California court finds Borders must pay sales tax for online sales
A California state appellate court in San Francisco has ruled against Borders Group Inc., finding that the book retailer must pay state sales tax on past online sales.
“The court has ruled that if you’re an online retailer and you maintain a relationship with brick-and-mortar operations in California, to the extent that those entities are acting as your agent, then you will not be able to avoid collecting and remitting sales taxes for online purchases,” says a spokesman for the office of the California State Attorney General.
Borders declines to comment on the ruling other than to say it is reviewing the court’s decision, but a spokeswoman notes that the ruling covers a period from May 1998 to September 2001 and that Borders has since changed how it operates online. “This is for a period only when we operated our proprietary Borders.com site,” she says. Borders’ online sales are now conducted by Amazon.com.
The San Francisco case involved $167,000 in sales tax revenue, an amount that Borders has already paid. It filed court action against the California State Board of Equalization to get a refund of the $167,000, but lost a lower court ruling before filing an appeal with the appellate division.
Based on a standing U.S. Supreme Court ruling, online retailers are not required to collect and remit sales tax from customers in states where the retailer has no physical presence, or nexus.
But California, which is also fighting Borders in a similar case in a Los Angeles court, believes the appellate court ruling can set a precedent for Borders’ current mode of operating online, the spokesman for the State Attorney General says. He notes that store receipts issued at Borders stores, for example, encourage store customers to also shop online.
Borders now sells online through a co-branded section of Amazon.com, which handles all inventory, fulfillment and customer service. Amazon records all online sales and pays Borders a commission on each sale.
In addition, Borders and Amazon let online shoppers check availability of ordered products in Borders stores, and arrange for store pickup. In that case, Borders records the sale and pays Amazon a referral fee.
The San Francisco case itself is unlikely to set a national precedent, but should nonetheless serve as a warning to online retailers that California as well as other states will continue to use legal resources to enforce taxes for online sales, says attorney Sarah Hewitt, who specializes in online retail sales tax issues for New York law firm Brown Raysman Millstein Felder & Steiner LLP. “This it suggests to other states that there’s a way to be creative if they want to get their hands on online sales tax revenue,” she says. “It’s an indication of the interest states have in getting their mitts on that revenue.”
California state tax officials have also expressed interest in possibly pursuing legal action against Amazon.com Inc. because of its relationships with brick-and-mortar partners, Hewitt says. “Amazon has to be careful about who they partner with,” she says, adding that being forced to charge sales tax would alter Amazon’s low-cost business model.
Amazon, however, says it maintain business as usual. “The recent decision by a California court which may allow the state to require Borders to begin to collect sales tax will not have an impact on Amazon.com," an Amazon spokesman says. "Amazon.com will continue its practice of not collecting sales tax from the Borders.com web site for sales into California as Amazon.com has no ownership interest in any Borders entities, including the one that owns the physical stores in California.”
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