How North Carolina Overreached in Its Sales Tax Battle With Amazon


The Great Recession has turned state budgets into deficit disasters, while the coming election has made raising taxes, or imposing new ones, politically impossible. So, governments are trying something they should have done all along: do a better job of collecting the taxes they already impose.

One big target is Amazon (AMZN) and the sales taxes states don't collect on the goods it sells and ships to their residents. Although sales taxes are due from residents on all purchases, Amazon and other retailers collect and give them only to states where the companies have sufficient presence to be bound by state laws requiring them to do so. States have long complained that online retailers like Amazon use that tax rule as a competitive advantage over bricks-and-mortar stores while making it easier for their residents to avoid paying sales tax.

But as states target Amazon, they'll have to do better than North Carolina has.

Drawing the Line on Disclosure

North Carolina went after Amazon last year, officially seeking information about its sales in the state that would let the government calculate how much tax Amazon itself owed. In response, Amazon gave North Carolina very detailed information about its in-state sales, including the precise products sold, down to the titles of books and videos.

Citing the First Amendment, however, Amazon didn't include the names and addresses of the North Carolina residents who made the purchases. Amazon rightly claimed it wasn't the government's business what its citizens read or watch. Nor was that information necessary to collect tax from Amazon, so the state should have been happy. Indeed, not disclosing that info was to Amazon's disadvantage, because without it Amazon can't claim potential tax reductions and would face a higher tax bill.

But North Carolina wasn't happy, because it also wanted to collect sales taxes from its residents who made the purchases. So the state went to court, demanding that information. Amazon, joined by the ACLU, fought back, again citing the First Amendment. And it won -- but only a limited victory. As the district court explained:

"The Court is aware of the sensitive nature of this case. [The court's ruling that Amazon doesn't need to give North Carolina the information it asked for to date] is of limited scope and cannot be interpreted to grant Amazon a free pass from complying with any valid tax law of North Carolina or elsewhere....

[The ruling] does not prohibit [North Carolina] from issuing a new request for information as to only the names and addresses of Amazon's customers and general product information, assuming that [North Carolina] destroys any detailed information that it currently possesses.

Sponsored Links

In short, North Carolina, if you want to collect sales tax from your residents, ask for the information you need, but only that information. But if you want to spy, forget about it.

North Carolina isn't the only state to go after Amazon. As DailyFinance's Sarah Weinman reports, Texas just sent Amazon a $269 million tax bill. And surely more such bills and data requests will come Amazon's way. As they should. Governments should make sure they collect every penny of tax they're already due before they contemplate new levies.

Get info on stocks mentioned in this article: