Constitutional Threats in the E-Commerce Jungle: First Amendment and Dormant Commerce Clause Limits on Amazon Laws and Use Tax Reporting Statutes

BY Scott W. Gaylord and Andrew Haile

Internet sales continue to increase as consumers take advantage of the convenience and price competition that e-commerce provides.  Yet, as North Carolina and other states have learned, frequently the “lower” prices available online result from the fact that many internet retailers, such as, do not collect sales tax on such purchases.  In fact, under United States Supreme Court precedent, North Carolina and other states cannot require internet retailers such as Amazon that lack any physical presence in a state to collect sales tax.

But what many consumers do not know (or choose to ignore) is that they still owe tax on their internet purchases.  This tax, known as the “use” tax, is not collected by the retailer; rather, the individual consumer is responsible for paying this tax directly to the North Carolina Department of Revenue.  The use tax applies at the same rate as the sales tax.  As a result, North Carolinians should pay the same amount in tax whether they buy goods at the local store or over the internet.

As it turns out, though, most North Carolinians are not fulfilling their use tax obligations.Given the state’s ongoing budget shortfalls, the North Carolina Department of Revenue has been actively trying to find new ways to either force internet retailers to collect taxes on internet sales or to increase use tax compliance among consumers.  In particular, in 2009, the Department of Revenue demanded that Amazon provide the identities of North Carolina purchasers and a list of the products they purchased so that the Department of Revenue could determine each purchaser’s use tax liability.  Amazon refused and filed a declaratory judgment action in federal court alleging that the information request violated the First Amendment rights of its consumers.  The federal district court agreed and granted summary judgment to Amazon.

This article examines that decision and explores (i) the First Amendment issues raised by the federal district court’s order in the Amazon case as well as (ii) the First Amendment and Commerce Clause issues that would arise if North Carolina were to enact a statute requiring internet retailers to report to the Department of Revenue the amount of purchases that individual consumers make annually.  Such a statute presents significant, though not insurmountable, First Amendment and Commerce Clause issues.  In light of the State’s budget problems, we propose that the General Assembly seriously consider enacting a use tax reporting statute while at the same time continuing to pursue alternative approaches to increase use tax compliance.


DOWNLOAD PDF | 89 N.C. L. Rev. 2011 (2011)