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Tax Reporting Laws Raise Privacy Claim Risks for Online Companies

By Marvin Kirsner and Elizabeth Rogers

States are scrambling to shore up sales tax revenues that are eroding because of e-commerce sales. A new approach to sales tax collections involves information reports on customers' online purchases. This approach may create potential legal claims against many online companies for giving too much information about customers to state tax agencies or even to the customers themselves. Companies potentially affected include any e-commerce business selling goods or taxable services, companies that sell digital products through electronic download or streaming service, cloud computing companies, and brick and mortar retailers that do not have stores in the state but deliver products there.

Because of U.S. Supreme Court precedent, brick and mortar companies and online companies are required to collect sales tax on products and taxable services only when the customer is in a state where the company has a physical presence (“nexus”), either directly or through affiliates. Although companies without nexus in the state where a customer is located are not obligated to collect the sales tax, the customer is still obligated to pay the tax to the state herself.

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