NC v. Amazon: Round Two

Oh, it’s so on. The battle between North Carolina and Amazon.com is heating up – and it’s going to get good (well, good in a tax geek kind of way – but that’s still good, right?).

I blogged last year that Amazon.com was picking a fight with the Tarheel State by notifying its affiliates that it would cease to do business with residents of NC due to an “unconstitutional tax collection scheme” that left “Amazon.com little choice but to end its relationships” with them. The tax scheme in question was an effort to tax online sales in the state based on the idea that sales affiliates in the state constituted a “presence” for sales tax purposes. It’s not a new argument: since many traditional brick and mortar stores have been replaced with optic fibers, the notion of what having a presence means for tax purposes has been in controversy and taxing online sales is, in my opinion, creeping closer to becoming a reality. Painfully aware of the trend, Amazon.com fired off the letter to North Carolina affiliates just months after the state of New York successfully defended a similar sales tax position with the online giant. In that case, a judge ruled that Amazon.com did “not come close” to demonstrating that the sales tax law was unconstitutional.

As I noted at the time, I found it less than surprising that Amazon.com had not officially challenged North Carolina’s position in court. It was a much more compelling position in the public eye than in the courts. But now, Amazon.com has no choice but to lawyer up in North Carolina… This week, they filed a lawsuit in response to a request from North Carolina’s tax collectors to provide detailed records, including names and addresses of NC residents who were Amazon.com customers between 2003 and 2010 – as well as lists of what they purchased. The deadline for the request was April 19, 2010. Amazon.com, of course, failed to provide the information by the due date. There’s been no official reaction from NC tax collectors – but that may just be a matter of time.

Ouch is right.

Amazon.com, for its part, claims that it’s a violation of privacy and of customer’s First Amendment rights. They’ve asked a federal judge in Seattle (now there’s a favorable venue!) to rule that the request is illegal.

The issue came about after NC tax collectors decided to go after residents who might not be paying their use tax – a tax on goods or services “purchased or received” outside of the state. Most states have a similar tax. It’s an easy rule to understand and comply with when it comes to big ticket purchases from out of state (cars are a good example since you have to comply in order to register your vehicle in most states). But online sales can be tricky. In fact, I previously blogged about the uneven and nonsensical rules surrounding the purchase of online music (specifically, iTunes) in my own state of Pennsylvania.

The fact remains, however, that dollar after dollar is escaping taxation because of online sales. And North Carolina, like many other states, is struggling to close the gaps in the budget. Rather than raise taxes, they’re ramping up enforcement. Which brings us to the fateful request to Amazon.com for a customer list.

It should make for an interesting battle. Traditionally, the privacy rights associated with the purchase of books and other media have been fiercely protected. Let’s face it: we want to read our porn and Kitty Kelley biographies in private. And the courts have largely agreed (anyone remember Monica Lewinsky?).

However, it’s a changing world. And courts are weighing the interests of those seeking to collect tax revenue against privacy interests in a new way. For the past ten years, for example, the IRS has been chasing credit card companies in court in an effort to obtain financial records thought to be tied to tax evasion – and they’ve had some success.

You can bet that the entire online world will be watching this one.

Comments

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  2. MommyLisa

    WOW. I would be PO’d if my state could back tax me for online purchases I had made.

  3. J G

    If the states didn’t have a sales tax there wouldn’t be a problem.

  4. Rainer

    Massachusetts has an elegant solution to the use tax collection problem:

    There is a line on the income tax return where you report (and hence pay!) the use tax you owe. But since calculating this is really quite onerous for someone who is active online, Massachusetts offers a “safe harbor” estimate that you can plug in for the use tax you owe (0.05% of AGI plus actual use tax on individual purchases of $1,000 or more). MA promises that if you choose the safe harbor number, you will be considered in full compliance, even if you under-report the use tax you owe.

  5. LK

    I wonder how Massachusetts residents accurately or report at all for that matter, their out of state and online purchases? How many use the safe harbor number. When even our politicians cross state lines to avoid paying taxes, how can they enforce it on the rest of the community

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  8. Robert Nailor

    Exactly why would a judge rule in favor of Amazon and eliminate the possibility of more tax revenue? Doesn’t anyone realize that judges get their pay through the government – city, state, fed? Uh, that is from taxes. Just like all the salary and raises Congress give themselves – it is OUR tax money. Any judge that rules in favor of Amazon is cutting his own pay hike. Think about it.

  9. mar412

    NC has a line on the income tax return where uncollected sales tax should be reported. The problem is that compliance with this is very low. I worked in this area, and this line item generates only about 200,000 dollars in revenues per year. Obviously, citizens cannot be trusted to be honest about this. With the streamlining of the sales tax, I don’t think it’s unreasonable for states to expect online retailers to collect.

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