Wednesday, June 15, 2005

California Court Rules That Borders must charge Internet Sales Tax

The California 1st Circuit Court of Appeals has ruled that Borders web operations, run by, must remit state sales taxes for purchases made by customers based in California.

Borders Online is a distinct corporate entity from Borders Inc., which owns Borders retail stores, but both companies are owned by a common parent, Borders Group Inc. Borders was running the web sales operation as a distinct company with no physical presence in California, and the web store was managed by, but the 3-judge bench ruled that the online and store operations were too interlinked to consider separate. They cited in-store advertising for the Web site, receipts that said "Visit us online at"; and the ability of customers to return online merchandise at retail stores - all common-place features of most online stores. The appeals court also said the businesses were linked by Borders' cross-selling efforts to promote the Borders brand as a whole, with retail employees encouraging customers to visit the Web site, and the Web site providing information about the retail stores.

"This evidence demonstrates that the retail stores' activities were "significantly associated with [Borders] Online's ability to establish and maintain a market" in California, the court wrote, and thus the imposition of the use tax is constitutional."(Borders Online LLC v. State Board of Equalization, No. A105488, 2005 WL 1274623 (Cal. Ct. App., 1st Dist., Div. 4 May 31, 2005)

Following an audit, the State Board of Equalization demanded that Borders Online pay $167,668 in use taxes for Internet sales to California customers between April 1, 1998, and Sept. 30, 1999, pursuant to Section 6203 of the California tax code. Borders initially paid up, but then sued the State Board. The lower court, too, ruled for the Board. Borders has not indicated as yet whether they will appeal this ruling.

This raises the distinct possibility of other retailers and web-site only stores being levied with an Internet Sales Tax, despite a 1992 U.S. Supreme Court ruling that businesses can avoid paying sales taxes to states where they have no physical presence.

Independent booksellers have hailed the decision, calling it an example of the playing-field being levelled. Of course, in a Flat World, businesses may choose other means of protecting their customers' interests and protectionist measures oftentimes have a counter-productive effect on sales and revenues.

One solution might be a form of VAT, or Value Added Tax. Most countries around the world have adopted VAT-based sales taxation as a uniform means of levying taxes on transactions. In one form, like in the EU, each state charges its own rate of VAT. If a company sells out-of-state to a registered business it sells ex-VAT. If it sells to an individual, it sells inc-VAT. Taxation in the US can be quite complex. In Texas, for example, taxes can vary for the same zip-code, based on whether the residence is within one city's limits or another. If the state taxed all the sales made to people outside the state as well as ones made to people inside the state, which they're perfectly free to do, businesses would move out of that state and into one without sales tax. It might also contribute to smuggling operations and other forms of tax evasion like false inventory accounting.

Have you filed your use taxes fairly for online purchases? The taxman cometh.

Sell Globally, Tax Locally: Sales Tax Reform for the New Economy (AEI Studies on Tax Reform)/Michael S. Greve E-trepreneur: A Radically Simple and Inexpensive Plan for a Profitable Internet Store in 7 Days/Lamont  Wood Federalism in Taxation: The Case for Greater Uniformity (Aei Studies in Regulation and Federalism)/Daniel N. Shaviro Bargaining With the State/Richard A. Epstein Shifting the Burden : The Struggle over Growth and Corporate Taxation (American Politics and Political Economy Series)/Cathie J. Martin

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