Democrats push for new Internet sales taxes [Archive]

Quantum

3rd July 2010, 08:47 AM

http://news.cnet.com/8301-13578_3-20009603-38.html?part=rss&subj=news&tag=2547-1_3-0-20

July 2, 2010 12:28 PM PDT

Democrats push for new Internet sales taxes

by Declan McCullagh

The halcyon days of tax-free Internet shopping will, if Rep. Bill Delahunt gets his way, soon be coming to an abrupt end.

Delahunt, a Massachusetts Democrat, introduced a bill on Thursday that would rewrite the ground rules for Internet and mail order sales by eliminating the option for many Americans to shop over the Internet without paying state sales taxes.

At the moment, Americans who shop over the Internet from out-of-state vendors usually aren't required to pay sales taxes. Californians buying books from Amazon.com or cameras from Manhattan's B&H Photo, for example, won't be required to cough up the sales taxes that they would if shopping at a local mall.

This is hardly a new debate: pro-tax officials and state governments have been pressing Congress to require taxes to be collected for a decade or so. They argue that reduced sales tax revenue threatens budgets for schools and police, and say that, as a matter of fairness, online retailers should be forced to collect the same taxes that brick-and-mortar retailers do.

But with states scrambling for new sources of revenue during what may be a double-dip recession, pro-tax lobbyists are hoping that they'll have better luck this year. The National Conference of State Legislatures applauded Delahunt's legislation, saying he should be commended for allowing states to collect as much as $23 billion in new taxes.

So did the Retail Industry Leaders Association, whose tax committee members include Wal-Mart, Home Depot, Costco, AutoZone, Target, and IKEA.

On the other side are groups that advocate for lower taxes and retailers including Amazon.com and eBay. In a statement on Friday, Tod Cohen, eBay's vice president for government relations said: "At a time when unemployment rates are high and small businesses across the country are closing shop, we are confident that Congress will protect small Internet retailers and the consumers they serve from another Internet tax scheme."

Co-sponsors of Delahunt's bill, the "Main Street Fairness Act," include Reps. Michael Capuano, John Conyers, Stephanie Herseth Sandlin, and Peter Welch, all Democrats. No Republican has signed on as a co-sponsor.

The final version of Delahunt's legislation had not yet been made public on Friday, and his office did not immediately respond to queries from CNET. But it's expected to be similar to other versions he's introduced before.

Earlier versions were drafted in response to a U.S. Supreme Court decision saying that, in general, out-of-state retailers can't be required to collect sales taxes unless Congress changes the law. The justices noted in a 1992 case called Quill v. North Dakota: "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."

One exception to that rule is a legal concept called "nexus," which means a company can be forced to collect sales taxes if it has a sufficient business presence. If Amazon had an office in California, it already would be collecting sales tax for Golden State residents. (Another exception is the sale of cigarettes, which is covered by the Jenkins Act.)

In response to complexity concerns, the pro-tax forces have offered a proposal that they hope Congress can be persuaded to adopt. The concept is called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of sales tax laws' most notorious convolutions.

Since then, some 24 states have signed on, either wholly or partially, to the agreement, meaning they agree to simplify their tax codes and make them uniform. If enough states participate, proponents believe it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers.

"Despite a decade of trying to reduce the unreasonable burdens cited by the Supreme Court, the actual simplification achieved by the Streamlined Sales Tax Project is not nearly sufficient to convince Congress that it should abandon its role in protecting interstate commerce," Steve DelBianco, executive director of the NetChoice coalition, said in e-mail on Friday. Coalition members include AOL, eBay, Expedia, and Yahoo.

There is one caveat under existing law: online purchases from sites like Amazon and eBay only seem to arrive tax-free. Legally, however, purchasers are required to pay their own state's sales tax rate--the concept is called a "use tax"--and then voluntarily report the amount owed at tax time. But, state tax collectors say, few do.

State tax collectors haven't exactly been idle while waiting for Congress. They've been trying to force Amazon to turn over purchase records in North Carolina, attempting to force retailers to become tax-tattlers in California and Tennessee, and putting the squeeze on affiliate programs in Colorado.

Earlier this week, the Direct Marketing Association sued Colorado, saying its law requiring out-of-state retailers to turn over purchase history information is unconstitutional.

Quantum

3rd July 2010, 08:49 AM

Two articles from earlier this year...

http://news.cnet.com/8301-13578_3-20002434-38.html?tag=mncol;txt

April 14, 2010 4:00 AM PDT
Turning Web retailers into tax tattlers
by Declan McCullagh

Internet users accustomed to tax-free online shopping may soon be in for an unpleasant surprise: new laws that will force them to cough up more cash every year on April 15.

An increasing number of politicians, concerned with shrinking budgets and eyeing continuing growth in e-commerce, want to force out-of-state retailers like Amazon.com, Overstock.com, and Blue Nile to tattle to tax collectors about how much in sales taxes their customers have avoided paying.

At the moment, for instance, Amazon customers in California don't pay sales tax but are supposed to voluntarily write a check for the full amount on tax day--the concept is called a "use tax." Few people do. Tax collectors view it as a loophole that can be closed by requiring Amazon to share customer data with the government.

"This is Big Brother--it's the purchasing police," says Steve DelBianco, executive director of NetChoice, which counts eBay, Overstock.com, and Yahoo as members and says the proposals are probably unconstitutional.

Colorado recently adopted such a measure, which says retailers must divulge the total purchases "made by each Colorado purchaser during the prior calendar year"; they also must forward a more detailed list to every customer accompanied by a warning that paying use taxes is mandatory. A similar proposal in the California legislature will be the subject of a hearing next week, and a Tennessee bill is scheduled for discussion on Thursday.

Critics already are raising privacy concerns, saying that state tax collectors should not be told what their residents are buying. An order from the gay-themed A Different Light bookstore could hint at a customer's sexual identity, for instance, while a purchase from AdamEve.com is likely to be an adult novelty item of the sort that cannot be adequately described in a family publication.

You could "buy an item from the Tea Party store or you could buy an item from a seller of a particular medical product that would reveal an embarrassing illness," says Jim Halpert, a partner at the DLA Piper law firm who represents a coalition including eBay, Facebook, Google, and Yahoo. Coalition members, he says, "are concerned about barriers to e-commerce and measures that would chill sales on the Internet."

Pete Sepp, vice president at the National Taxpayers Union, says: "There is a whole raft of privacy concerns over purchases made of a political nature. The tax bureaucrats themselves may not take an interest in the data but the elected officials who oversee them might."

Making matters more complicated is a federal law called the Video Privacy Protection Act, which makes it illegal for anyone selling or renting movies to disclose customer information to anyone including state tax collectors. If online DVD retailers chose to comply with the Colorado statute, in other words, they could expose themselves to significant fines and class action lawsuits.

"Form 1984?"

In California, the push for an Internet use tax law is coming from Charles Calderon, a Democrat who's the majority leader of the state assembly. He has introduced a bill, AB 2078, saying that out-of-state retailers must submit to the Sacramento tax agency "a report that sets forth the names and addresses of purchasers of the tangible personal property, the sales price of the property, the date of sale, and such other information as the board may require."

Tom White, a spokesman for Calderon, said he can't predict when the measure will become law, adding that Republican Gov. Arnold Schwarzenegger has not weighed in yet. When asked about how the legislation would work in practice--for instance, would retailers be required to report sales of items such as groceries that are tax exempt?--White replied: "I hadn't thought about that."

State politicians are being egged on by traditional retailers including the American Booksellers Association, which has publicly assailed Amazon over tax issues, including saying last month that "the retailing giant is only interested in maintaining its significant competitive advantage over the bricks-and-mortar retailers." The association has even prepared what it calls an action kit, including prefabricated op-ed pieces that can be submitted to a local newspaper under the name of the local bookstore.

The American Booksellers Association did not respond to a request for comment on Tuesday.

The Multistate Tax Commission, a taxpayer-funded organization of state tax collectors, has been preparing a "Model Use Tax Notice and Reporting Statute," according to an April 12 document (PDF). It features a list of discussion points including whether non-profit sellers would be exempt, how frequently use tax reports should be sent to consumers, and how high penalties should be for noncompliance. (The commission did not respond to a request for comment.)

Michael Mazerov, a senior fellow at the Center for Budget and Policy Priorities, which has frequently supported efforts to collect use taxes from Internet purchases, says the Colorado law is carefully crafted to preserve taxpayers' privacy rights.

"The only thing that is disclosed to the revenue department is the total purchase by the consumer," Mazerov says. "There's no detail about what they bought. I would expect and hope that there wouldn't be much fallout with respect to privacy concerns. There's really very little sensitive information being disclosed to the state."

Mazerov said that Internet companies that are warning of privacy dangers should be concerned that they might raise too loud an alarm. They might conclude, he says: "If our customers become too concerned about privacy, they might decide to stop buying from us." Mazerov believes that use tax disclosure leads to "equal treatment of consumers and equal treatment of merchants--it's a fairness issue."

Colorado's tax agency has proposed regulations based on the law that will require mail order or Internet retailers with more than $1 million in sales to send all customers in the state the equivalent of a 1099 form by January 31 of each year starting in 2011. The notice must include a "description of the item(s) purchased, and the dollar amount(s) of the purchase(s)"--which might come as a surprise to someone buying a gift for a spouse who's in the habit of opening the mail.

It also must say that Colorado "requires that the consumer file a sales or use tax return at the end of every year and pay tax on all taxable Colorado purchases for which no tax has been collected by the retailer, and that details of these requirements, including how to file, may be found at the Colorado Department of Revenue's website, www.taxcolorado.com."

Once millions of those forms are mailed early next year, DelBianco of NetChoice believes, the taxpayer revolt will be quick and fierce. "We already deal with 1099 forms--the new form is going to be labeled the 1984 form," he says. Politicians in other states should "hold their powder a bit and wait to see what blowback there is in Colorado next year when taxpayers realize that it's their money that's at stake."

A possible constitutional challenge

The more potent argument against the Internet use tax movement, however, may be the constitutional one. In 1992, the U.S. Supreme Court ruled that states could not burden interstate commerce by trying to collect use taxes from remote retailers without "nexus," or a physical connection such as a branch office in that state.

Mark Gergen, a tax law professor at the UC Berkeley School of Law, says he's not aware of any previous cases that would resolve whether a state can "impose an information reporting requirement on a foreign merchant if there is insufficient nexus to require the merchant to collect and remit a use tax." It's "difficult to predict how a court would come out on the question," Gergen says.

One hint about the constitutionality of these laws comes from a 1995 legal opinion written by Don Stenberg, attorney general of Nebraska at the time, and L. Jay Bartel, the assistant attorney general.

They concluded such a mandatory-reporting law was constitutionally problematic. "There remains a question as to whether such requirements would be found to place an impermissible burden on interstate commerce, in violation of the Commerce Clause," the opinion says. "We also note that enactment of the reporting requirements... may pose significant, and potentially costly, enforcement problems, if out-of-state retailers do not voluntarily comply with efforts by the Department of Revenue to compel compliance with such requirements."

There's been talk among industry groups of filing a lawsuit seeking to overturn Colorado's law. Some of the possible arguments were previewed in an April 5 article co-authored by Stephen Kranz, a partner at the Sutherland law firm in Washington, D.C. who focuses on tax law. Kranz argues that the burden on interstate commerce will be "substantial" and unconstitutional and that the law is protectionist and discriminatory.

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http://news.cnet.com/8301-13578_3-20003065-38.html

April 21, 2010 11:17 AM PDT
N.C. defends request for Amazon customer records
by Declan McCullagh

North Carolina's tax collectors said Wednesday that they never demanded personal information such as book titles from Amazon.com, which filed a federal lawsuit against the state this week seeking to keep that information confidential.

"Amazon's complaint is misleading in alleging the department has required detailed information revealing personal consumer preferences, such as book titles," North Carolina Secretary of Revenue, Kenneth Lay, said in a statement.

But CNET has obtained correspondence from the Department of Revenue that calls North Carolina's claim into question.

In a letter to Amazon dated December 1, 2009, Romey McCoy, the state Department of Revenue's audit manager, asked for "all information" relating to nearly 50 million purchases that customers in that state had made between 2003 and 2010. McCoy's letter did not exempt the titles of books or Blu-ray movies and did not address the privacy implications of the request.

Amazon subsequently turned over limited, anonymous information: the amount of the purchase, the seller, and the postal code it was sent to.

McCoy replied in a second letter on March 19, 2010, saying Amazon had until this Monday to divulge the full records of each transaction or North Carolina "will" take legal action. To punctuate his threat of litigation, McCoy's letter copied two assistant attorneys general in the North Carolina Department of Justice.

The second letter reiterated the request for "all information" on each purchase, and said Amazon "omitted" the billing name and address, the shipping name and address, and the "product/item code or description." It also asked for a "detail[ed] description" of each item shipped and "any other" information about the transaction.

Because Amazon has no offices or warehouses in North Carolina, it's not required to collect the state's 5.75 percent sales tax on shipments, although tax collectors have reminded residents that what's known as a use tax applies on anything "purchased or received" through the mail.

Lay, the state tax collector, said Wednesday that his agents routinely request information including the purchaser's name, address and the item's purchase price but that information such as book titles "is not required to calculate the tax due, and the department has not requested this information."

Amazon replied in a statement saying: "It's encouraging that the North Carolina Department of Revenue now agrees that it doesn't need the customer information it has demanded in order to complete its audit of Amazon... We are hopeful that the Department of Revenue's statement today will enable us to continue cooperating with the department's audit in a way that does not compromise the privacy and First Amendment rights of our customers."

When asked whether the state Department of Justice provided legal advice about asking for Amazon customer records, department spokeswoman Noelle Talley said she would not comment on pending litigation. A representative of the Department of Revenue did not immediately respond to questions from CNET on Wednesday.

In general, purchases of books, DVDs, Blu-ray discs, and other media enjoy special privacy protections. In a 2002 decision, the Colorado Supreme Court ruled that the First Amendment protects an "individual's fundamental right to purchase books anonymously, free from governmental interference." The Colorado justices tossed out a subpoena from police to the Tattered Cover Bookstore asking for information about what books a certain customer had purchased.

North Carolina's aggressive push for customer records comes as other states are experimenting with new ways to collect taxes from online retailers. California may require retailers to report the total dollar value of purchases made by each state resident, which CNET reported last month, and Colorado already has enacted such a law. A decision is expected at any time in a related case that Amazon filed against New York state.

Update late Wednesday: Beth Stevenson, the North Carolina Department of Revenue's director of public affairs, sent me this statement: "As mentioned in our previous statement, the Department of Revenue has not requested information regarding specific titles of books or CDs. The request for 'product/item code or description' simply requested the type of product purchased, for example, 'book.' Information regarding the type of product is necessary to determine the correct rate of tax."

However, both letters from the department had asked for "all information" for each of the 50 million orders.