Since 1999, Borders has used Amazon.com to handle on-line sales. But before that switch, it sold more than $1.5 million of books and CDs through its own on-line presence at Borders.com, a site then operated by a company then called Borders Online, Inc. That company had its headquarters in Michigan. And while it was part of the same group of companies as the Borders Books and Music stores, it had no premises, employees or bank accounts in California.
It is the state taxes on these internet sales – a bill for $167,000 – that caused the dispute with California's Board of Equalization. Borders paid, but it fought in court for a refund, without success. So it appealed.
California's First District Court of Appeal ruled on the case on 31st May, upholding the decision in favour of the tax collector – a ruling which could affect some other companies with both an off-line and on-line presence today.
Internet businesses rely on a 1992 Supreme Court decision that prevents states from collecting sales taxes from a business unless the company has a physical presence or “nexus” in that state.
This creates an obvious discrepancy between on-line and off-line retailers, with the latter arguing that it is unfair for them to have to collect taxes while their on-line competitors do not, making it harder to compete with a dot.com.
In the Borders dispute, the court looked at the connection between the on-line company and the off-line company. Their respective boards of directors contained some of the same people. And it noted that customers could return books purchased on-line to the physical stores. This made the off-line company the on-line company's authorised agent or representative, and the court viewed this policy as an integral part of the on-line service. California-based stores also advertised the web business on their till receipts: "Visit us at www.Borders.com".
So while the on-line company was based outside the state, the court decided that it had a sufficient presence in California to justify the imposition of the tax burden.
