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Amazon fights North Carolina tax probe

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18th May 2010
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North Carolina has launched an audit of online retailer Amazon’s compliance with the state’s sales tax laws, our sister site AccountingWEB.com reports.

North Carolina passed a law requiring out-of-state retailers with marketing affiliates in its jurisdiction to collect sales tax on its behalf.  Affiliates are people who earn a fee for providing links to online retailers on their own Web sites. While Amazon has cut its ties with North Carolina affiliates, state officials want to seek taxes for sales during the years those affiliates were operating, even before the law was enacted.

The state asked Amazon for names and addresses of residents who purchased items from the site since 2003. Officials are seeking to establish what kind of items were purchased on Amazon under and believe that millions of dollars in uncollected sales taxes could be due on products sold.
 
“This is really an issue of fairness and equity for small businesses, the brick and mortar, corner store operations. These businesses are at a competitive disadvantage when they have to collect sales taxes that other businesses do not,” said Kenneth R Lay, the state’s secretary of revenue.

Amazon filed a counter-complaint in the US Federal District Court in Seattle, claiming the audit violates the First Amendment and customers’ privacy rights. Federal law prevents states from requiring out-of-state retailers to collect sales tax if the company does not have a physical presence in that state.
 
Amazon said it has already provided "the order ID number; the city, county, and zip code to which the item was shipped; the total price for the transaction; the date of the transaction; and Amazon's standard product code for each item,” according to court papers. The company refuses to disclose more personal details.
 
North Carolina is not alone. Other states including Colorado are trying to capture sales tax on online purchases. Colorado and New York have both passed laws requiring online retailers to collect sales tax or share the purchaser information so that the state can get consumers to pay.

New York State's "Amazon law" found that online retailers with affiliates that pay commissions on sales generated from the Amazon site have a physical presence, known as nexus, in the state. Amazon.com challenged the law in court and lost, but is appealing the ruling.

While not burdened by the federal US legal system, the episode is relevant to the UK, which operates under the European Union’s wider sales tax rules, but also has dominion over the VAT-free Channel Island tax havens. Millions of pounds of sales go through companies based in Jersey and Guernsey in a distribution arrangenment that is said to be costing the Exchequer £110m a year.

With VAT arrangements under the microscope in the run-up to the 22 June Budget, will the new UK government be looking into cracking down on this kind of avoidance – or will the North Carolina experience deter them?

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