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North Carolina on the Ropes in Sales Tax Fight

February 10, 2011

The North Carolina Department of Revenue has dropped its efforts to force and other online retailers to provide it with information about their customers’ Internet purchases.

The American Civil Liberties Union of North Carolina Legal Foundation filed suit against the state tax department on behalf of seven state residents, claiming that the effort would provide the state with information about the types of books, music and movies that North Carolina residents were buying, violating their First Amendment rights. Amazon joined in filing the suit in Seattle, Wash., where it is based, against the North Carolina Department of Revenue, and the state settled last month, according to ABC News. The settlement was announced Wednesday by the ACLU.

“The NC Department of Revenue does not need access to private customer records that reveal which specific customers in North Carolina have ordered which specific books, music or movies in order to complete its audit of Amazon and collect any taxes owed,” said Jennifer Rudinger, executive director of the ACLU of North Carolina, in a statement. “We are pleased that the public’s First Amendment rights have been upheld by this settlement, which prohibits the Department from seeking this kind of information from Amazon or other Internet retailers in the future.”

In another setback for the North Carolina tax collectors, a whole other set of online retailers, in this case travel sites, has also sued the Department of Revenue. Six travel sites, including Expedia’s Hotwire and, Orbitz, Trip Network, Travelocity, Travelscape, filed a lawsuit last week claiming that recent amendments to North Carolina’s sales tax laws that took effect on Jan. 1 are unconstitutional and constitute a violation of the Internet Tax Freedom Act, according to the Seattle Times. The amendments require that the fees paid to the travel sites for hotel room bookings be included in the gross receipts of the hotels and thus subject to sales and hotel taxes.

North Carolina isn't the only state facing setbacks in trying to get online retailers to extract sales taxes from customers. Last month a judge in Colorado blocked that state’s law requiring e-commerce vendors to provide a list of their customers’ purchases, North Carolina seems to be faring little better at taxing Internet purchases.

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