ACLU, Amazon face North Carolina tax collectors in Seattle court

North Carolina tax collectors say they want Amazon.com to turn over the names and addresses of customers in their state and a description of all purchases so they can get the sales-tax money they're owed.

But the American Civil Liberties Union argues that if Amazon is forced to comply with North Carolina's data demands, Internet users would start to think twice about buying controversial books, music and movies, violating their constitutional rights to free speech.

Both sides met Wednesday in a federal courtroom in Seattle as part of a lawsuit that Amazon filed in April to stop the North Carolina Department of Revenue from collecting personal information about its customers.

Along with the ACLU, Seattle-based Amazon urged U.S. District Judge Marsha Pechman to declare North Carolina's demands unconstitutional. Pechman said she expects to make a decision within two weeks.

Amazon, which is being audited in North Carolina, says it has provided massive amounts of data about sales to state residents since 2003, including the city, county and ZIP code to which an item was shipped, the product code and total transaction price, but it did not turn over names and addresses.

Amazon says disclosure of such data would have a chilling effect on people's willingness to buy books, music and other "expressive works" that might reveal an intimate fact about them. The ACLU agrees, saying the seven Amazon customers it represents include an elected official in Asheville, N.C., who is an atheist.

"The intervenors have bought books about divorce, atheism, personality disorders, cancer and numerous politically charged issues," said ACLU lawyer Aden Fine. "It's no surprise the intervenors want to keep that information private and free from government scrutiny."

But North Carolina says it doesn't want to know the details of people's reading habits, just a general idea about what they bought.

Special Deputy Attorney General Kay Miller Hobart told Pechman that Amazon already collects sales tax in a handful of states where it has offices or warehouses and should be able to satisfy North Carolina's data demands without divulging potentially sensitive information.

Amazon counters that it lacks the mechanisms to provide a more general account of customer purchases in all but those five states.

North Carolina is one of several financially strapped states that have made more of an effort to collect sales tax from online purchases in the past two years.

While the recession has hit many stores hard, Internet-only retailers continue to grow as shoppers become more comfortable buying online. North Carolina argues that because many online shoppers never pay sales tax, Amazon enjoys an unfair advantage over bricks-and-mortar stores. (North Carolina merchants collect state and local sales tax of 7.75 percent in most counties.)

Under a 1992 U.S. Supreme Court ruling, North Carolina cannot force Amazon to collect its sales tax if it doesn't have a physical presence in the state.

Amazon has no offices or warehouses in North Carolina, so state lawmakers last year decided the company's relationships with local marketing affiliates amounted to a physical presence. Amazon responded by severing ties with its North Carolina affiliates, a move it also made in Rhode Island and Colorado.

A few days after Amazon filed its lawsuit, North Carolina offered a deal to Internet retailers, saying it would give them until the end of August to sign an agreement to begin collecting sales tax on products sold to state residents. In return, the state would not come after them for years of back taxes, penalties or interest, and it would not demand data about customers who bought from them.

Of about 450 e-commerce companies that received the offer, 24 entered into an agreement with North Carolina, said revenue-department spokeswoman Beth Stevenson. The state estimates it will lose $162 million in uncollected sales tax from online purchases this year.

Meanwhile, U.S. Rep. Bill Delahunt, a Democrat from Massachusetts, has introduced federal legislation that would allow states to require online retailers to collect sales tax regardless of whether they have a local presence.

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