State tries to tame Amazon.

• Author: Mooneyham, Scott
• Position: CAPITALGOODS

Last year. The Motley Fool investor website posted a piece entitled "Why Does North Carolina Hate Amazon?" The writer might have asked the question another way: Why does North Carolina love Walmart? Or Lowe's? Or Mom and Pop's Gas-N-Go? It's because those brick-and-mortar stores collect sales tax from Tar Heel customers and dutifully remit it to Raleigh. But does trying to get Seattle-based Amazon.com Inc. to cooperate equal hate? I suppose you might see it that way if the state were trying to take away a competitive advantage you enjoyed over instate stores.

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In trying to make the big dog of Internet retail heel, the tax man seems to have made a political misstep--maybe even stumbling over the U.S. Constitution--when he demanded that Amazon hand over all customer records of North Carolina residents dating to 2003. Residents who shop on the Web are supposed to self-report the tax to the state. Few do. Amazon collects sales tax from residents of its home state of Washington and those in Kentucky and Kansas, where it has fulfillment centers, as well as New York.

Last year, North Carolina tried to use the Amazon Associates program, through which the Internet retailer pays local website operators and bloggers a commission for sales resulting from traffic they direct to Amazon's site, as a shoehorn. A law passed by the General Assembly said those affiliates provided the means--what tax people call nexus--to go after the sales tax. Amazon responded by dropping the program in North Carolina. But by now, the tax man, egged on by the legislature and emboldened by similar efforts in New York and a few other states, was spoiling for a fight. He--Revenue Secretary Ken Lay--told his auditors to make Amazon hand over the customer records. If the company wouldn't collect the tax, the state would use the information to make big purchasers cough up the back taxes on what they had bought.

Amazon filed a federal lawsuit to block the request, contending that the state's demand was so broad that it violated First Amendment rights of the company and its customers. It contends that the state would be looking at book and movie titles individuals had bought, something that could have a chilling effect on Amazon's business. The state doesn't care what Tar Heels have been reading or watching, Lay says. It just wants its money.

Whether Amazon has a First Amendment case--is buying a book the same as writing one?--those who oppose taxation of...