Inland Revenue did not respond to requests for information about companies from which it sought data, and the Trade Me case has come to light only because the company publishes a "Transparency Report" to tell customers about approaches to it for their information.
Trade Me's trust and safety chief, Jon Duffy, said the firm initially resisted the order to hand over members' data. "We were pretty uncomfortable with how broad it was. The number at the start was closer to one million. That made us stand up and take notice and ask if that was absolutely necessary."
He said IRD was able to reduce the amount of data Trade Me had to provide by explaining "the type of transactions and volumes that were targeted". Information released included transaction records, financial data and the details members gave Trade Me to register accounts.
The IRD approach in 2012 was resolved last year after negotiations.
Mr Duffy would not say if the one million members initially covered represented those who sold through Trade Me, although he said the company's 3.6 million membership was largely made up of those who used the website for buying goods.
An Inland Revenue spokesman sent prepared responses on the Trade Me case, saying the agency obtained "large datasets" regularly.
He said members should be paying tax if they bought something with the purpose of selling it again, traded to make a profit or had a business which involved the goods being traded. The agency also acknowledged the information provided by Trade Me could be used to identify those who had not paid taxes.
The request for the vast database of information comes at a time when the tax department is upgrading its antiquated but powerful computer systems, expanding its ability to collect and analyse data.
Deputy Commissioner Mike Cunnington said IRD was undertaking a "business transformation" and the handling of data was an important issue on which it wanted feedback.
He said the massive growth in data was an issue the department would have to grapple with - and could include law changes.
"Some of the legislation we operate under was written in a paper-based world where information got embedded in a monolithic mainframe. That's not how the world is nowadays. A lot of our legislation isn't quite right for the world today."
Asked if change could include declaring which firms data was sought from, he said: "In principle, transparency is a good thing."
He said consultation on the "transformation" project included asking "what is the appropriate use of data".
"You've got this exponential growth in data and exponential growth in the ability to share and manipulate data. When you're thinking about how the tax system needs to work five or 10 or 15 years ahead, data exchange is going to be a fundamental part of that.
"The vast majority of New Zealanders want to pay their tax and get it right. Those people also want us to make sure the small number who aren't doing the right thing, that we're catching them. Data is a tool that can help us achieve both those things."
University of Auckland Business School senior lecturer Mark Keating - who has worked with IRD's tax investigation team - said the targeting of large datasets was new and gave the department a powerful new tool.
He said court decisions had confirmed IRD's powers to demand information about taxpayers from anyone who held it. That included going on a fishing expedition for individuals or groups of individuals.
"Inland Revenue can fish with what amounts to a dragnet. The Inland Revenue are now using Edward Snowden-size sets to fish."
Mr Keating said the amount of information held about customers, and IRD's desire to capture large datasets, meant companies were virtually working for the tax agency.
"People might have thought they could hide on Trade Me. That's not going to work now."
