New internet tax threatens privacy of Washington customers

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In their zeal to shake a few more tax dollars out of Washington residents’ pockets, state lawmakers are brushing aside legitimate privacy concerns raised recently by civil-liberties groups. Under the new internet sales-tax law signed by Gov. Jay Inslee last month, the Washington Department of Revenue could learn more than most of us want it to know about our online purchases.

State officials vow the information provided to them by online retailers to facilitate the collection of the so-called “use” tax will be held in the utmost confidence. But from police agencies to the Internal Revenue Service, government bureaucracies have far from an unblemished record when it comes to protecting private records.

If you’ve bought nothing weird, then maybe you’ve got nothing to hide. And maybe the retailers, or third-party websites like eBay will do the state’s bidding and collect the tax for the department without turning over any information. Or maybe not. The new law gives out-of-state sellers the option to “voluntarily” collect Washington sales taxes or to provide the names, addresses and purchase information to the revenue folks in Olympia. As a consumer, the decision won’t be yours to make.

The stores must provide purchase amounts rather than a list of specific items. But this can be small comfort for those who patronized, e.g., a mental-illness center, a paraphernalia shop or a company that sells sex toys. Current law requires sellers with a brick-and-mortar presence in the state to collect taxes from in-state consumers, but the tax collectors say they want to “level the playing field.” Your privacy wasn’t much of a concern when they passed the law.

Even if your raciest online purchase is a calendar with cutesy cat photos, you ought to be concerned about the costly implications. There are your personal costs. The new law is, after all, a tax increase on Washington residents’ purchases. Then there’s the likely cost to the general fund, as state officials defend it for years in the federal courts. The state balanced its budget based on revenue assumptions from the tax (an estimated $1 billion over the next four years), but those collections will be put on hold through the length of the trials.

Lawmakers are confident that they are on solid legal ground, because the federal 10th Circuit Court of Appeal, after six and a half years of litigation, upheld Colorado’s internet sales tax law. The U.S. Supreme Court recently refused to review the Colorado decision, which cleared the way for that state to begin collections from out-of-state online customers.

But there’s no guarantee the federal 9th Circuit Court of Appeals, which oversees Washington state matters, will reach the same conclusion. There are significant other differences between the Washington and Colorado laws, even though Washington legislators used Colorado as a model. Those, too, can lead to a different outcome.

Both states require sellers that don’t collect the sales tax to provide personal information about online purchasers to their respective revenue departments. But the Washington law applies to companies that gross more than $10,000 a year in sales to in-state residents, whereas Colorado’s threshold is 10 times higher. “Washington’s puts more responsibility on so-called ‘marketplace facilitators’ and other internet ‘middlemen,'” according to a Tacoma News Tribune report.

That Colorado case centered on the U.S. Constitution’s Commerce Clause, governing business among the states. The Direct Marketing Association challenged the law based on a seminal 1992 U.S. Supreme Court ruling (Quill Corp. v. North Dakota) that state officials can only collect sales taxes from a business if they have a physical presence in that state. For instance, Seattle-based Amazon has long collected taxes for sales to residents living in Washington.

But the 10th Circuit ruled that “Quill applies only to the collection of sales and use taxes, and the Colorado law does not require the collection or remittance of sales and use taxes. Instead, it imposes notice and reporting obligations.”

Nevertheless, there are many reasons to question the Washington law. The $10,000 threshold imposes a burden on small businesses, given that they will need to maintain detailed reports on buyers in the state. If this law withstands court scrutiny, similar tax schemes will spread like a bad internet rumor. Even the tiniest enterprises, located here and elsewhere, will have to collect data to meet the varied demands of 50 state revenue offices – or face $20,000-plus penalties.

All U.S. internet companies, not just the small ones, will face disadvantages given that Olympia’s tax grabbers will not be able to enforce the statutes on sellers based in Shanghai or New Delhi. And Commerce Clause arguments won’t be the only ones that might tie it up in court.

In 2010, the U.S. district court in Seattle rebuffed efforts by the North Carolina secretary of revenue to receive detailed purchase information from Amazon as part of a tax audit of North Carolinians’ purchases. The court found that “citizens are entitled to receive information and ideas through books, films, and other expressive materials anonymously.”

That’s true even when the government is seeking the information for tax purposes rather than to censors. Do we really trust any government agency with such personal information? Unfortunately, we’re now at the mercy of the courts and Congress to protect such privacy rights.


Image by koya979

 

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