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.

Amazon.com Fights Sales Taxes

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.

Benefits of No Sales Tax

Critics argue that, generally, avoiding charging the sales taxes levied by its brick-and-mortar rivals is key to the success of Amazon.com and other online retailers.

Overstock.com general counsel Mark Griffin doesn't disagree.

Griffin said that his company has, indeed, kept its physical footprint small -- that is, limited its physical presence in various states -- "to avoid becoming tax collectors for states."

Griffin said it's unfair to compare companies like Overstock or Amazon to brick-and-mortar businesses because online retailers don't consume the same amount of resources -- think real estate or water, for instance -- as their rivals do.

"We chose our businesss model, they chose theirs," he said. "Now they want to change the ground rules."

Joseph Henchman, tax counsel and director of state projects for the Tax Foundation, said that forcing online retailers to collect state sales taxes won't level the playing field between them and brick-and-mortar stores.

Brick-and-mortar stores, he said, often have to concern themselves with only one taxing jurisdiction. But national online retailers face many more.

"There are over 8,000 sales taxing jurisdictions in the United States," he said. It's up to online retailers to sort the different rules of the jurisdictions, he said, and if they get it wrong, they could face "enormous liability."

Amazon.com's First Amendment Argument

After Amazon cut ties with its North Carolina affiliates, the state didn't give up. Last year, the state began an audit of Amazon's sales to North Carolina residents.

In a recent statement, the North Carolina Department of Revenue said that it "routinely requests third party, or consumer information, in order to identify and collect any taxes due the state."

Mazerov said that the information collected from Amazon could allow North Carolina to solicit sales taxes directly from Amazon customers, just as Colorado is attempting to do under its new law.

Amazon Gets Support From ACLU

"Certainly, Colorado is not likely to come after someone if bought $5 book or $10 book for 40 cents of taxes," Mazerov said. "But a $2,000 flat-screen TV or laptop computer -- that may be worth it for the state."

Back in North Carolina, Amazon.com said that it has already provided the state with "voluminous information" about its North Carolina sales, including information on pricing and item descriptions for each transaction.

But the retailer argues that state officials should not be privy to information on which customers have purchased what items.

"The First Amendment protects the rights to distribute, sell, purchase and receive lawful expressive materials free from government scrutiny," the company said in its lawsuit, filed last month.

The state, meanwhile, has argued that Amazon's complaint is misleading and that the state is not actually seeking the level of detail that Amazon asserts.

"We are not looking for details of transactions. The only thing we need is data that helps us administer and collect the taxes legally due to the state of North Carolina," Lay said in an e-mailed statement to ABCNews.com.

Asked about Lay's comments, ACLU attorney Aiden Fine said the group still supports Amazon.

"What's important here is that the state of North Carolina has already received detailed product information about what North Carolina customers have purchased, and forcing Amazon to provide specific user information would violate the constitutional rights of those customers," Fine said. "The state should not attempt to force Amazon to provide that information."