June 16, 2005

E-commerce > Court: Borders.com Must Charge California Sales Tax

Washington Post:

Borders Group Inc. says it has never collected sales tax for books and music sold over the Internet to California residents, even though the Ann Arbor, Mich.-based corporate parent operates 129 California stores under the Borders and Waldenbooks brands, as well as a 414,000-square-foot distribution center in the state.

Borders says it doesn't have to collect California sales taxes because its online division _ since outsourced to Amazon.com _ doesn't own or lease property in the state. None of the online division's employees or bank accounts are in California and all Internet orders were received and processed outside the state.

"We've done everything within the confines of the tax law. We have always believed that what they did was correct under the Constitution," said Borders lawyer Scott Brandman.

California's 1st District Court of Appeal in San Francisco rejected that argument, ruling on May 31 that the Borders' Web site and retail stores have been too intertwined to call themselves separate companies.

Sales tax is a huge issue for online operations. The issue isn't just charging sales tax - it's figuring out the tangle of laws necessary to calculate the correct sales tax and remit it to the proper authorities. This Slashdot comment is a great example:

You can't even calculate sales taxes by zip code.

In Texas, for example, the sales tax rates in my zip code are 8.25% in the city limits and 6.25% outside the city limits. There are some zip codes that have three different sales tax rates depending on the location within that zip code.

Even if the sales tax is 8.25% in the zip code, the 2% local sales tax may be due to different local taxing authorities depending on the address. For example, you could have a city sales tax and a county sales tax for sales outside the city. So the company would have to be able to determine which taxing jurisdiction in order to properly remit the local sales taxes collected.

Here are, to the best of my knowledge, the Texas sales tax rules:

case 1: If the order is placed to a company in Texas, the sales tax to use is the sales tax where the company is located.

case 2: If the order is taken outside the state by a company who has no business presence in Texas of any kind, they are not required to collect sales taxes. However, if they wish to collect sales taxes, they may, as long as they remit whatever is collected to the state of Texas.

case 3: If the order is taken outside the state by a company who has a single business presence in Texas, the applicable sales tax is that of the location of that business. For example, if they have a store in Dallas and no other presence at all, you pay the 6.25% state sales tax and the 2% local sales tax which goes to Dallas.

case 4: If the order is taken outside the state by a company who has two or more business presences in Texas, the applicable sales tax is that of the destination address. So if the sales tax rate of every store by the company is 8.25% but the destination is in a 6.25% area, the applicable sales tax is 6.25%.

The company I work for doesn't have a nexus in California, but some of our distributors do. Typically we drop-shop items from the distributor or manufacturer to the customer. If the distributor is in California, however, we have the item shipped to us in Tennessee, then we re-ship to the customer in California.

Several customers have offered to pay the sales tax to expedite shipping, but we have to refuse. Why? Once we start paying sales tax in California or any other state, we can't stop. So even in cases where the distributor isn't in California, we'd have to charge all California customers sales tax once we started. That's why we don't start.

I don't think the Borders case will have much effect on 99% of e-commerce operations. Borders tried to construct a thin, Chinese wall between their online and bricks-and-mortar divisions, but the Supreme Court saw through it, noting the following ties between the two:

  • Both shared a similar name and logo. That's pretty thin, but...
  • Borders stores advertised the www.borders.com URL, which could simply be advertising, except...
  • Borders.com customers could return items to the physical stores in California. Ouch. In my mind that clearly illustrated the relationship between the two.

Now that the Chinese wall is down, Borders should take better advantage between their online presence and physical presence and develop a more sophisticated "bricks and mortar" strategy. The returns are a good start.

BestBuy has a fantastic bricks and mortar strategy that I've used in the past. When you buy from BestBuy.com you can query inventory at your local BestBuy stores. If the item is in the local inventory you have the option of picking it up at the local store rather than waiting for delivery. The local store will take the item off the shelf for you to pick up. Returns can also be processed at the local store.

Posted by lesjones

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