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Tuesday, April 20, 2010

North Carolina Demands Customer Info; Amazon.com Sues

Reasonable tax policy or Big Brother? That's what a federal judge in Seattle will have to decide. North Carolina has ordered Amazon.com to turn over 50-million-plus purchase records so state tax agents can determine which South Carolinians bought what and perhaps did not pay the required 5.75% use tax. Amazon.com finds the idea of government looking through records of what you buy and read objectionable.

CNET's Declan McCullagh cites some relevant case law and federal statute:

In a 2002 decision, the Colorado Supreme Court ruled that the First Amendment protects "an individual's fundamental right to purchase books anonymously, free from governmental interference." The justices tossed out a subpoena from police to the Tattered Cover Bookstore asking for information about what books a certain customer had purchased.

And in a 2007 case, federal prosecutors tried unsuccessfully to force Amazon to identify thousands of innocent customers who bought books online, but abandoned the idea after a judge rebuked them. Judge Stephen Crocker in Wisconsin ruled that "the subpoena is troubling because it permits the government to peek into the reading habits of specific individuals without their prior knowledge or permission."

In addition, a federal law called the Video Privacy Protection Act makes it illegal for anyone selling movies to disclose customer information to anyone, including state tax collectors. The 1988 law specifically covers "prerecorded video cassette tapes," and also sweeps in "similar audio visual material" such as DVDs and Blu-ray discs [Declan McCullagh, "Amazon Fights Demand for Customer Records," CNET News, 2010.04.19].

The current Republican administration in South Dakota has often trumpted the idea of increasing the taxes you pay by applying sales tax to your online purchases. Complications like this have kept the state from making any real progress on that front.

But given our attorney general's penchant for advocating lost causes in court, perhaps he'll submit an amicus curiae brief for the North Carolina Department of Revenue.


  1. I don't have a link, but an article explained recently that South Dakota is losing as much as $50 to $100 Million a year in sales tax revenue from internet sales. Wouldn't that pretty much cover our state deficit?

    When I bought my Dell Computer online, I was pleasantly surprised that Dell charged South Dakota sales tax. I'm hoping they submitted the tax to our state.

    Would it be so hard, rather than relying on the honesty of taxpayers to remit use tax on their online or out-of-state purchases, for our legislature to simply require online companies doing business in South Dakota to collect sales tax and remit it to our state? Computers of the online companies are already programmed to make the move.

    After all, if you buy clothing at Kohl's.com or JCPenney's.com or Target.com and have it shipped to your home, shouldn't sales tax be collected upfront and remitted to the state? It seems like an easy fix to a massive problem that isn't going to get smaller.

  2. The state does have rules requiring all public agencies (including schools, as I learned at Montrose) to do business only with vendors who are on a certified state list of folks who play by our tax rules. That doesn't collect money directly, but it's a reasonable step toward enforcement.

    One thing I've noticed: a couple of vendors have tried overcharging me. They assign 6% tax based on my ZIP, even though I live in the country and, by taking possession from the UPS man in my driveway outside of city limits, owe only 4%.

    Some numbers: in 2009, our state's total taxable sales were $16.1 billion. Nationwide, online retail sales made up 6% of total sales. If we assume a similar ratio for South Dakota consumers, then that $16.1B is 94% of our total retail purchases... meaning there'd be about $1B of Internet sales waiting to be taxed. I don't know how much of that the state is already collecting from honest dealers like Dell, but 4% of that total online sales amount would be $40 million. That would pay a lot of teachers.

    It would also be an increase in your taxes.

  3. Cory . I am not sure how much it has to do with Dell being honest, as much as it has to do with the law. In the Supreme court case Quill v. North Dakota, the courts ruled that a business that does not have a physical presence in the State is not subject to collect the tax, but one that does, is.

    Many States require the purchaser to pay the tax through different instruments, mostly the State income tax system, Of course this would be difficult in South Dakota , because there are so few instruments of taxation compared to other states. However there is nothing stopping the honest consumer from paying the correct tax to the state.
    I think that North Carolina is getting a bit to big brotherish in their zeal to collect the tax, here is something "real" for all the constitutionalists to scream about.

  4. Goldman: Kohl's .com JCpenny.com and Target.com are already collecting the tax

  5. Cory, I don't think it would be an increase in our taxes because we're supposed to be paying use tax, by law, on those out-of-state purchases already. Right now it is pretty much the honor system, which obviously has faults.

  6. That depends on how you define "tax increase." Enforcing existing tax code isn't a new tax. It's not an increase on the statutory rate.

    But practically speaking, enforcing that tax code takes money out of citizens' pockets and puts it in the hands of government. The government has the authority to enforce its tax code and collect that money, just as it has the authority to increase tax rates and collect a comparable amount of money by other means. Are the economic impacts of an increase in revenue through enforcement any different from the economic impacts of an increase in revenue by other means?

  7. The main blocks for online out of state tax collection has always been the burden to small business of having to collect taxes for every tax district in the country and then submitting those taxes. A solution would be for a national program that simplified this process for the collector, and there are many good ideas out there. However they have a hard time going anywhere as Amazon and Ebay lobby heavily against anything like this, and for some reason there just hasn't been the political will to do it.


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