Amazon's profit falls as costs for faster shipping soar

Amazon.com has been locking horns with South Carolina over its state sales tax obligations since mid-2017. File/AP

Amazon.com CEO Jeff Bezos didn’t build the world’s biggest online retailer by giving up easily.

So it's not a surprise that he’s decided to soldier on in his company’s long-running sales tax skirmish with South Carolina.

Last week, Amazon disclosed in a footnote in a quarterly financial filing that it is challenging a recent court ruling that found it owed the Palmetto State as much as as $12.5 million in sales tax on goods sold through its website in early 2016 by independent merchants. 

"We believe the assessment is without merit and intend to defend ourselves vigorously in this matter," the Seattle-based company said.

It's not so much about the money, which amounts to a rounding error compared to Amazon's $2.13 billion profit last quarter. It's more about the risk of a potentially costly legal precedent.

"If other tax authorities were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities," the company said.

Once upon a time, when most states hadn't gotten their arms around e-commerce, Amazon didn't fork over a penny in sales taxes to South Carolina under a five-year grace period that started in 2011. In exchange, the e-commerce behemoth agreed to invest $125 million and create 2,000 jobs in the state.

The S.C. Department of Revenue started looking at the company's books shortly after the reprieve expired, when it started hearing from buyers who said they were charged tax on some Amazon purchases but not others.

The audit covered the first three months of 2016. The assessment on so-called third-party sales came to about $9.6 million for the quarter. Interest and penalties have added at least another $2.9 million to the tab.

Amazon countered that it wasn't responsible for collecting taxes on those transactions. It never owned the goods that had been exchanged, so, technically speaking, it wasn't the seller, the argument went.

Rather, the company maintained that its role was TO provide an online platform that connected buyers and sellers, while also taking care of some back-office functions, such as shipping and payment processing.

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The company appealed the assessment to the S.C. Administrative Law Court, which hears disputes involving state agencies. And it lost.

Judge Ralph K. Anderson III issued his 54-page decision in September. He agreed with the Department of Revenue's interpretation that Amazon, for all intents and purposes, was the seller, mainly because the company controlled so much of the sales process. 

The case was one of the reasons the General Assembly started requiring out-of-state retailers to collect and remit sales tax if they generate more than $100,000 in revenue within South Carolina. The new rules took effect last November and were expanded to include "marketplace facilitators" such as Amazon and eBay in April

Amazon has a new legal team in its corner as it seeks to reverse Anderson's decision before the S.C. Court of Appeals.

It's quite possible this showdown could make its way to the state Supreme Court, unless one side decides to send up the white flag. It's not likely to be Jeff Bezos.

Contact John McDermott at 843-937-5572 or follow him on Twitter at @byjohnmcdermott