Amazon and North Carolina continue battle over Internet sales tax collection

April 21, 2010

The tax collection battle between Amazon and the State of North Carolina has heated up again, with America’s largest online retailer filing suit to block a demand to turn over customer records.

Filed in the United States District Court Western District of Washington at Seattle, AMAZON.COM, LLC v. KENNETH R. LAY, in his official capacity as Secretary of the North Carolina Department of Revenue, sets out to block the demand for the “name and address of virtually every North Carolina resident who has purchased anything from Amazon since 2003, along with records of what each customer purchased and how much they paid.”

Amazon is asserting the “privacy and First Amendment rights of itself and of its customers” in the suit, claiming the information requested is not necessary to determine if Amazon is collecting any taxes required from North Carolina residents. Without a presence in North Carolina, my understanding is the online giant wouldn’t need to collect any sales tax on these purchases. This was the motivation to cancel the Amazon Associates program, as I wrote about last summer.

The obvious motivation for North Carolina DOR to request the sales details so the State can go after the customers directly. For the last few years, the State has conducted a voluntary collection of sales tax on Internet purchases through a question on annual income tax filings. I’m sure DOR officials (legitimately) believe Internet purchases are underreported, and Amazon’s records would allow the state to compare individual’s online order records with their tax filings.

What the Department of Revenue would do with this information, if attained, should be of interest to consumers. While just knowing the State has access, may make tax filers more inclined to acknowledge purchases on future income tax returns, would the state conduct an audit, and levy back taxes against those who did not accurately report their purchases?

As much as Amazon is making this out to be about privacy, while this may be a factor for some purchases, in the whole, it is likely just down to dollars and cents. One advantage Amazon holds over purchasing from a North Carolina based retailer is not charging sales tax. The roughly six to eight percent (depending on the year and county the order was placed from) makes a difference to many shoppers, especially on big ticket electronic items that Amazon is now a popular source for—having moved beyond being simply a book seller years ago.

With many states in addition to North Carolina hurting for revenue, this may only be the start of a national trend, the final results of which may need to be settled by Congress, if not by the courts.

For those interested in the details of the fourteen-page action, the heart of the matter is outlined in the Nature of the Action below:

Nature of the Action
  1. The North Carolina Department of Revenue (the “DOR”) is demanding that Amazon turn over the name and address of virtually every North Carolina resident who has purchased anything from Amazon since 2003, along with records of what each customer purchased and how much they paid. If Amazon is forced to comply with this demand, the disclosure will invade the privacy and violate the First Amendment rights of Amazon and its customers on a massive scale. But the DOR does not need personally identifiable information about Amazon’s customers in order to audit Amazon’s compliance with state tax laws. All it needs to know is what items Amazon sold to North Carolina customers and what they paid, and Amazon has already provided that information to the DOR.
  2. Accordingly, Amazon seeks a declaration, pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201 – 2202, that the actions of officials acting on behalf of the DOR, at the direction of the Defendant Kenneth R. Lay (“Defendant”) in his official capacity, violate the United States Constitution, the Washington State Constitution, and federal law.
  3. The DOR is auditing Amazon’s compliance with state sales and use tax laws. To date, Amazon has cooperated fully with the audit, providing the DOR with voluminous information about its sales to North Carolina, including, for each transaction: the order ID number; the city, county, and zip code to which the item was shipped; the total price for the transaction; the date of the transaction; and Amazon’s standard product code for each item (known as the Amazon Standard Identification Number or ASIN). With these product codes, the DOR is able to immediately find on Amazon’s website the full description of every product purchased by Amazon’s North Carolina customers since 2003 — nearly 50 million items in all.
  4. Notwithstanding the information that Amazon has already provided, the DOR now threatens Amazon with an administrative summons and summary contempt proceeding if Amazon does not turn over the name and address of each customer who purchased or received any of the millions of books, movies, music CDs, or other products that Amazon sold to North Carolina customers.
  5. The DOR does not need personally identifiable customer information to audit Amazon’s compliance with applicable tax laws, and Amazon opposes the DOR’s demand for information that is irrelevant to that audit. Amazon, without violating its customers’ privacy, fully cooperated by furnishing data requested by the DOR to conduct its tax analysis. But the DOR has no business seeking to uncover the identity of Amazon’s customers who purchased expressive content, which makes up the majority of the nearly 50 million products sold to North Carolina residents during the audit period, let alone associating customers’ names and addresses with the specific books, music, and video content that they have purchased during the past seven years.
  6. There is no allegation by the DOR that any of the products Amazon customers purchased is in any way unlawful. Rather, the identities and expressive choices of these customers have become subject to government scrutiny only because those products were purchased from an out-of-state retailer. The DOR’s actions threaten to chill the exercise of customers’ expressive choices and to cause Amazon customers not to purchase certain books, music, movies or other expressive material from Amazon that they might otherwise purchase if they did not fear disclosure of those choices to the government.
  7. Amazon asserts the privacy and First Amendment rights of itself and of its customers so that Amazon may sell — and customers may read, hear or view — a broad range of popular and unpopular expressive materials with the customers’ private content choices protected from unnecessary government scrutiny. This privacy concern is even greater for public figures who have purchased items from Amazon, because their purchase histories may generate significant political or press interest or otherwise be made public.
  8. Amazon seeks a declaration that the DOR’s ongoing demand for information that will disclose the names, addresses and purchasing habits of Amazon’s North Carolina customers violates the rights of Amazon to sell, and its customers to purchase, books, movies, music, and other lawful expressive content free from government intrusion into the customers’ reading, viewing and listening choices. These rights are secured under the First Amendment of the United States Constitution, Article I, sections 4 and 5 of the Washington State Constitution, and federal law. The DOR’s demand for the identity of customers who purchased video material also violates the Video Privacy Protection Act of 1988, 18 U.S.C. § 2710. Declaratory relief from this Court is necessary to avoid piecemeal litigation or inconsistent rulings in the event other states make similar demands for customer data.

Would the situation have been different if North Carolina had requested a limited set of customer records, and restricted the information to only order totals, dates, and item categories (such as book, DVD, computer, etc.), seeking the records as evidence of tax evasion? While I’m not a lawyer (nor even play one on TV), I guess it is not surprising to read forum posts and blog comments related to this story, with posters being not at all ashamed to admit to avoiding (evading?) NC state sales tax.

Unfortunately, in the end the winners will likely be the Internet retailers, and not the consumers who save a bit by ordering online. States need revenue to pay for public services that most or all of us consume. Unless consumption is reduced (which is another argument all together), a reduction in the volume of local sales will need to be made up some way, and that will likely be an increase in the local sales tax rate. This just sets up a spiral, as more consumers move their purchases online, forcing even higher sales tax rates. Even if the rates don’t increase, the Internet sales will likely come at the expense of local vendors, who are experiencing difficult enough times, without the “unfair” disadvantage of having to compete in price with companies like Amazon that are fighting not to have to collect sales tax.