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The taxing fight between North Carolina and Amazon [UPDATED]

April 20, 2010 |  1:35 pm

Amazon Nobody wants to be harassed by a tax collector, but we all have an interest in the Internal Revenue Service and states effectively enforcing the tax laws. The IRS estimates that individuals and businesses dodge nearly $300 billion in federal tax bills annually -- more than twice the amount needed to pay for the new health insurance subsidies. States fail to collect more than $20 billion annually just in sales taxes. [Two noted economists challenge that estimate; see update below.] Every dollar owed but not collected winds up being taken from someone who is complying.

With that in mind, I found myself actually rooting for North Carolina in its battle to force Amazon.com to disclose what North Carolinians bought from 2003 to 2010. Admittedly, the state isn't exactly doing the right thing on this issue. Its records request probably violates the federal law protecting the confidentiality of video purchases, as well as the 1st Amendment's protections for speech, as CNET's Declan McCullagh points out. But McCullagh glosses over the central issue here, which is that states impose taxes on every purchase of nonexempt items, whether online ("use taxes") or in a local store ("sales taxes"). North Carolina's invasive demand for documents is aimed simply at making people pay what they owe.

Amazon has been, umm, less than helpful to the states on this point. In a pair of rulings that predated the Web, the Supreme Court held that mail-order merchants aren't compelled to collect taxes in states where they did not have a physical presence. These rulings have led Amazon, like many other online merchants, to offer tax-free shopping to customers in most states -- a distinct competitive advantage over the local stores who have no choice but to collect the taxes. And when lawmakers in North Carolina and a handful of other states declared that online merchants established a local presence merely by paying commissions to websites located within the state's borders, Amazon terminated its affiliate sales program in those states.

Yet as unfair as it may be for Amazon to avoid sales-tax collections, I don't see how states can level the playing field without creating new problems. Consider what Colorado is doing. A law passed this year requires online merchants to send customers in the state an annual report showing what items they purchased that are subject to state use taxes, prodding them to pay up on their annual tax forms. To help enforce compliance, the merchants would also have to disclose to the state each customer's total amount in taxable purchases. That's less intrusive, but even aggregated disclosures pose a threat to privacy -- for example, revealing that someone shopped at an adult book store discloses sensitive personal information. The new requirement could shift the advantage back to local stores, which don't reveal who their shoppers are when they submit sales tax receipts.

The right approach is for Congress to let states require online merchants to collect sales taxes, possibly through a uniform mechanism such as the Streamlined Sales Tax that 44 states are developing. The idea has bipartisan support on Capitol Hill, but not enough to become law -- at least not yet. That's probably because it looks like a tax increase, even though it isn't. It's an attempt to get people to pay what the law obligates them to pay. What's wrong with that?

Updated, 3:29 p.m. April 29: Jeffrey Eisenach of Navigant Economics and Robert Litan of the Brookings Institution weighed in today, bemoaning this post's use of "vastly inflated estimates of Internet sales tax revenue from the so-called Fox Study." They continue:

Advocates of Internet sales tax continue to tout the Fox Study estimates, despite the fact that these estimates are based on obsolete data, as well as a number of unrealistic assumptions.

We reexamined these revenue estimates taking into account the current online environment, and found that uncollected sales tax on e-commerce in 2008 was $3.9 billion — far less that the $20 billion estimate included in the column. To put it into perspective, $3.9 billion is less than three-tenths of one percent of state and local tax revenues.

Our study accounts for the growth of the “brick and click” retail model in which traditional retailers have substantial online sales and already collect Internet sales tax in the states in which they operate stores. In fact, 15 of the 20 largest Internet retailers collect taxes in nearly every state. That trend is continuing, suggesting that uncollected sales taxes will continue to decline relative to overall tax revenues.

It is understandable that states facing budget shortages are considering options to raise revenue; however it is vitally important that lawmakers know how much revenue is realistically at stake.

The "more than $20 billion" figure I cited came from the International Council of Shopping Centers, which didn't provide a source for its numbers. But its figures do seem to align with those in the Fox study.

Photo credit: Scott Eells / Bloomberg News

-- Jon Healey

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