Taxpayers and First Amendment advocates won a huge victory yesterday when a U.S. District Court ruled that North Carolina could not collect detailed and private information about online shoppers to pursue them for tax collection.
Beginning last year, the North Carolina Department of Revenue (DOR) sent letters to online retailer demanding that the company provide “all information” about in-state customers and their nearly 50 million purchases. This included names, addresses, products purchased with descriptions, and more. The state DOR would then target those residents and force them to pay “use tax” on the purchased goods. Yet, a federal court in Seattle has now ruled such “reporting requirements” unconstitutional.
Online retailers do not collect tax on Internet and other out-of-state purchases unless they have a physical nexus in the state. Doing so would be a violation of the Commerce Clause, per U.S Supreme Court precedent in the 1992 case Quill v. North Dakota. This has led a few states, such as Colorado and North Carolina, to demand detailed consumer information to force them to pay the “use tax” required on out-of-state purchases.
Yet, as we have repeatedly argued and a federal court has confirmed, such demands for information move from being a Commerce Clause violation to trampling on First Amendment and privacy rights. Similarly, Colorado has enacted a similar “reporting requirements” scheme, despite a 2002 state Supreme Court ruling that consumers have a “fundamental right to purchase books anonymously, free from governmental interference” under the First Amendment.
The District Court Judge, Marsha Pechman, agreed, noting simply that “the DOR’s request runs afoul of the First Amendment.” The case against North Carolina was brought by and the ACLU.
While this is welcome news for North Carolina shoppers, the fate of the Internet tax collection scheme is still uncertain in Colorado, where a similar injunction has been filed. It has also not stopped lawmakers in other states, such as California, from continuing their push to collect tax on online purchases from out-of-state companies.