State-level bureaucrats in the United States have their eyes fixed on
Amazon and other online retailers. The reason: online shopping, in
theory, results in less tax revenue for their states because these
retailers don’t collect sales tax in states in which they have no
physical presence.

Up until now, a number of states have sought to force Amazon and others
to collect sales tax through legislation that would use in-state
affiliates to create ‘nexus‘. With nexus established, online retailers
would be legally responsible for collecting sales tax.

Fortunately, affiliates have recently been able to successfully lobby against this sort of misguided legislation. And bureaucrats in states that have passed such legislation are seeing that the tax revenue they were supposedly missing out on never existed in the first place.

But none of this means that states are giving up in their quest to tax retail transactions their citizens make with out-of-state online retailers. And the bad news is that their desperation could create nightmares for everyone, not just affiliates.

North Carolina is one state that has been aggressive in pursuing Amazon and online retailers. And Amazon was equally aggressive in terminating its North Carolina affiliates when threatened with the possibility that it would be forced to collect sales tax because of its relationship with them. But North Carolina isn’t stopping with affiliates. Yesterday, Amazon filed a lawsuit aimed at stopping North Carolina from forcing the ecommerce giant to reveal the names, addresses and purchasing records of its customers in North Carolina. North Carolina’s tax collector wants this information for some 50m Amazon purchases made between 2003 and 2010.

The reason: something called a ‘use tax‘. Technically, citizens in North Carolina (and other states with a similar tax provision) are required to report purchases of goods in which no sales tax is paid. In other words, a North Carolina resident who buys something on Amazon and who pays no sales tax is required by North Carolina to report the purchase to North Carolina’s tax collector and pay a use tax generally equivalent to the sales tax. And since North Carolina hasn’t been able to get Amazon to collect sales tax, it wants to try its hand at enforcing the use tax.

The use tax isn’t new and few people apparently have ever paid it. And for good reason: not only are many people unaware that a use tax exists, it’s all but impossible for a state tax collector to track every single purchase that state residents make which are sales tax-free. But North Carolina essentially wants to do just that, and it is demanding that Amazon provide it with the data it needs to track down the poor soul who purchased a $15 book and didn’t pay his $1.16 use tax.

Obviously, the failure of residents to pay use tax adds up in the aggregate, but Amazon has a few good reasons for fighting North Carolina’s demands. As the company’s complaint explains:

Amazon must either comply with the (tax collectors’) information request and violate the privacy and First Amendment rights of Amazon and its North Carolina customers, or refuse to comply with a request from a state agency that has stated its intention to issue an administrative summons.

By revealing the names, addresses and purchasing records of its North Carolina customers for tax purposes, Amazon would potentially be violating those customers’ First Amendment rights, as well as other laws designed to protect individual privacy. In doing so, Amazon would, arguably, irreparably harm its reputation. After all, who would want to buy books and other products from a company that is willingly (or unwillingly) revealing purchases to a government agency? Even for those who aren’t buying books like 1984, Fahrenheit 451 or Animal Farm, the idea that data around private purchases is being shared with a bunch of bureaucrats (and potentially everyone else) is not conducive to online shopping.

Needless to say, the sales tax issue is one that is not going away in the United States, and it will be addressed comprehensively at some point, for better or worse. But misguided attempts to turn Amazon and other online retailers into extensions of the tax collector are not only misguided, they’re increasingly dangerous.

Photo credit: jacreative via Flickr.