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Originally published June 2005
Online retail businesses making sales in California, and having certain physical ties – even if only indirect – to the state, should be aware of potential state use tax liability, as discussed in the recent California state appellate case, Borders Online, LLC v. State Bd. of Equalization.
An excise or use tax is imposed "on the storage, use or other consumption in [California] of tangible personal property purchased from any retailer…for storage, use or other consumption in" California. Technically, purchasers of personal property pay the tax, but it is collected by retailers – who are liable to the State of California for failure to collect and remit it.
In 1998 and 1999, Borders Online, LLC ("Online") sold California consumers more than $1.5 million in merchandise (books, magazines, CDs, etc.) over the Internet from www.Borders.com. The website contained a statement that customers could return any such merchandise to any Borders Books and Music ("BBM") store for a refund or an exchange. Borders, Inc. ("Borders") – which had the same corporate parent as Online – owned the BBM stores. Many BBM stores were located in California.
Online was incorporated in Delaware and headquartered in Michigan. Online did not own or lease any property in California, and did not have any employees or bank accounts in the state. Merchandise orders to Online were processed by employees outside California. Therefore, Online believed that it did not have to collect use taxes from California customers or pay the taxes over to the State of California.
Borders and Online, in addition to having a common owner, had many common members of their respective boards of directors. Borders and Online also shared a logo, exchanged certain financial and market data and filed joint California tax returns – but did not intermingle their respective corporate assets.
BBM store receipts sometimes contained the statement, "Visit us online at www.Borders.com." BBM store employees were encouraged to refer customers to Online. Online’s website linked to BBM’s website,www.borderstores.com, which contained advertising and lists of store locations.
Whenever an Online customer returned merchandise to BBM stores, it was absorbed into Borders’ inventory or disposed of. BBM did not charge Online for accepting the returned goods.
The California appellate court held that Online, by its affiliation with Borders, had to collect and remit the use tax on its customers’ purchases. "By accepting Online’s merchandise for return, Borders acted on behalf of Online as its agent or representative in California" (emphasis added.) This was true even though Online and Borders had no written contracts concerning the return of merchandise, and Borders claimed to believe subjectively that it was not Online’s agent. The Court further held that Borders effectively assisted Online’s selling efforts to California customers by offering them the opportunity to exchange or get refunds for unsatisfactory goods locally. Consequently, Online was held liable for the use taxes for 1998 and 1999.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
