Taxpayers have won an important first-round victory in thebattle against taxing Internet sales.
Late Monday, a U.S. district court judge in Seattle ruled that the First Amendment of the U.S. Constitution forbids state tax authoritiesfrom knowing what goods customers purchase from online retailers. At issue wasan effort by North Carolina to require online retailers to report the names,addresses, and purchases of their customers so that they could collect salestaxes from the transactions. Amazon, which filed the lawsuit challenging theeffort, successfully argued that such “data demands would make customers thinktwice about buying controversial products” when they purchase books, movies,and music.
Across the country, states starving for tax revenue, yetunwilling to reduce spending, have gone after out-of-state online retailers.The states claim that the out-of-state retailers have an obligation to collectsales taxes on purchases with their citizens. But not according to a 1992 U.S.Supreme Court case, which says that retailers are not required to collect astate’s sales tax unless they have a physical presence within the state.
Despite the Supreme Court’s ruling, several states, namelyNew York, Colorado, and North Carolina, have zealously sought to collect taxesfrom out-of-state online retailers through creative schemes commonly known as“Amazon laws.” Basically, these laws require out-of-state retailers to collecttaxes because they have in-state affiliates, which are websites that link tothe retailers. Other variations of Amazon laws require the retailers to reportpurchases to the state or send notices to customers that they owe sales tax.Online retailers have shut down their affiliates programs rather than meetthese burdensome requirements. What these Amazon laws have done is cost the staterevenues because without the affiliates, there is no business activity for thestates to tax.
This case is an important victory for taxpayers. Not onlydoes it protect Internet commerce from tax revenue-hungry states, but it alsoensures the right to privacy in online shopping. But it is only a first step.Appeals will likely follow. There are also other states considering similarlaws. Stay tuned. Rest assured, NTU will be watching these cases closely.