A ruling in a California appellate court may be a key step in ending the current exclusion from charging sales tax enjoyed by the online divisions of brick and mortar retailers. The ruling was in a suit brought by Borders Group, which sued the state of California over sales tax that the state had charged Borders for sales made to California customers in 1998 and 1999. Borders had paid the tax but then sued the state to get a refund.
Borders argued that its online division, with no property, bank accounts, or employees in the state, was not subject to sales tax. The state argument, which was accepted by the court, was that the online division and the brick and mortar stores were too closely connected to be considered separate companies. Borders operates 129 Borders and Waldenbooks stores and a 414,000 square foot distribution center to serve them in California.
The connections between the online and brick and mortar divisions were substantial. Store receipts said, 'Visit us online at www.Borders.com;' in-store advertising promoted the online division; and returns from the online division are accepted at the brick and mortar stores. The court also noted that the companies shared a common logo and had common board members.
The ruling by the 1st District Court of Appeal in San Francisco rejected Borders' claim that the divisions were separate and that no sales tax was due. The next stop for Borders, should it choose to appeal, will be the California Supreme Court.
There's a lot at stake in this case and others that are currently working their way through the court systems of other states. Brick and mortar retailers have long argued that online retailers have an unfair price advantage because of their untaxed sales, and cash-strapped state and local governments are salivating at the prospect of collecting an estimated $15 billion a year in sales taxes on online sales.