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The taxing fight between North Carolina and Amazon [UPDATED]

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

 

Comments () | Archives (13)

The comments to this entry are closed.

Ken Vuncannon

How about everyone just gets taxed x percent of their income and leave it at that. This is quite ridiculous. The money we spend has already been taxed. It's taxed when we earn it, it's taxed when we put it to work for us, it's taxed when we spend it, it's taxed on an ongoing basis in ownership of property, it's taxed again when we die.

Collin

I'm an NC resident I and think it is despicable my state legislature is resorting to these type of tactics to rectify their budget shortfall. We are in this mess because they can't budget their way out of a paper bag, not because residents buy some items online and don't pay ANOTHER tax.

I worked full time last year and am expecting upwards of $2,000 in state tax refunds. As a current graduate student that amount of money is very significant as I can only work upwards of 15-20 hours per week while in school. I filed 5 weeks ago I have been told that I will have to wait on MY MONEY for up to an additional 8-12 weeks. Just another sign of incompetence.

It is a slippery slope. If they succeed with Amazon they will go after Ebay buyers from NC, then they will go after Ebay income earned by sellers from NC . If they do this I will probably owe over $5,000 in tax from my buying and reselling ventures to earn a little extra cash while I was in high school and undergrad. Thanks for kicking us when we are down NC.

Jon Healey

Umm, Collin? If you sold things for a profit on Ebay, as opposed to getting rid of things you bought and used or reselling new items at a loss, you already owe income taxes. You're a retailer, just like the folks who run the 7-11 down the street. Why *shouldn't* you pay taxes on that revenue (assuming your gross income was more than the taxable minimum)? And if you don't like the idea of having to pay use taxes, your problem isn't that North Carolina is trying to enforce its law. It's that it has the law in the first place.

Dori

It seems to me that NC's request is prohibited by the 4th Amendment to the US Constitution. "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized." This seems like a seizure of "papers and effects" to me.

Peter

Amazon is not in NC, nor has any form of presense there. It is not Amazon's duty to enforce NC tax laws. It is up to NC to ensure that it's population comply with sales and use tax reporting requirements. If NC buyers refuse to comply with their legal obligations to their own state run by those they elected, why is it amazon's problem. Jurisdiction. Amazon is not in NC. PERIOD.

Rapahel

Does the LA Times really think that demanding the complete, itemized purchases of all NC residents is okay? In effect, NC is on a fishing expedition and violating the privacy of ALL of its citizens in the hopes of catching some that didn't report all of their online purchases.

Where does it stop? Will NC sue every internet retailer for the list of everything purchased by everyone living in NC? I'm ashamed to live in this state and ashamed at the LA Times editorial staff for not recognizing police-state tactics when they see them.

Incidentally, if NC succeeds, these records become public records and then everyone in the world can know exactly what you've bought from Amazon over the last 7 years. Perhaps the LA Times editors would like to volunteer that information in a show of solidarity with NC.

It's coming to CA ...

Ronda b

There's a difference between state and federal tax. State taxes are for maintaining the state, particularly the infrastructure that occupants require. It's a stretcher to ask far away merchants to pay or even collect state sales tax. Are these merchants wearing down municipal infrastructures?
Arguments either way have validity, but they eventually digress to "taxes are too high" which is not relevant. If a persons purchases at the store down the street are private then 'splain how come it's different online? The government position of "we will tax you based on our calculation, not on taxpayer reporting"
is cockeyed. If that's how the IRS wants to handle it, let's do it that way for eeeeeverything.

Mike Moore

I'm also a NC resident. I like the article but I think a couple of misconceptions are worth correcting.

I don't shop on Amazon to avoid taxes. I shop on Amazon because local retailers simply don't have the items I want to buy. (Nor, in some book purchases, would it make sense to stock highly technical items)

I'd sooner pay sales tax than pay shipping since sales tax is undoubtedly cheaper.

I'm not against paying sales tax but I am against being the NC DOR's unpaid employee while I add up items and then compute the tax. There are already efforts out there for State governments to streamline this process and that collection of beauracratic retards has failed to accomplish anything.

My $0.02

Keith

I am an online retailer in SC. Do online shoppers owe Use Tax? In NC they do. As an online retailer, it is not my problem that NC has poor law to collect that tax. This is a consumer issue, not one for online retail.
NC DOR are going after the wrong people (business). You don't go after Amazon, you go after the payment arm of the company. Same with eBay; NC DOR needs to go after PayPal.
My solution is to have the Merchant Accounts (Amazon Payments, PayPal, Visa, MC, Google Checkout) collect the Sales (Use) tax @ point of sale, then remit those taxes directly to the State (States pay related fees). Privacy then would be as private as they are now when you purchase from a local store. It's a win-win. Buyers pay what is LAWFULLY owed, States get instant $$, and business is not burdened with extra paperwork (and believe me, that would be a huge savings)
Now I am just as anti-tax as the next guy. That said, what is owed is owed until you visit the voting booth. There is a simple solution to this tax mess. Problem is that legislators do not have the word 'simple' in their vocabulary.

Robert

How about this.

STOP SPENDING MONEY.

CUT budgets instead of taking the work of others to pay for more and more.

Look at it this way.

One NC resident buys a mixer off of Amazon.
That mixer costs $300/shipped.
He pays no taxes on it so the state loses out at most $20.
However.... His purchase employs the local fedex or UPS driver.
His purchase employs the oil company that fueled the UPS truck
His purchase employs the fuel delivery truck driver for the fuel tanks.
His purchase employs the person that processed his order at Amazon.
His purchase employs the person in the warehouse that packed his order.
His purchase employs the person that made the box his order shipped in.

On and on and on.

Now, if he only had 300 bucks to spend and he can't find the mixer he wants for that price in state or online due to taxes.... he won't buy it. Now not only does NC miss out on the sales tax, but all the people along the line that consume products on their own AND pay income tax.

The internet and internet sales have allowed people to continue with non-essential spending on goods BECAUSE they are tax free and prices get pushed down due to competition. Ruin that and not only will discretionary spending slow down, you will see prices in the store go UP because there will be no more competition with internet sales.

God forbid this VAT get put on, all discretionary spending will cease and then the states will be destitute and untold numbers of workers that keep the flow of good coming will be out of work.......

needing unemployment checks and there will be no money for that and the states will need more money and will try to increase taxes again to cover that.....

on and on and on.....

Brandon

Who wrote this? One of the morons in the government? We already pay over 50% of our income in taxes! How can you feel sorry for the government, federal or state.? Taxes should be reduced dramatically, and frankly any business or individual that fights back against the theft from the government is my hero.

How about getting rid of forced taxes all together? If the government doesn't provide people what they want efficiently then they shouldn't make money.

CancelRush

While NC goes after Amazon.com. The state of NC is the largest offender of this Law. All of our states Athletic departments have a managing company which handles the retail platform on their official Internet websites.

While proceeds go to the Non profit Athletic department much like I received as an affiliate member with Amazon, the managing company set up outside of North Carolina so they would conform to the old Law. Their FAQ section of their Internet Store explains clearly they do not have to charge Sales Tax in NC. they declare the have no physical address in NC even though they represent almost all of University Athletic departments in NC.....

The NC Amazon Tax Law changed all of that but I am sure NC will never address this issue with CBSSports.com since it would affect the politically powerful NC Athletic supporters....

With all of the National championships we have won over the years I am sure these official Athletic websites sold more product than Amazon could have ever imagined...

So NC continues to go after Amazon.com while NC is the largest recipient of revenue from non taxed Internet purchases and their partner is most likely a bigger offender of the Amazon Tax Law than Amazon....

Amazon Tax Law sponsor NC House Rep 35 Jennifer Weiss told me to go get a Walmart relationship when I mentioned losing Amazon would remove our product links to NC products. Since the law was passed I have found almost impossible for my NC websites to find NC products with an affiliate product link.... That shut me down and has made me one of the walking poor....

I was born in NC and had hoped to remain here until I died. I can not afford to move to another state and some carpet bagging lawmaker tells me to go get a Walmart affiliate relationship.... Now I discover the information and I am appalled.....

Russ

I have lived in NC all my life. This is not really about taxing or getting missed taxes. This is about spending, or rather overspending. The state has a thing where they must balance the state budget i.e., not spend more than they take in. In my 40+ years as an adult, over the years I have watched our legislators have excess tax monies at the end of many years and guess what they do? They went on a spending spree every time!

I hope this country continues to take everything they can until the place is a Detroit from Canada to Mexico.


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