State Efforts to Obtain Customer Identifying Information in Digital Goods Audits: Balancing Tax Compliance and Data Privacy

State efforts to obtain customer identifying information for digital goods audits have raised concerns about data privacy. Tax authorities are requesting sensitive information such as names, addresses, and even Social Security numbers to determine how to source digital transactions. The Streamlined Sales Tax Governing Board is taking steps to amend its agreement to simplify sales tax codes, addressing issues with assigning local tax rates when complete customer information is not collected.

The lack of a national data privacy law in the US has left many companies unsure of how to navigate these requests. While states like California have robust data privacy laws, the exemption for compliance with tax laws is not always clear. Telecommunications companies have long been subject to providing customer information for compliance with the law, but the intersection of tax compliance and data privacy laws is becoming increasingly complex.

The European Union’s General Data Protection Regulation (GDPR) sets strict guidelines for the transfer of personal data, even outside of EU member states. However, the US has successfully argued that its interest in tax compliance outweighs privacy concerns, as seen in the case of United States of America v. Eaton Corp. The court ruled in favor of the IRS, allowing the transfer and disclosure of data for tax purposes.

Companies can take protective measures to ensure compliance with data privacy laws, such as providing customer account numbers instead of names and addresses, or requesting administrative summons for personally identifying information. The gray area between tax compliance and data privacy laws is evolving, but companies can protect themselves by reviewing audit practices and implementing internal processes.

As the landscape of data privacy and tax compliance continues to shift, companies must stay vigilant in protecting customer information while meeting their tax obligations.