Two major online retailers have cut their ties to North Carolina in an effort to avoid collecting sales tax in the future.
That's their prerogative. But it doesn't mean that the N.C. Department of Revenue shouldn't sue both of them, if it must, to recover sales taxes the retailers should have been collecting before they severed ties here.
Amazon.com and Overstock.com terminated ties with their partner online retailers in North Carolina this summer, citing a new tax law. The General Assembly decided this year to make it crystal clear that an out-of-state online retailer's ties to in-state retail partners is enough of a connection to trigger the need to collect sales tax.
Because of the U.S. Constitution's Interstate Commerce Clause, no state can tax commercial transactions among the states. So, North Carolina cannot require a Maine-based catalog sales outlet, for example, to collect our sales tax when it ships products here.
There is, however, an exception to that ban. If the retailer has a commercial presence in the state to which the goods are shipped -- a "tax situs" in legal parlance -- then the receiving state can require that the retailer collect sales tax.
Online customers are often given the option to buy from a retailer's own stock or from a partner's. For years, both Amazon and Overstock helped to sell goods -- and thus received a commission for doing so -- that were stocked right here in North Carolina.
State officials say that connection, under law that existed before this month, was adequate to trigger the two online retailers' responsibilities to collect sales tax on North Carolina purchases. The retailers disagree and argue that North Carolina's new law is unconstitutional as an abridgment of the commerce clause.
This should set up a court battle between state lawyers and those for the retailers. It may be years before we get an answer, but it is a battle worth undertaking.
North Carolina loses $200 million a year in interstate sales either online or through mail-order catalogs. Consumers who are saving on sales tax -- although they are usually paying higher shipping and handling charges -- are breaking the law. North Carolinians who use products purchased this way legally owe a corresponding amount of use tax.
For decades, legislators from most of the 50 states have been begging Congress to solve this situation. Congress has failed to do so. The real solution resides in a national policy on interstate sales taxation, but until that develops, the best way to get the money owed to North Carolina is through a lawsuit. The revenue department should go and get it.
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