Federal judge upholds North Carolina’s right to pursue online retailers for uncollected sales tax

A federal judge has blocked North Carolina’s attempt to force Amazon to turn over customer names and addresses to state tax officials. The judge found that, because North Carolina’s Department of Revenue already possessed information on specific items purchased, turning over customer names and addresses would violate Amazon’s customers’ First Amendment right to freedom of expression.

Clearly this is a big win for consumer privacy. The court agreed with Amazon’s claim that the Department of Revenue’s request for all information on Amazon’s sales to North Carolina residents violates the First Amendment, as well as the Video Privacy Protection Act.

However, the decision also upholds North Carolina’s right to compel Amazon to remit sales tax—so the relief it offers to Amazon is limited. As the judge wrote, the ruling “cannot be interpreted [as granting] Amazon a free pass from complying with any valid tax law of North Carolina or elsewhere.” In addition, the court’s decision leaves the Department of Revenue with the ability to make similar future requests for information from Amazon or other out-of-state retailers.

This ruling could add significant momentum to the movement already underway to enact federal legislation—the Main Street Fairness Act (HR 5660)—that would allow states to require out-of-state retailers to collect sales tax. Federal legislation is becoming necessary to curb the growing complexity of state-by-state efforts to collect sales and use taxes. Recent state efforts include: Colorado legislation that requires some out-of-state retailers to report consumer purchases to the state, Texas’s recent assessment to Amazon for $269 million in uncollected sales tax, and notices that Alabama sent to some consumers in September for use tax owed on online purchases.

The Main Street Fairness Act would require all merchants to collect sales tax based upon the simplification and streamlining measures already established by 44 states. For merchants concerned about the burden of collecting sales tax in every tax jurisdiction across the country, our TaxCloud service is certified to meet the requirements of the Streamlined Sales Tax initiative.

We have designed TaxCloud to be easy-to-implement, and it’s completely free for all merchants. It enables any merchant to immediately begin calculating and collecting accurate local sales tax for every jurisdiction in the country. In addition, for the 23 current Streamlined Sales Tax states, TaxCloud can also prepare sales tax returns and automatically remit sales tax proceeds without any additional effort by the merchant.

North Carolina’s motivation in pursuing the collection of sales tax is clear. According to the National Conference of State Legislatures, the state will lose over $160 million in uncollected sales tax revenue on e-commerce sales in 2010, a number that is expected to rise as customers continue to buy more goods and services online.

As the majority of states face budget shortfalls in 2011, we expect more and more attempts by states to collect the sales tax due on online purchases. Federal legislation, in conjunction with the technology available for free from FedTax.net, would make it unnecessary for states to act individually to collect much-needed sales tax revenue.

One Response to Federal judge upholds North Carolina’s right to pursue online retailers for uncollected sales tax

  1. […] itself filed a similar suit against North Carolina. As we blogged about the ruling in that case last October, the decision was not a clear victory for Amazon. The court […]

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