace was in the “business of selling” for purposes of the sales tax act, the ALJ further rejected the marketplace’s constitutional claims. Throughout the analysis, the ALJ relied heavily on the reasoning of the state supreme court in its Travelocity case involving a hotel intermediary. It is not yet clear whether this decision will be appealed. Please contact Harley Duncan at 202-533-3254 with additional questions on Amazon Services, LLC v. South Carolina Dep’t of Revenue and stay tuned to TWIST for future marketplace-related developments.