Metropolitan News-Enterprise


Wednesday, June 1, 2005


Page 3


Borders Must Collect State Tax on Online Sales—C.A.


By a MetNews Staff Writer


By accepting returns through Borders bookstores in California, Borders Online became obligated to collect state tax on merchandise sold to California residents, the First District Court of Appeal ruled yesterday.

The court affirmed a summary judgment in favor of the State Board of Equalization granted by San Francisco Superior Court Judge Ronald E. Quidachay. In accepting the returns, Div. Four concluded, Borders, Inc. was acting as an agent for Borders Online, LLC, bringing the transactions within the ambit of Revenue and Taxation Code Sec. 6203(c)(2).

Both Borders and Borders Online are subsidiaries of Borders Group, Inc. Borders Online had California sales of more than $1.5 million in 1998 and 1999, the period at issue in the litigation. Borders Online paid California use tax of nearly $168,000 for that period, but sought a refund, arguing that it was not “engaged in business in” the state within the meaning of Sec. 6203(a).

Sec. 6203(c)(2) defines a retailer as engaged in business in California if it has a “representative [or] agent...operating in this state...for the purpose of selling...any tangible personal property.”

The company also contended that requiring it to collect the tax would violate the Commerce Clause of the U.S. Constitution.

Writing for the appellate court, Justice Maria P. Rivera rejected both arguments.

In order to find an agency relationship, Quidachay was not — as Borders Online contended — required to apply a four-factor test, including making determinations that the agent had power to alter legal relationships of the principal and that the principal had the ability to control the agent, Rivera said. While the four factors identified by Borders Online have been used by courts considering agency issues “in various contexts,” the justice explained, “there is no bright-line ‘four-factor test’ in determining agency.”

She declared:

“It therefore does not matter, as Online claims, that Borders did not have the subjective belief it was Online’s agent. By accepting Online’s merchandise under the terms of Online’s return policy, Borders was effectuating Online’s policy, even if it was also Borders’ own policy. The undisputed facts show Borders acted as Online’s agent....”

Though the statute does not define “selling,” state tax officials properly determined that the activity of the bookstores in accepting returns and exchanges of merchandise purchased online qualified, Rivera said.

“The Board appears to have thoroughly considered the meaning of the term, and its reasoning that the act of ‘selling’ encompasses offering other inducements to purchase is consistent with at least one later pronouncement,” Rivera wrote. “....We agree with the Board that Online’s return policy undoubtedly made purchasing merchandise on its website more attractive to California customers, as they would know that returning or exchanging any unwanted items would be far simpler than if they purchased items from an e-commerce retailer with no presence in California.”

She added:

“Whatever the subjective intent of Online or its individual customers, the Board’s conclusion that Online’s return policy is integral to making sales because of its attractiveness, convenience, and trustworthiness is persuasive, especially in the context of e-commerce.”

Though Borders Online eventually eliminated all reference to the policy of accepting returns at Borders bookstores from its Web site, the justice said that made no difference, especially since the stores continued to make the refunds or exchanges when asked to do so.

The “cross-selling synergy” created by the connection between the Borders bookstores and the online retailer were sufficient to support the state’s taxing authority under the Commerce Clause, Rivera said.

“We have already determined that Online’s return policy was part of its strategy to build a market in California,” she observed. “We further note that Borders’s efforts on Online’s behalf were not limited to accepting returns from — and providing exchanges and credit card refunds to — Online customers. Borders’s receipts were sometimes imprinted with ‘Visit us online at,’ and Borders’s employees were encouraged to refer customers to Online to find merchandise not available at Borders stores.”

The two companies also used similar logos, had linked Web sites, and shared some market and financial data, Rivera pointed out.

Justices Timothy A. Reardon and Patricia Sepulveda concurred.

The case is Borders Online, LLC v. State Board of Equalization, A105488.


Copyright 2005, Metropolitan News Company