Capital Goods - June 2010

State tries to tame Amazon
By Scott Mooneyham

Last year, The Motley Fool investor website posted a piece entitled “Why Does North Carolina Hate Amazon?” The writer might have asked the question another way: Why does North Carolina love Walmart? Or Lowe’s? Or Mom and Pop’s Gas-N-Go? It’s because those brick-and-mortar stores collect sales tax from Tar Heel customers and dutifully remit it to Raleigh. But does trying to get Seattle-based Amazon.com Inc. to cooperate equal hate? I suppose you might see it that way if the state were trying to take away a competitive advantage you enjoyed over in-state stores.

In trying to make the big dog of Internet retail heel, the tax man seems to have made a political misstep — maybe even stumbling over the U.S. Constitution — when he demanded that Amazon hand over all customer records of North Carolina residents dating to 2003. Residents who shop on the Web are supposed to self-report the tax to the state. Few do. Amazon collects sales tax from residents of its home state of Washington and those in Kentucky and Kansas, where it has fulfillment centers, as well as New York.

Last year, North Carolina tried to use the Amazon Associates program, through which the Internet retailer pays local website operators and bloggers a commission for sales resulting from traffic they direct to Amazon’s site, as a shoehorn. A law passed by the General Assembly said those affiliates provided the means — what tax people call nexus — to go after the sales tax. Amazon responded by dropping the program in North Carolina. But by now, the tax man, egged on by the legislature and emboldened by similar efforts in New York and a few other states, was spoiling for a fight. He — Revenue Secretary Ken Lay — told his auditors to make Amazon hand over the customer records. If the company wouldn’t collect the tax, the state would use the information to make big purchasers cough up the back taxes on what they had bought.

Amazon filed a federal lawsuit to block the request, contending that the state’s demand was so broad that it violated First Amendment rights of the company and its customers. It contends that the state would be looking at book and movie titles individuals had bought, something that could have a chilling effect on Amazon’s business. The state doesn’t care what Tar Heels have been reading or watching, Lay says. It just wants its money.

Whether Amazon has a First Amendment case — is buying a book the same as writing one? — those who oppose taxation of Internet purchases have no shortage of arguments: Out-of-state Internet retailers don’t require state services, so why should they pay into a state tax system? The lack of a tax-collection mechanism has encouraged e-commerce, which has been good for the economy. Consumers who buy online leave a smaller carbon footprint by not driving to the local store. But those points ignore the financial pressure state legislators face as sales-tax bases erode as consumers shift to online purchasing. Last year, sales levies accounted for 28% of tax revenue collected by the state. Department of Revenue officials say the current effort aimed at Amazon and 350 other online merchants could bring in $162 million this year. The loss of sales-tax revenue in North Carolina because of unreported Internet sales might be three times that. Nationwide, states are losing between $5 billion and $20 billion in uncollected online taxes.

Amazon is finding no friends among the North Carolina political class due to another simple fact: It creates no direct jobs here. One of its biggest critics has been state Sen. David Hoyle of Gaston County. A Democrat, he has consistently ranked ahead of most Republicans in rankings of business-friendly legislators. “The Department of Revenue is going after them, and I’m for it,” he said last year.

When the agency went after bakers and cabinetmakers a few years ago in another sales-tax dispute, Hoyle lined up on the opposite side, filing legislation to protect the business owners. But those bakers and cabinetmakers, just like Walmart and Lowe’s stores, employ people in the districts Hoyle and other legislators represent. “It is not fair to Belk’s or Books-A-Million or any other legitimate retailer in this state who collects and pays the state of North Carolina sales tax,” Hoyle says of the current situation.

So, off to court go Amazon and the state. Lay hopes that an offer to forgive penalties will persuade other out-of-state Internet retailers to comply. Meanwhile, I suppose we’ll all just have to keep on carefully calculating our own tax on Internet purchases, filing the total on that “use tax” line on our state income-tax forms. You did do that, didn’t you? Didn’t you?

Scott Mooneyham is the editor of The Insider, www.ncinsider.com.