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Ruling Could Lead to Internet Sales Tax

An appeals court's decision against Borders Group sets a precedent for levies on goods bought online by state residents, analysts say.

June 14, 2005|From Associated Press

A little-noticed appellate court ruling against Borders Group Inc. sets a precedent that could enable California to force some major Internet retailers to start paying the state sales tax for books, music and other goods sold online to state residents, analysts said Monday.

Whether California tax collectors use the precedent to go after not only Borders but also Barnes & Noble Inc., and other online retailers remains to be seen. But independent booksellers and other bricks-and-mortar retailers have been cheering, saying the ruling should remove their Internet competition's unfair advantage.

"There are a lot of online retailers who are watching this intently," said Tom Dresslar, spokesman for state Atty. Gen. Bill Lockyer. "Clearly online retailing is growing, so one would think the potential revenue problem is fairly substantial."

Businesses can avoid paying sales taxes to states where they have no physical presence, according to a 1992 U.S. Supreme Court ruling.

Borders Group says it has never collected sales tax for books and music sold over the Internet to California residents, even though the Ann Arbor, Mich.-based company operates 129 stores in California under the Borders and Waldenbooks brands, as well as a 414,000-square-foot distribution center in the state.

Borders Group says it doesn't have to collect California sales taxes because its online division -- since outsourced to -- doesn't own or lease property in the state.

"We've done everything within the confines of the tax law," Borders Group lawyer Scott Brandman said. "We have always believed that what they did was correct under the Constitution."

California's 1st District Court of Appeal in San Francisco rejected that argument, ruling May 31 that the company's website and retail stores have been too intertwined to call themselves separate companies. The three-judge panel cited in-store advertising for the website, receipts that said, "Visit us online at" and the ability of customers to return online goods at retail stores. The judges also noted that the companies had board members in common and shared a similar logo.

The decision could lead to similar rulings by the State Board of Equalization against New York-based Barnes & Noble and Seattle-based, which handles online sales for Borders and others, said Lenny Goldberg, executive director of the California Tax Reform Assn. who also lobbies for the Northern California Independent Booksellers Assn.

Borders hasn't decided whether to appeal to the California Supreme Court. Neither Dresslar nor Anita Gore, a spokeswoman for the state tax collection agency, would comment on what the state will do next.

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