The California Appeals court ruling late last month that Borders had a sufficient presence in the state to force the chain to charge and collect tax on online sales is expected to be only the first of several decisions that will move the debate on online taxes forward. Next up is expected to be a ruling by the California Board of Equalization, the state's tax collection arm, on whether Barnes & Noble has enough of a physical nexus in the state for the company to pay tax on sales through BN.com. Sources said the staff of the BoE has already recommended that BN.com should be subject to sales tax; a formal ruling could come as early as this week.
The Borders decision was good news for the American Booksellers Association. The ABA, along with other traditional retailers, has long claimed that the lack of an Internet sales tax gives online retailers an unfair pricing advantage over their earthbound competitors. The Borders decision "could be the beginning of establishing tax equity on Internet sales," said ABA COO Oren Teicher. In its decision, the California court ruled that because Borders conducted cross-promotions between its stores and online site and permitted customers to return items to its stores that were purchased online, the company had established a physical presence in the state and therefore was subject to the tax laws. The court also rejected arguments that Borders and Borders Online were two separate companies. (Borders moved its online operations to Amazon in 2001.) Borders has until the end of July to appeal the ruling.
The ruling that Borders and Borders Online were not two companies is expected to strengthen the BoE argument that B&N should be collecting taxes on BN.com sales, especially since B&N assumed full ownership of the online retailer in May 2004.
Hut Landon, executive director of NCIBA, said the Borders ruling makes him feel "much better about the chances" that the BoE will require BN.com to pay sales tax. But even if BN.com is required to pay sales tax, "that is still only a skirmish. From day one we've said the main target has been Amazon." Landon maintains that although Amazon doesn't have stores in the state, its affiliates and agents who live and work in California give Amazon nexus. However, a tax lawyer familiar with the online sales issue said there are important differences between Borders and Amazon. Amazon's affiliates are not part of the Amazon corporation, the lawyer said, adding, "it doesn't logically follow that because the court ruled against Borders, it would rule against Amazon." Landon is hopeful, however, that if the BoE rules against B&N, the chain will then throw its clout behind efforts to press the board to require Amazon to charge and collect sales tax.