ACLU Sues North Carolina Over Its Sales/Use Tax Audit Practice

The aggressiveness of some states to assert tax jurisdiction over out-of-state retailers (or to enforce tax against their customers) took another turn last week. On June 23, 2010, the American Civil Liberties Union (ACLU) filed a complaint in U.S. Federal District Court against Kenneth Lay in his official capacity as the Secretary of the North Carolina Department of Revenue in an attempt to protect the privacy of customers of Amazon.com.

Background

The North Carolina Department of Revenue (the Department) has been seeking to impose sales and use tax collection obligations on Internet retailers, including Amazon.com LLC (Amazon). In August 2009, North Carolina enacted a statute that asserts taxing jurisdiction over an Internet retailer if the retailer had entered into “affiliate” relationships with North Carolina residents (whereby North Carolina residents refer potential customers to the Internet retailer in exchange for compensation). N.C. Gen. Stat. § 105-164.8. In anticipation of the legislation, Amazon had severed its ties with its North Carolina affiliates on June 26, 2009. Nevertheless, the Department has pursued Amazon and has been engaged in an audit of Amazon.