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Originally published October 26, 2010 at 6:40 PM | Page modified October 27, 2010 at 7:15 PM

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Amazon wins one round, but battles continue over taxing online sales

Amazon.com wins a round in court over disclosing information so North Carolina can collect sales taxes from online shoppers, but it's fighting similar battles against many other states.

Seattle Times business reporter

Score one for Amazon.com in its struggle against states pursuing the Internet giant for not collecting sales tax.

And give an assist to the American Civil Liberties Union.

U.S. District Judge Marsha Pechman ruled late Monday that the First Amendment forbids state tax collectors from knowing the books, music and movies that online customers buy from websites — a victory for Amazon.

But the case hardly settles the many battles now raging between Amazon and various states that are stepping up their efforts to make Internet-only retailers charge sales tax on their behalf.

The company filed a federal lawsuit in Seattle last April to stop North Carolina tax collectors from getting the names, addresses and purchases of its customers. Amazon contended North Carolina's data demands would make customers think twice about buying controversial products, and should be declared unconstitutional.

Pechman agreed, saying "citizens are entitled to receive information and ideas through books, films and other expressive materials anonymously."

The ACLU, which joined the lawsuit on behalf of several Amazon customers, called the decision a victory for privacy and free speech on the Internet. Amazon declined comment.

The North Carolina revenue department said it does not want the details of purchases, just "basic information" needed to collect state and local sales taxes.

"This case has been twisted into something it is not. The North Carolina Department of Revenue wants to collect the sales tax that is due to the state and nothing more," said spokeswoman Beth Stevenson in a statement.

North Carolina said it's reviewing the judge's decision, leaving open the possibility that it will appeal.

Because the North Carolina case centers on the privacy rights of Internet users, it's unclear what effect, if any, Pechman's ruling will have elsewhere over whether Internet-only retailers such as Amazon should have to collect state and local sales taxes.

The New York Legislature passed a law in 2008 saying online retailers must collect sales taxes from state residents based on their relationships with local affiliate websites that link to products sold on Amazon's site. Amazon sued New York, lost, and now awaits an appeals-court ruling.

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A new law in Colorado takes a different approach: It requires Internet retailers to tell Colorado residents their purchases may be subject to sales tax, and it allows the state to ask Amazon for a year-end summary of purchases made by residents. Amazon responded by severing ties with its Colorado marketing affiliates, as it has done in North Carolina and Rhode Island.

The Direct Marketing Association recently filed a federal lawsuit against Colorado, arguing as Amazon did against North Carolina that disclosure of customers' online purchases would violate their First Amendment rights.

Meanwhile, Texas is coming after Amazon for $269 million in sales taxes it believes the Internet giant owes from a four-year period ending last December, including interest and penalties.

Amazon said it will "vigorously" defend itself against the claim. The company has a warehouse in Texas "that is an affiliate, but not subsidiary, of the Amazon retailing entity," spokeswoman Mary Osako said in a statement.

Allen Spelce, spokesman for the Texas Comptroller of Public Accounts, said the state stands by its tax assessment.

"We feel like Amazon is no different than the mom-and-pop store on the corner. If you do business in the state of Texas, you should be required to pay sales tax, along with all the other businesses in the state," Spelce said.

With Texas in a financial crunch after a deep and prolonged recession, he said, "Every dollar and penny is going to count, especially when we're looking at a budget shortfall this January."

The number of state governments making increased efforts to collect sales tax from Internet purchases has grown in the past few years as U.S. consumers become increasingly comfortable shopping online, and bricks-and-mortar rivals call for a "level playing field."

Under a 1992 Supreme Court ruling, Amazon does not have to collect a state's sales tax unless it has a physical presence in that state. Besides Washington, Amazon collects sales tax in Kentucky, Kansas and North Dakota, where it has a physical presence.

But Amazon also has a physical presence in at least a dozen other states where it does not collect sales tax, said Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities in Washington, D.C.

He says Amazon is splitting hairs over what constitutes a physical presence in those states, such as making a distinction between affiliates and subsidiaries.

Mazerov predicts Amazon eventually will lose the battle.

"I think they're determined to eke out every bit of competitive advantage for as long as they can by not collecting sales tax where they've not been forced to," he said.

Still, Joe Henchman, a lawyer with the Tax Foundation in D.C., said he worries about the far-reaching implications if state governments are allowed to "reach across their borders to tax out-of-state residents."

"It's bad for the national economy, and I view it as bad for public services — this idea that 'we want good schools, good roads and good safety, but we're not willing to pay for it. We're going to force others to pay for it,' " Henchman said.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

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