Privacy Case Related to North Carolina Sales Tax Fairness Fight Settled

The North Carolina Department of Revenue has reached a settlement in the legal fight regarding the state’s request for sales data from Amazon.com in its efforts to recoup an estimated $50 million in lost tax revenue for online purchases.

In October 2010, U.S. District Judge Marsha Pechman ruled that the First Amendment protected Amazon.com’s customers from Department of Revenue inquiries for “detailed records of their purchases, including the expressive content.” However, at the time, Judge Pechman also noted that her decision did “not prohibit the [Department of Revenue] from issuing a new request for information” with only general product information, stating that the ruling “cannot be interpreted to grant Amazon a free pass from complying with any valid tax law of North Carolina.”

The North Carolina Department of Revenue’s future requests for data from online retailers will clarify that tax collectors are not seeking either the titles or other identifying information of books, movies, or music sold, according to a copy of the settlement provided by the agency, as reported by the Associated Press. The agency also agreed to pay $99,000 in attorneys fees, and it reserved the right to pursue tax collections against Amazon or its customers.

The agreement came in the settlement of a lawsuit originally brought by Amazon.com in federal court in its home city of Seattle. The North Carolina ACLU intervened in the lawsuit on behalf of several Amazon customers, and the ACLU announced the settlement on February 9.

In a statement, the Department of Revenue noted that “the case between the North Carolina Department of Revenue and Amazon has long been twisted into something it is not. Bottom line, this is about fairly collecting the tax that is due to the state of North Carolina and nothing more.” The statement said that “the Department has always maintained that we do not need – or want –- titles or similar details about products purchased by Amazon customers.... [The Department] voluntarily destroyed the detailed information that Amazon unnecessarily provided, and offered them the opportunity to comply with the state tax laws moving forward.”

The statement concluded by noting, “The lawsuit on this particular issue could have been avoided altogether if not for the aggressive stance Amazon took to avoid compliance with North Carolina’s tax laws. There would have never been an issue of customer privacy if Amazon would simply collect the North Carolina sales tax that others already do.”

Amazon.com’s lawsuit followed the state’s passage in 2009 of e-fairness legislation, which required online retailers with affiliates in the state to collect sales tax. Soon after the legislation was signed into law, Amazon.com fired its affiliates in the state to avoid collecting sales tax. However, state residents still must pay a use tax on online purchases, and the state’s Department of Revenue had sought customer information to assist in collecting those monies.

At the time of Judge Pechman’s October 2010 ruling, ABA CEO Oren Teicher said, “It is heartening to see a court again rule in favor of readers’ First Amendment right to privacy. It is clear from the ruling and the details of the case, many of which only came to light this week, that the North Carolina Department of Revenue’s second request for data from Amazon.com would have potentially compromised North Carolina customers’ right to privacy. That said, this situation could easily have been averted if Amazon.com had simply followed the state’s existing sales and use tax laws in the first place. We have never believed that sales tax equity compromises reader privacy, which Judge Pechman underscores in her ruling.”