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California wins tax spat with Borders.com

Borders Online should have collected sales taxes for Internet orders sent to California, an appeals court rules.

State governments' attempts to collect tax from retailers who also sell online received a boost thanks to a recent decision by a California appeals court.

The state court said that the once-cozy relationship between Borders, which operates physical storefronts, and Borders Online permits California to collect sales taxes on Internet shipments sent into that state.

"Borders' receipts were sometimes imprinted with 'Visit us online at www.Borders.com,' and Borders' employees were encouraged to refer customers to Online to find merchandise not available at Borders stores," the California court concluded on May 31.

It's unclear how far-reaching the impact of the court's decision will be. Even though few retailers have precisely the same structure that Borders created in the late 1990s, the ruling could embolden tax collectors in other states who are worried about their inability to collect money from major Internet retailers.

In general, out-of-state retailers are not required to collect sales taxes on shipments sent to other states. That's what the U.S. Supreme Court concluded in a 1992 case, Quill v. North Dakota, saying that any other rule would unduly interfere with interstate commerce.

Borders Online, which has its headquarters in Michigan, said the Quill rule should immunize it from collecting sales taxes on shipments sent to California customers. It had no employees, bank accounts or property in California.

But the close relationship in 1998 and 1999 between Borders and Borders Online, including a deal that let Internet customers return books to more than 120 physical storefronts in the state, was enough to permit the California's Board of Equalization to win the case, the three-judge panel concluded. (Borders' online sales are now handled by Amazon.com.)

The time frame at issue in the lawsuit was April 1998 through September 1999, during which the two Borders companies shared members of their boards of directors and had similar logos but did not intermingle their corporate assets.