Wednesday, April 21, 2010

North Carolina, Amazon, Taxes, and Personal Privacy

My home state of North Carolina, never a state to allow a penny of potential tax revenue to go uncollected, is one of a dozen or so states that requires citizens to disclose the total dollar amount of out-of-state purchases made each year (e.g., catalog and Internet purchases) and pay sales tax on those purchases via the annual state tax return. While it's the law in NC, it's a voluntary disclosure since the state has no way of tracking one's purchases. The lady who does my income taxes every year says I'm one of the few (maybe the only one) of her clients who ever discloses their out-of-state purchases; most NC residents ignore the requirement and don't pay the taxes.

The trend identified by my CPA must be irritating the NC authorities and they are taking steps to find out exactly what NC residents purchase. Recently, NC tax officials journeyed to the headquarters of in Seattle and demanded that Amazon provide full details on nearly 50 million purchases made from by NC residents between 2003 and 2010.

To their credit, Amazon told 'em to stick it -- and filed a lawsuit this past Monday to block the NC demand on the grounds that it violates the privacy and First Amendment rights of Amazon's customers.

As most people have discovered, if an online retailer has a presence in a state (e.g., Wal-Mart, Target, and many, many others) the retailer is required to collect sales tax when a purchase is made online at the company's web site, just as tax is collected when you make a purchase in the local store. But Amazon has no such presence in NC. Amazon's referral program, which allows people with web sites or blogs to collect a small referral fee for purchases made via a referral from a web site, was discontinued by Amazon in NC in 2009 when the NC State Legislature passed a law forcing Amazon to collect sales tax on referrals coming from within the state. Again, Amazon told 'em to stick it -- and discontinued the referral program in this state. (Thanks, NC -- way to promote commerce.)

Time will tell who will win the current battle between Amazon and NC. But it is a sign of the times. Cash-strapped states are going to do whatever it takes to dig deeper into citizens' pockets for their loose change. NC is not alone in this -- Colorado has already enacted a law requiring online retailers to disclose the total dollar amount of purchases made by its citizens (but not the details of the purchases).

You can read the details of this developing trend here at

[So as not to appear naive, I'm the first to acknowledge that the Internet has provided a free lunch for consumers for the last decade by allowing purchases to be made without paying local and state sales taxes. States have lost hundreds of billions of dollars in revenue they would otherwise have received. The Internet has been a disruptive innovation (to paraphrase Harvard's Clayton Christensen) which demands a solution in terms of the sales tax revenue gap. But the heavy-handed approach of North Carolina to Amazon -- "We demand to know who has purchased what from your company!" -- is unlikely to be the solution. Colorado's approach -- total purchase figures without details -- seems more reasonable. The bottom line is that the decade-long free lunch for consumers is coming to a close. If you live in a state that does not currently require your online purchase information, I would start stocking up now. The days of tax-free purchases are numbered.]

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