Colorado ‘Amazon Tax’ Raises Privacy Concerns

Published April 10, 2010

Colorado’s new state Internet sales tax may not only diminish e-commerce in the state but also invade the privacy of residents who purchase goods online.

The law signed in March by Gov. Bill Ritter (D) requires online retailers to notify the state Department of Revenue of products consumers purchased and provide a tax purchases tally for each Colorado resident every year. These lists, which track what consumers purchase and from where, is sent to both the government and the resident.

Janice Alvarado, vice president of the Lakewood, Colorado-based Mountain States Legal Foundation, said Colorado’s way of collecting the Amazon Tax is an overreach because the state doesn’t “need to know everything.”

‘Stay Out of It’
“I don’t think this is the right thing to do,” Alvarado said. “The state should stay out of it.

“If [the law’s intent] is just to harass people or taking their time away from business at hand, I don’t think that’s a good idea,” she said. “It is certainly not for the better. Trying to figure out what people are purchasing and what they’re spending on it isn’t a good idea.”

Discouraging Online Commerce
Carl Tate, a former aide in the Department of Homeland Security in the Bush administration, says the law could discourage online commerce.

“I am fundamentally opposed to all tax increases because they lead to higher consumer costs and more regulation,” Tate said. “I believe imposing a sales tax on Internet purchases amounts to a tax increase, plain and simple.

“We’re in the midst of one this country’s worst economic downturns, and the solution should not be to burden consumers or businesses with yet another tax,” he said.

Invading Privacy
Braden Cox, policy counsel for Washington, DC-based NetChoice, expresses concern about the law as an invasion of privacy.

“We’re definitely trying to think of more angles on this tax. It’s not a tax, but a reporting regulation leading Colorado to collect the tax, and it definitely has a privacy issue,” Cox said.

“There’s a number of problems with it,” he added. “States are desperate for revenue right now, thinking of ever-more creative ways to go after untouched resources. A lot of people think the Internet and buying and selling online has been untaxed.

“They say, ‘Let’s tax it. Let’s think of some interesting way to go forward with that,’ ” Cox said.

‘Intrusive, Heinous’ Law
Donald W. R. Allen II, editor-in-chief of the Minneapolis, Minnesota-based Independent Business News, agrees with Cox’s evaluation.

“The tax that the state of Colorado has on Internet goods is intrusive, heinous, and borderlines on the equivalent of a corporate takeover of individual rights,” Allen said. “There will be no privacy for the individual and business, and it’s clear that all competitive mechanisms like the best price online will be colluded by the government.

“I strongly disagree with any type of tax on Internet-brought goods,” he added. “The companies that sell and the people who purchase already pay taxes.”

Supreme Court Precedent

Cox says U.S. Supreme Court precedent could put the Colorado version of the Amazon Tax into legal jeopardy. He pointed to the Quill v. North Dakota decision in 1992 as meaning it would take an explicit act of Congress to regulate Internet commerce—which is almost by definition interstate in nature.

“Fortunately, there is Supreme Court [precedent] out there that say it’s a burden on interstate commerce to require out-of-state sellers to collect and remit out-of-state sales tax,” Cox said.

“Basically, the test is: If you have a physical presence in a state, you have to collect tax,” he said. “Amazon has warehouse facilities in four states, and they collect sales tax if you live in one of those four states. Otherwise, they don’t collect, but you are still obligated by law to pay your state’s use tax.

“But there’s no way to prove what you owe for the use tax, so states like Colorado are trying to go after [online purchases] in a different way,'” Cox said.

Nebulous Nexus
Cox says the idea of “nexus”—the physical place one purchases a good—is becoming harder to divine in the digital age. That makes tax collection not only more complicated but constitutionally questionable.

“When you go to different Web sites, you’ll see ads—some of them from Amazon,” Cox said. “You’ll click on that link, and it’ll take you to that book. If you buy that book through the link on that blog, whatever that site was will get some money back.

“The state is saying those ads and links—because [Amazon pays affiliates] on a commission basis—are using a ‘sales force’ if this blogger happens to live in say, North Carolina or Colorado,” Cox said. “Those states are saying Amazon needs to collect and remit sales tax from every purchase North Carolina or Colorado residents made, because it has a nexus with the state.”

However, “Those companies rightly don’t think of their ‘affiliates’ as a sales force, but just a way of advertising the site,” he noted

‘Obnoxious’ Requirement
“A lot of states are passing these types of bills,” Cox said. “Colorado went with a hybrid approach. But there has to be a disclaimer that [residents] are obligated to pay a ‘use tax’ on Web-based purchases.

“Individuals have to file a report to the state on the total amount they bought online, and that’s the part that’s really obnoxious,” he added. “We’re getting the government involved with what people are buying, when, and from whom. That brings up serious privacy issues.

“And there is an increased cost for companies to notify consumers what they bought at the end for the year,” Cox said.

Krystle Russin ([email protected]) writes from Texas.