The Courts Rule on the 'Amazon Tax'
Confronting privacy and "nexus" issues, courts in several states have handed down new rulings in an escalating battle with online retailers to tax Internet transactions.
The so-called "Amazon tax" is in the news again: North Carolina, Colorado, New York and Texas continue to pursue Amazon and other online retailers in an effort to force them to collect sales taxes for online purchases.
Court Rulings on Privacy
Last month's newsletter was taken up with North Carolina's recent attempt to urge online state retailers who are affiliated with such sites as Amazon.com, to voluntarily report and collect sales taxes on purchases their customers make. As noted in that article, North Carolina was being challenged in court by Amazon on the grounds that the state was asking for information about what books, films and music customers were buying. Amazon contended North Carolina's data demands would make customers think twice about buying controversial products and should be declared unconstitutional. The ACLU got involved in the case -- on the side of Amazon.
A ruling came down a few weeks ago in Seattle, and the decision went to Amazon. A U.S. District Judge ruled that the First Amendment forbids state tax collectors from knowing what taxpayers are buying. "Citizens," the judge ruled, "are entitled to receive information and ideas through books, films and other expressive materials anonymously."
The North Carolina Department of Revenue says it does not want the details of purchases, just "basic information" needed to collect state and local sales taxes. "This case has been twisted into something it is not," says spokeswoman Beth Stevenson. "The North Carolina Department of Revenue wants to collect the sales tax that is due to the state and nothing more." North Carolina is reviewing the judge's decision and its options. Will the state challenge the ruling? "The decision to appeal," Stevenson says, "has not been decided at this time."
A similar scenario is playing out in Colorado, which has a law requiring Internet retailers to tell Colorado residents that their purchases may be subject to sales tax. The law allows the Colorado Department of Revenue to ask out-of-state Internet retailers with annual revenues of $100,000 or more to supply customer information for individuals who buy more than $500 in a year from the company. Colorado's Department of Revenue isn't asking for detailed purchases -- just a total amount purchased.
The Direct Marketing Association (DMA), which represents the industry, filed a federal lawsuit against Colorado, arguing as Amazon did against North Carolina, that disclosure of customers' online purchases is an unconstitutional invasion of privacy. DMA claims that even the request for total purchases -- and not something as specific as itemized lists -- violates First Amendment protection, because the names of some online companies and interest groups can suggest overt religious or political or expressive affiliations. For example, if someone buys books from, say, the Communist Party, it won't matter if the names of the books aren't listed.
Because these cases center on the privacy rights of Internet users, it's unclear what effect the Seattle court ruling will have on other states' Internet sales tax laws. New York, for instance, does not ask specifics about purchases. It simply targets online retailers that are located outside the state and do not collect the sales tax that is due on sales to in-state customers. The law relies on the fact that many such out-of-state retailers enlist independent in-state websites known as "affiliates" to promote sales. In round one, Amazon sued New York and lost. Last week, the intermediate court of New York handed down its long-awaited Amazon tax opinion in Amazon.com, LLC v. New York State Department of Taxation and Finance.
Thirteen months in the making, the court's ruling referred the case back to the trial court in order to shed more light on key unresolved issues, including how significant the affiliates are for Amazon's operations in New York and whether the affiliates actively solicit for business. Amazon says that affiliate referrals represent 1.5 percent of their sales in the state. The court, however, wants more information to determine whether that is significant. The ruling points out in a footnote that a high dollar figure could be significant regardless of proportion.
The Court also ruled that advertising does not create nexus but noted that the challenged law would be valid if "a New York representative uses some form of proactive solicitation which results in a sale by Amazon, and a commission to the representative; and the representative has an in-state presence sufficient to satisfy the substantial nexus test."
The case is likely to be appealed to the Court of Appeals, New York's highest court.
Texas is also taking on Amazon, not with a new law but with an audit over state claims that Amazon owes it four years' worth of sales taxes, or a total of $269 million. The audit has been in the information-gathering stage for several months, but after that process, the matter could go to an administrative hearings process, says Allen Spelce, spokesman for the Texas Comptroller of Public Accounts.
Texas has a "nexus" ground for its claim: Since at least 2006, Amazon has had a distribution center in Irving near the Dallas/Fort Worth International Airport. An Amazon spokeswoman, Mary Osako, said in a statement that the company's warehouse in Texas "is an affiliate, but not subsidiary, of the Amazon retailing entity."
Texas doesn't see it that way. Spelce says the state believes "Amazon is no different than the mom-and-pop store on the corner. If you do business in the state of Texas, you should be required to pay sales tax[es], along with all the other businesses in the state."
Texas is also targeting other online retailers that may also have a physical presence in the state.
The underlying ground for all these "nexus" cases is, of course, the 1992 U.S. Supreme Court ruling Quill Corp. v North Dakota. That case held that a state cannot force a company to collect that state's sales taxes from consumers, unless the company has either property or employees in that state. The ruling also told the states that sales taxes couldn't extend beyond state lines because they were too complex. The Streamlined Sales Tax Project has worked to make state sales-tax systems simpler, and is using that simplification effort to try to win congressional authorization for states to extend the reach of their sales tax to remote sales (for example, Internet and catalog sales).
The Streamlined Sales Tax Governing Board is not pinning all its hopes on a congressional solution. It is looking into the possibility of challenging Quill in another court case if Congress does not take action.