- The Washington Times - Tuesday, June 14, 2005

A recent California appellate court ruling against Borders Group Inc. could make it easier for states to tax Internet retailers that sell books, music and other goods online.

Although Borders has not announced whether it would appeal, federal commerce issues involved in the case mean it could be considered by the U.S. Supreme Court.

Other states have avoided Internet taxation because of the complexity of the issue, said Jeremy Spector, a Washington tax lawyer who handles e-commerce cases.

With the May 31 California ruling, “They may look to California for guidance,” Mr. Spector said.

Borders is also fighting online sales tax offensives in Nevada and Illinois, according to documents filed with the Securities and Exchange Commission.

Under a 1992 U.S. Supreme Court ruling, states can tax businesses for interstate transactions only if they have a physical presence in the state.

Most retailers that sell online, such as Sears, Crate and Barrel, Barnes & Noble Inc., have outlets nationwide. Consumers must pay sales tax if the retailer has a store in their state.

Ann Arbor, Mich.-based Borders operates 129 stores in California under the Borders and Waldenbooks brands, as well as a 414,000-square-foot distribution center in the state.

However, Borders argued that it keeps its online sales separate from its retail brick-and-mortar outlets, which means the court should consider them separate businesses.

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

But California’s 1st District Court of Appeal in San Francisco ruled that the company’s Web site and retail stores are too intertwined to be called separate companies.

The three-judge panel cited in-store ads for the Web site, receipts that said, “Visit us online at https://www.borders.com” and the ability of customers to return online goods at retail stores.

The ruling also noted the companies shared board members and a similar logo.

The decision could lead to similar rulings in California against Barnes & Noble and Amazon.com, said Lenny Goldberg, executive director of the California Tax Reform Association.

The National Retail Federation, which represents both bricks-and-mortar and online retailers, said yesterday the ruling is not significant. It shouldn’t have much effect on other retailers because Borders set up its online business as a separate subsidiary to its a bricks-and-mortar business, which is not the way most multichanneled retailers are structured, said Maureen Riehl, vice president, government and industry relations counsel for the group.

The appeals court ruling reiterates a 1992 Supreme Court ruling that said businesses can avoid paying sales taxes to states where they have no physical presence.

“We believe in a level playing field where all retailers play by the same tax rules,” said J. Craig Shearman, an NRF spokesman.

Independent booksellers and other bricks-and-mortar retailers say the ruling might help them compete against their untaxed Internet competition.

“There are a lot of online retailers who are watching this intently,” said Tom Dresslar, spokesman for California Attorney General Bill Lockyer. “Clearly online retailing is growing, so one would think the potential revenue problem is fairly substantial.”

States and local governments have lost $15.5 billion in sales tax revenue because of Internet sales, according to conservative estimates by researchers at the University of Tennessee. The loss is projected to increase to $21.5 billion by 2008 as e-commerce continues to grow.

Until now, states have not taxed Internet sales because of questions about whether they would infringe on the federal government’s exclusive authority over interstate commerce.

“The real problem has been, does the state have the jurisdiction to do that under the Commerce Clause,” said Joseph A. Rieser, a Washington tax lawyer who handles telecommunications cases.

Donna De Marco contributed to this report, which is based in part on wire service reports.

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