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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.

Patricio Robles

Published 20 April, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2401 more posts from this author

Comments (8)

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Steve

You really have to wonder just how far certain state legislatures will go to dip into the online shopping tax revenue pool. Violating privacy rights of shoppers is no small matter, even if it is in the name of leveling the playing field for traditional brick and mortar retailers. Look, consumers are increasingly shopping online with sites like Google products and Sortprice.com because they offer value and convenience at a time when every penny counts. If states are going to go after online retailers to try to solve their own budgetary woes, they should do so in a way that doesn't unfairly burden the retailers themselves or put customers' private information at risk.

over 6 years ago

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Pete

Amazon is doing the right thing in this case. Privacy is a big concern.

NC DOR (as well as other states looking to enforce Use Tax Law) are going after the wrong people (business).  It isn't Amazon you want, it's the payment center.  Don't look to eBay ... go after their payment center, PayPal.  It would be easy to have Amazon Payments, PayPal, Visa, MC, Authorize.net, and other payment centers collect Use Tax @ Point of Sale, then remit those funds directly to the State (States pay elated fees).  No privacy issues there, as the records would be kept the same as any purchase at a B&M store today.

The is a consumer issue, and should not be a burden of online retail.  My solution is a simple answer to enforce existing law.  Unfortunately, simple is not in a lawmakers vocabulary.

over 6 years ago

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Tanner Lovelace

Actually, it is incorrect to say that residents of NC are not aware of the use tax. We are extremely aware of it since a few years ago NC added it as a line to the NC income tax forms. However, rather than make people keep receipts on everything they buy, NC only requires people to pay the actual use tax on items that cost over $1000 each. For everything else, we are allowed to estimate our use tax based on our income. Therefore, the idea that NC is going after my personal spending records with amazon.com bothers me greatly as I have broken no law.

over 6 years ago

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new business credit

For me, tax is for all. if the law mandate for it, then we need to follow the law.

over 6 years ago

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Colin Cooper, Director at ISSEL

California is doing the same but is chasing companies on the basis that a) there are fewer of them and are registered so easier to track down and b) the amount per tax entity paid will be greater so more cost effective to chase!

over 6 years ago

Fran Jeanes

Fran Jeanes, Internet Business Consultant at i-contact web design

As a North Carolina resident I think it is a complete waste of time for my state to be going after online retailers, let alone trying to implement the accounting nightmare it entails. You've gotta love the bureaucracy.

over 6 years ago

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Business owner

I am a small business owner and I have to say that it is entirely unfair that on-line vendors have this tax advantage over local small business owners. Why would someone decide to pay an additional 6,7,8%... sales tax when they could simply purchase the exact same item from an on-line company based in Outofstateland for the same price tax free? Everyone loves the diversity that small businesses bring to thier own community but i bet if presented with this scenario they would choose to save the money rather than support thier local community and pay the tax that, by the way, would help keep thier police and firefighters paid as well as fix more potholes and help salt the roads in the winter.....

over 6 years ago

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Mark

I disagree. I purchase many items online and have for years. However, it's not always to not have to pay taxes. It's usually because the item is just found for a lower cost online; in some cases, much lower. Also, the no tax issue is only beneficial if there is Free shipping involved anyway. I would much rather support local community if the price is comparable, but I just don't see that typically. You will pay a higher price plus the taxes from the local vendor in most cases.

over 4 years ago

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