Californian Court Rules Online Retailer Must Pay State Sales Tax

by Mike Godfrey, Tax-News.com, Washington

15 June 2005

A key ruling by a Californian appeal court has set an important precedent that could oblige internet retailers based out of state to collect sales tax on goods sold to Californian residents.

In the case in question, Michigan-based online book retailer Borders argued that it doesn't have to collect California sales taxes because its online division, which has since been outsourced to Amazon.com, does not own or lease property in the state, and all internet orders were received and processed outside the state.

The Supreme Court ruled in 1992 that states could not force businesses outside their borders to collect their sales taxes unless the companies have stores or headquarters in those states. However, in the May 31 ruling, the three-judge panel at the California 1st District Court of Appeal in San Francisco rejected Borders' argument, noting that the firm's web site and retail stores are inextricably linked and cannot be defined as separate entities.

The key factors behind this reasoning included in-store adverts for the website, receipts that promoted borders.com and the ability of customers to return online merchandise at retail stores. The judges also noted that the companies had board members in common and shared a similar logo.

The lawsuit began after a state audit of sales between April 1, 1998 and September 30, 1999 found that the company owed more than $167,000 in taxes, which Borders duly paid up. However, the firm's request to have the money refunded was denied by state tax collectors, leading Borders Online to sue in a lower court.

Commenting on the appeal court's decision, a disappointed Borders lawyer, Scott Brandman observed that:

"We've done everything within the confines of the tax law. We have always believed that what they did was correct under the Constitution."

Currently the states estimate they are losing over $15 billion a year from internet sales, although much of this relates to uncollectable inter-state sales. Borders is also fighting online sales tax disputes in Nevada and Illinois, according to documents filed with the Securities and Exchange Commission.

The company has not yet announced whether it intends to contest the latest ruling in the California Supreme Court.

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