Taxed: Ruling Could Change Online Sales World

by Jim Milliot, PW Daily -- Publishers Weekly, 6/8/2005

Borders may be forced to pay tax on its online sales for the 2000 and 2001 period after a California Appeals Court ruled last week that the company's stores in the state makes it subject to California tax laws.

Current tax law requires companies only to pay sales tax in states in which they have a physical presence, and there has been a longstanding debate over whether stores constitute such a presence. But in its ruling, the court found that because Borders conducts cross-promotions between its stores and online site and permits customers to return items to its stores which were bought online, the company had established enough of a presence.

It now becomes a likelier possibility that other hybrid retailers would be forced to change its policy, as well as that other states might follow California with attempts to enforce sales tax laws of its own.

This ruling stems from a 2001 complaint filed by Borders in San Francisco seeking a refund for back taxes it paid in 1998 and 1999 on its online sales. The California Superior Court ruled against Borders in 2003, when the chain appealed to the appellate court. Borders did not pay online tax in 2000 and moved its online operation to Amazon in 2001; the ruling has no direct impact on Borders' online sales through Amazon. A Borders spokesperson said the company was reviewing the decision and had no comment on whether Borders will appeal to the California Supreme Court