E-Commerce Tax Explodes into Privacy Rights Battle

Published May 24, 2010

Efforts by Colorado and North Carolina to tax Internet sales have sparked a firestorm of bipartisan criticism.

Right-leaning groups calling the idea a tax-grab that violates the U.S. Constitution’s Commerce Clause are joined by left-leaning organizations criticizing its alleged violations of First Amendment privacy rights.

The storm started building in February when Colorado lawmakers shuffled through a package of tax increases that contained a seemingly benign but controversial way of forcing consumers to pay tax on online purchases. House Bill 1193 required out-of-state retailers to provide the state’s Department of Revenue with detailed customer information so the state could target those residents and force them to pay up.

Demand for ‘All Information’
Shortly after, North Carolina followed Colorado’s lead but without passing legislation. Instead, the state’s Department of Revenue sent letters demanding select out-of-state retailers provide “all information” about North Carolina customer purchases dating back to 2003. This included each consumer’s name, address, product/item code for each item that was purchased, a detailed description of the purchase, and other information.

After North Carolina requested the information, Jennifer Rudinger, executive director of the state’s American Civil Liberties Union chapter, declared “it is unconstitutional and wholly unnecessary for the NCDOR to gain access to private customer records.”

Internet retailer Amazon.com then filed a lawsuit against the state. The North Carolina Department of Revenue quickly backpedaled, rescinding some of its original information requests.

Questionable Legality
In Colorado the law was passed despite a 2002 ruling by the state’s Supreme Court that the First Amendment ensures “an individual’s fundamental right to purchase books anonymously, free from governmental interference.”

The so-called “reporting requirements” bill might also violate the Commerce Clause of the U.S. Constitution and U.S. Supreme Court precedent established in Quill v. North Dakota. In that case the court found a state can only force a retailer into collecting sales taxes if the company has a physical presence in the state, also called a nexus.

The Colorado law presumes nexus exists if a company is part of a “controlled group of corporations” with any other one of those businesses having a presence in Colorado. The law allows the state to subpoena and fine online retailers for not providing consumer information.

‘Incredible Overreach’
“It’s an incredible overreach that is completely unenforceable,” said Colorado State Senator Kevin Lundberg (R-Berthoud). “It’s a heavy-handed reach into Colorado citizens’ private lives.”

Lundberg led a legislative fight in April to repeal Colorado’s reporting requirement bill, but his measure was ultimately rejected.

As in North Carolina, a lawsuit appears inevitable in Colorado. The Direct Marketing Association (DMA) has already begun activating its members to file a preliminary injunction.

“This will place an amazing burden on businesses, will interfere with interstate commerce, and will provide the government with a purchase portfolio for all customers who have goods shipped to Colorado,” said Jerry Cerasale, senior vice president at the DMA.

Lundberg agrees, noting that during the General Assembly’s debate, “we discussed legal action and expect it to occur.”

Another Dubious Tax
The Colorado and North Carolina efforts sprang from another possibly unconstitutional measure: The affiliate nexus (or “Amazon”) tax. First passed in New York state in 2008, it requires an out-of-state retailer to collect the state’s sales tax if the company advertises on in-state Web sites. Concerns that the measure violates the Commerce Clause led to an ongoing lawsuit in the Empire State.

The nexus tax movement gained some additional traction last year, with laws passing in North Carolina and Rhode Island. However, it received increased criticism following this short-lived string of successes. Critics note it causes online retailers to sever their ties with in-state advertisers to avoid collecting the tax.

The laws also mean a significant loss of profit for thousands of bloggers and small online businesses who work as affiliated advertisers, which means the state loses tax revenue on the lost income. Hawaii Gov. Linda Lingle (R) and California Gov. Arnold Schwarzenegger (R) stated this concern when they vetoed nexus bills in their states last year.

The affiliate nexus tax movement appears to have lost steam, though the Colorado-style reporting requirement bill still has some legs in California and possibly Tennessee.

Kelly William Cobb ([email protected]) is executive director of Americans for Tax Reform’s Digital Liberty Project and www.StopETaxes.com.