Turning Web retailers into tax tattlers
Tax collectors want to force Amazon.com and other e-tailers to disclose how much you owe in unpaid sales taxes. And that could come back to haunt you.
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.
Coloradosuch 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.
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.