Tuesday, June 21, 2011

North Carolina Drops Lawsuit Against Amazon

You probably are aware that online vendors – such as Amazon – do not charge sales tax to customers outside their home state. You also know that this has created much the controversy with the states, ever eager to tax to anything that moves within their borders. To be fair, if a person went a sticks-and-bricks store to purchase an item, the transaction would be sales taxable. It is the intermediation of the internet that presents the problem. And it is a problem. For example, I recently purchased an item from Britain. Would it be reasonable for that vendor to charge me Kentucky sales tax, as I live in Kentucky and the transaction would otherwise go untaxed?

Take a start-up company, say Hamilton Educational (HE). HE makes and sells educational accounting videos of captivating content and quality. HE sets up a little website; its fame spreads; soon its videos are in intense demand and sold to every corner of the country. Is it fair, or even practicable, for HE to monitor its sales tax obligation to every state in the nation? What is the cost of this compliance? Does this cost outweigh any benefit to (name) the state? Has HE died before its birth, unable to comply with the administrative burden of its successful business model?

Enter North Carolina (NC). NC went after Amazon, requesting records of Amazon’s transactions with North Carolina residents. Think about this for a moment. The state is forcing a company to release its records about you. You are not involved in the litigation; heck, you are not even aware of the litigation. The privacy concern here is staggering.

The American Civil Liberties Union joined in a lawsuit against NC, and very recently NC settled the case. The state agreed to pay almost $100,000 in legal fees and ceased its action, but it reserved the right to go against Amazon and/or its customers in the future.

North Carolina had previously gone after Amazon for sales tax on the argument of economic nexus. This means that a company has “nexus” with a state if it derives a financial benefit from commercial transactions within that state. This is an interesting argument, in that a variation of that argument would subject me to New Zealand taxes for ordering the Lord of the Rings video trilogy. In Amazon’s case, NC argued that the economic nexus was provided by the affiliates, which are blogs or other online sites that provide links to products and/or offer coupons. I listen to online radio, for example. If a particular song captures my ear, I can click on the site, find out the artist and likely have a link to purchase the artist’s CD. That is an example of an affiliate.

Amazon cut its ties to its North Carolina affiliates in response.

North Carolina continued to chase Amazon for taxes before those affiliate ties were severed, resulting in the settlement mentioned above.

Do you see any winner in this story?

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