North Carolina is now asking Amazon.com to hand over sales records of all transactions shipped into the state since 2003. The state believes that many of its constituents are not paying the appropriate "use tax" on purchases, and it's probably right.
This is a tricky situation, though. Amazon is turning to the federal courts to block the state's request, the company's argument being that privacy rights are being trampled. On that count, Amazon is probably right, too. Critics of the state's move argue that it violates free speech as well as a federal law governing the confidentiality of video purchases.
Amazon doesn't peddle hardcore pornography, but it's understandable why someone wouldn't want the state to know that they're reading up on coping with alcoholism or unpopular religious beliefs.
The two parties lunged at one another this past summer, and Amazon came out on top. Under old mail-order laws, a retailer doesn't have to collect sales tax if it lacks a physical presence in the state. Amazon automatically tacks on sales tax in its home state of Washington and the handful of states where it houses a distribution center.
North Carolina argued that the Amazon Associates program -- the affiliate marketing plan that allows bloggers, website operators, and fundraising groups to generate royalties by referring visitors to buy merchandise through Amzon.com -- gave it a physical presence in North Carolina.
Amazon's response was swift and brutal. It booted all of the state residents as affiliates, leaving North Carolina to address the move that tripped up home businesses and cut off the incremental revenue streams.
So is this new move simply a case of sour grapes? It is, if it's only targeting Amazon. However, smaller e-tailers, including Overstock.com
If North Carolina is successful, Amazon will be taken down a few pegs. Shoppers who don't pay the use tax, whether intentionally or not, will no longer perceive Amazon's pricing advantage the same way. Privacy concerns may force some Amazon shoppers elsewhere.
The outcome won't be fatal, of course. Wal-Mart
North Carolina may be doing the right thing, since it's rightfully entitled to collect use tax, but it seems to be going about it the wrong way.
Is it too late to change those "first in flight" license plates to "first in paranoia-mongering"?
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Longtime Fool contributor Rick Munarriz has been shopping online for about as long as Amazon.com has been in business. He owns no shares in any of the stocks in this article and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.