Retailer Liable for Calif. Sales Tax on Internet Sales

Rhett Pardon
SAN FRANCISCO — A little-noticed California legal opinion may impact online retailers in a very big way — by forcing them to pay sales tax for products sold to state residents.

The ruling has a direct impact on mainstream, as well as adult, companies that have both online and offline businesses.

By accepting returns through Borders Group Inc. bookstores in California, Borders Online became obligated to collect state tax on merchandise sold to California residents, the state’s 1st District Court of Appeal ruled earlier this month.

The “cross-selling synergy” created by the connection between the Borders bookstores and the online retailer were sufficient to support the state’s taxing authority under the Commerce Clause of the U.S. Constitution, the court said, which pointed out that the two companies also used similar logos, had linked websites and shared some market and financial data.

The court affirmed a summary judgment in favor of the State Board of Equalization concluding that Borders Inc. was acting as an agent for Borders Online LLC, bringing the transactions within the sphere of Revenue and Taxation Code Sec. 6203(c)(2).

Both Borders and Borders Online are division of Borders Group Inc. Borders Online had California sales of more than $1.5 million in 1998 and 1999, the period at issue in the litigation.

Borders Online paid California use tax of nearly $168,000 for that period, but sought a refund, claiming that it was not “engaged in business in” the state within the language of Sec. 6203(a).

Sec. 6203(c)(2) defines a retailer as engaged in business in California if it has a “representative [or] agent...operating in this state ... for the purpose of selling ... any tangible personal property.”

Borders also contended that requiring it to collect the tax would violate the Commerce Clause.

The appellate court rejected both arguments.

“By accepting online merchandise under the terms of Border’s online’s return policy, Borders was effectuating its online’s policy, even if it was also Borders’ own policy. The undisputed facts show Borders acted as online’s agent,” the court said.

“Whatever the subjective intent of [Borders] online or its individual customers, the [tax] board’s conclusion that [Borders] online’s return policy is integral to making sales because of its attractiveness, convenience and trustworthiness is persuasive, especially in the context of e-commerce.”

Though Borders Online later eliminated all reference to its return policy at Borders bookstores from its website, the court said that made no difference, especially since the stores continued to make the refunds or exchanges when asked to do so.

The case is Borders Online LLC vs. State Board of Equalization, No. A105488.