Amazon.com: Fighting for Free Speech? Or Against Sales Tax?

May 11, 2010 — -- If you purchased a book called "Living With Alcoholism," would you want the government to know? How about "Outing Yourself: How to Come Out as Lesbian or Gay to Your Family, Friends, and Coworkers"? Or "Bipolar Disorder: A Guide for Patients and Families"?

In a lawsuit, Amazon.com, the online retailer, argues that such potentially sensitive information and more could be disclosed to North Carolina state officials if the state succeeds in its demand that Amazon turn over customer purchase records to state tax officials.

The retailer says that the demand is a violation of its customers' free speech and privacy rights, and its lawsuit has drawn the support of the American Civil Liberties Union.

North Carolina's Department of Revenue rebuts Amazon's claim, saying in a written statement that its requests to Amazon do not actually require the retailer to disclose book titles.

While the case may provide new fodder for debate for First Amendment scholars, not everyone is so sure that Amazon is being genuine in its free speech fight. Critics allege that the lawsuit is part of Amazon's broader campaign to avoid charging its customers state sales tax.

"Amazon is trying to distract attention from its lack of sales tax compliance and its aggressive efforts to avoid collecting tax by whipping up consumer concern about privacy violations where there's really no legitimate concern," said Michael Mazerov, a senior fellow at the Center for Budget and Policy Priorities, a Washington, D.C.-based think tank.

As established by a 1992 Supreme Court ruling, retailers with no physical presence in a state cannot be forced to collect state sales tax.

Since then, experts say, states have been battling to find ways to mandate that online retailers like Amazon still collect sales tax. There have been efforts to change the system both in Congress -- legislation that has languished in Congress in the past may be reintroduced this year -- and by state legislatures.

In recent years, retailers' affiliate programs -- consisting of in-state companies that collect commissions by referring customers to online retailers like Amazon -- have proven critical to state efforts.

North Carolina, Rhode Island and New York have all passed laws stipulating that online retailers' affiliate programs in their states qualify as physical presence and therefore, the states can force them to collect sales tax.

"This is really an issue of fairness and equity for small businesses, the brick and mortar, corner-store operations," North Carolina Secretary of Revenue Kenneth R. Law, who is named as the defendant in Amazon's lawsuit, said in a recent statement about the retailer. "These businesses are at a competitive disadvantage when they have to collect sales taxes that other businesses do not."

Amazon pushed back against the laws, ending its affiliate programs in North Carolina and Rhode Island. In New York, meanwhile, Amazon.com and fellow online retailer Overstock.com each sued to stop the state from forcing them to collect sales taxes after the state changed its tax law. Both companies argued that the law was unconstitutional. A judge dismissed both cases; Amazon.com and Overstock.com now have appeals pending.

Most recently, Colorado enacted a law requiring online retailers provide the state with information on their sales to Colorado customers and to notify their customers that their purchases could eventually be subject to state sales tax. Experts say that Colorado's law differs from those of New York and the others because it would be up to the state, not the retailer, to ultimately collect the sales taxes.

Amazon has also fought back against the Colorado law, ending its affiliate programs as it did in North Carolina and Rhode Island. But Amazon rejects assertions that the company is against charging sales taxes altogether.

The company said in a written statement that it's not opposed to "collecting sales tax within a constitutionally-permissible system applied even-handedly."

Amazon does collect sales tax in five states and that it does "a thriving business in these states," the company said.