Amazon.com LLC v. Lay

Filing 53

RESPONSE, by Defendant Kenneth R Lay, to 44 MOTION for Summary Judgment. (Attachments: # 1 Declaration of H. Alan Woodard, # 2 Certificate of Service)(Brennan, Thomas)

Amazon.com LLC v. Lay

Doc. 53 Att. 1

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SECOND DECLARATION OF WOODARD - 1 10-cv-00664-MJP v. KENNETH R. LAY, in his official capacity as Secretary of the North Carolina Department of Revenue, Defendant. AMAZON.COM, LLC, Plaintiff,

THE HONORABLE MARSHA J. PECHMAN

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

No. 10-cv-00664-MJP SECOND DECLARATION OF H. ALAN WOODARD IN SUPPORT OF NC REVENUE'S RESPONSE TO AMAZON'S SUMMARY JUDGMENT MOTION

I, H. Alan Woodard, do hereby depose and say as follows: 1. I have previously provided a Declaration in this matter and provide this Second Declaration in Response to Amazon's Motion for Summary Judgment. provided in that Declaration is hereby incorporated herein by reference. The information

N.C. Department of Justice Post Office Box 629 Raleigh, North Carolina 27602 [phone] Fax [phone]

Dockets.Justia.com

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2. As explained in the previous Declaration, when NC Revenue conducts a sales and use tax audit, it typically requests certain general information about the purchase and sales transactions in order to determine taxability, including the name and address of the purchaser and the name and address of the party to whom the product is shipped, if they are different. See, e.g., Woodard Decl., ¶ 8. 3. This information is requested for a number of reasons. This information is absolutely essential to the Department's ability to determine if any use tax should be assessed against the purchasers. 4. This information is also relevant to the proper determination of sales tax liability. First, customer information is necessary in order to determine the applicability of certain exemptions under North Carolina law. See, e.g., Woodard Decl., ¶ 6. In addition, this information is also useful when the Department decides circumstances make it appropriate to verify that certain transactions as reported by the taxpayer actually occurred or occurred as reported. In order to obtain verification of transactions in question, the Department may contact some or all of the taxpayer's customers, depending on the particular facts and circumstances. 5. In addition, the Department obtains customer information to aid in the determination of the responsible party for the taxable transaction. For example, this information is relevant in the context of a sale for resale. If a taxpayer under audit provides a properly executed certificate of resale, the liability on that transaction is transferred to the purchaser. In order to determine the proper party liable for the tax, the Department must match the information on the certificate of resale with the customer information to determine the accuracy and validity of the certificate.

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N.C. Department of Justice Post Office Box 629 Raleigh, North Carolina 27602 [phone] Fax [phone]

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6. Often the taxpayer does not provide a certificate of resale during the course of audit. In these situations, the Department generally provides the taxpayer with working papers and asks the taxpayer to indicate any transactions that it believes are exempt, including any that would be exempt as a sale for resale. If the taxpayer claims any sales for resale, the Department would then verify the accuracy of the certificates, including whether the purchasers were properly registered for North Carolina sales and use tax purposes. Customer information is needed for these functions. Even though Amazon contends it is not required to collect sales taxes for sales to North Carolina customers, it would likely want to reduce its potential tax liability by asserting, in the alternative, an exemption for sales for which it could after-the-fact produce certificates of resale. Certificates of resale can substantially reduce a seller's tax liability. 7. Even in cases such as this, where the taxpayer disputes its liability, the Department makes every effort to arrive at the correct amount of liability in the event that the taxpayer is ultimately determined to be liable for the tax. 8. In the event certificates of resale are produced, the Department may then institute an audit of the purchaser to determine its proper sales and use tax liability after conducting a preliminary investigation regarding that purchaser. As part of the preliminary investigation, the Department would look at the purchaser's sales and use tax reports filed with North Carolina, which would include information regarding the taxpayer's gross receipts and amount of tax paid. The Department may also look at the 10-Ks filed with the SEC. If the Department conducted an audit, the Department would, for example, verify whether the purchaser resold the product or whether it used the property in the regular course of its business operations. If the purchaser used the property in its business, this would indicate that the certificate was issued improperly and that use tax was due on the transaction (if the seller accepted the certificate in good faith).
N.C. Department of Justice Post Office Box 629 Raleigh, North Carolina 27602 [phone] Fax [phone]

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The assessment of sales and use taxes is a fact-intensive process. Exemptions and liability often turn on narrow factual distinctions regarding the nature of the transaction, the character of the parties to the transactions or the taxpayer's business operations. Customer names and addresses often provide important information in the context of sales tax liability. Of course, as previously stated, customer information is absolutely essential to the determination of use tax liability. 9. In the use tax context, another purpose for obtaining the "bill to" and "ship to" name and

address is to determine whether the purchaser can be assessed use tax. Generally, under North Carolina law, where the sales tax is not collected, the purchaser is liable for the use tax. There may be circumstances, however, where the purchaser cannot be assessed use tax liability. For example, if a North Carolinian purchased a product and had it shipped to a resident of New York, the Department would generally assess use tax on the North Carolina purchaser. If the transaction were reversed, however, and a New York resident purchased the product and had it shipped to a North Carolina resident, the Department would generally not assess use tax against the New York resident. Again, these determinations are highly fact dependent. 10. The Department is currently involved in an Internet Transaction Resolution

Program ("ITRP"). See Exhibit 1. In connection with that program, the Department contacted internet retailers in an effort to resolve their sales and use tax liability to the State of North Carolina. The Department has informed all internet retailers that, if they sign up for and successfully complete the program by agreeing to collect sales taxes, the Department will not exercise its authority to gather information about their customers in order to collect use taxes. The ACLU has asserted, citing my previous Declaration, that the Department has "threatened" to issue "overbroad information requests . . . that encompass details about individuals' purchases of expressive and private items" to internet retailers that do not participate in the program. These
N.C. Department of Justice Post Office Box 629 Raleigh, North Carolina 27602 [phone] Fax [phone]

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assertions are incorrect. As explained in my previous Declaration, the Department has not requested expressive content from any taxpayer, including internet retailers. Nor is this the type of information that the Department would seek in connection with an information request to nonparticipating internet retailers. Again, as previously explained, the Department would simply seek general information sufficient to determine the taxability and rate of tax applicable to each transaction and customer names and addresses. As previously explained, there are not

differential tax rates or exemptions relating to pornography, political views or other expressive content. 11. As also previously explained, the Department has requested that Amazon provide

more general product codes and has offered to return the disks with the ASIN numbers in exchange for more generic descriptions. Amazon has asserted in one of its Declarations that it "does not maintain sales records for specific items in its systems by more generic product codes." Galbreath Decl. ¶ 8. After Amazon provided the Department with the disks, the Department discovered that, beginning in June of 2008, Amazon included what it called "product tax codes" for each transaction. The product tax code consisted of a five-digit number. The five-digit product tax code or "PTC" relates to a "description" field. The description field uses terms such as "General Books," "Digital Books," "Music Downloads," "General Food," "Candy" and "Candy with Flour." Unlike ASIN numbers, this type of more general product information is relevant to the North Carolina sales and use tax statutory scheme (and that of any state that is a member of the Streamlined Sales Tax Project). 12. Amazon to date has not provided similar information for any of the other periods

under audit. Based on preliminary estimates, Amazon's sales tax liability to North Carolina is in the ballpark of $50,000,000 without interest and penalties. Because Amazon has failed to file
N.C. Department of Justice Post Office Box 629 Raleigh, North Carolina 27602 [phone] Fax [phone]

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and pay, it is facing substantial penalties. It is widely recognized that states are losing substantial sums of tax revenue as a result of internet retailers failing to collect sales taxes. The most recent estimates establish that North Carolina will lose $162 million in 2010 alone from un-taxed ecommerce sales. 52 State Tax Notes 537 (May 18, 2009). 13. In an effort to bring internet retailers like Amazon into compliance with North

Carolina law, the Department has offered to waive tax, interest and penalties for all years prior to 2010 if the retailer agrees to collect taxes for a period of four years, beginning in September 2010. Amazon has been offered this opportunity but has elected not to participate.

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