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A proposed online sales tax in the US could become a privacy nightmare

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By Simon Davies

If you’re one of the millions of Americans who foolishly imagined that you had privacy on the Internet it seems you can now abruptly dismiss such thoughts. Internal Revenue Service (IRS) documents obtained by the American Civil Liberties Union (ACLU) show that the agency advises that there is “generally no privacy” of emails, tweets and social networking activity.

The IRS opinion will come as a surprise to anyone with even a basic appreciation of the existing protections for online communications.

The IRS opinion will come as a surprise to anyone with even a basic appreciation of the existing protections for online communications. There are rules and safeguards regarding email surveillance, but the government thinks differently. Quite clearly the Electronic Communications Privacy Act is too recent to have filtered through to the IRS, having been on the statute books for only 27 years.

By adopting such an extreme position the IRS has institutionally set the surveillance bar to a subterranean level. When the news agency CNET asked the agency last month to confirm whether it even bothered to seek warrants to intercept emails the IRS refused to comment.

In light of this position imagine how the IRS might advise state revenue authorities if the agency were ever in a position to steer a nationwide e-commerce sales tax scheme.

We may soon find out. Over the next few days the US Senate will debate the Marketplace Fairness Act (MFA), a bipartisan-backed piece of legislation which intends to require websites to raise sales tax on all transactions. Currently online sellers that do not have a physical presence in a particular state are not required to pay sales tax on goods sold within that state.

it’s a certainty that whenever government envisions a new tax there will be a surveillance infrastructure waiting in the wings to enforce it.

Whether or not there is any “market fairness” in this scheme is unclear, but it’s a certainty that whenever government envisions a new tax there will be a surveillance infrastructure waiting in the wings to enforce it. And, invariably, the most complex and controversial tax schemes will spawn the most challenging and controversial surveillance measures.

The current proposal is both complex and challenging. It will be like trying to enforce health and safety standards on the streets of Beijing. There are around 7,000 tax jurisdictions in the US and few of them are equipped to deal with the complexity and shapelessness of e-commerce. Many online sellers too are ill-equipped to deal with tax administration at the level of complexity that this system would involve.

The legislation is weak and vacuous, with much of its emphasis being on emotive aspects such as state sovereignty and fairness rather than practicalities, limitations, due process and safeguards.

This isn’t even a matter of debating the pros and cons of taxation – it’s about common sense. The legislation is weak and vacuous, with much of its emphasis being on emotive aspects such as state sovereignty and fairness rather than practicalities, limitations, due process and safeguards. As currently worded it’s a recipe for abuse.

State and federal authorities have for years been hunting for ways to tax Internet sales but have encountered huge legal obstacles. In 1992 the Supreme Court ruled that states could not force out-of-state retailers to collect tax on sales to residents unless Congress, which oversees interstate commerce, said so. Only retailers with a physical presence – a “nexus”  – in the state could be taxed.

Some states have tried to find ways round the court’s ruling. Illinois redefined “nexus” to include local third-party affiliates who sell through larger web outfits, such as Amazon. Colorado ordered retailers to send customers a tax bill and report them to the tax collector. New York has defined “nexus’ to include any shop that can be reached by clicking through on a New York-based website. All have faced legal challenges: Illinois and Colorado have lost in court, although New York’s tactic has recently been upheld.

Europe has operated an e-commerce sales (Value Added) tax system for a decade without calamity for business. However there are several reasons why this system – generally – functions without major drama.

Many operations will threaten to move off-shore, others will ignore the requirements, some will adopt a robust ideological position to oppose the law.

First, the scheme was initiated relatively early in the development of e-commerce, so new markets were able to build around those requirements. Second, the European system was integrated into the pre-existing cross-border VAT system which business was already accustomed to. The US has no such advantage. It will be imposing a new and quite alien layer of tax administration onto a well established and complex industry.

So what will happen if Congress passes this law? Initially, there will be chaos. Many operations will threaten to move off-shore, others will ignore the requirements, some will adopt a robust ideological position to oppose the law. However a huge chunk of the more complex e-commerce ecosystem will just stumble along, conforming as best it can but failing to achieve its quota of tax.

That’s when the real risk to privacy will occur. Faced with non-compliance and a barrage of “hotline” tip-offs from traditional retailers, tax authorities are likely to impose ever-more onerous requirements. Many of these will doubtless be a direct transposition of current enforcement tactics into the online environment – sweeps, random audits, court orders and surveillance of customer data. It is the latter threat that should especially concern anyone interested in privacy protection.

As it stands the legislation contains almost no protections – either for sites or for consumers. Congress should demand safeguards before it even entertains the idea of this law.