Borders Online v. State Board of Equalization
129 Cal. App. 4th 1179, 2005 Cal. Daily Op. Serv. 4593, 29 Cal. Rptr. 3d 176 (2005)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
An out-of-state online retailer establishes a sufficient physical presence in a state to be required to collect and remit use tax when an in-state affiliate acts as its representative for activities that are an integral part of making sales, such as accepting merchandise returns.
Facts:
- Borders Online, LLC (Online), a Delaware company with headquarters in Michigan, sold goods over the internet to California consumers, generating over $1.5 million in sales during 1998-1999.
- Online had no physical offices, property, employees, or bank accounts in California during the disputed period.
- Online was wholly owned by Borders Group, Inc., which also owned Borders, Inc. (Borders), a separate corporation that operated numerous physical bookstores throughout California.
- From September 1998 to August 1999, Online's website advertised a policy allowing customers to return items purchased online to any Borders store.
- Pursuant to this policy, Borders stores would accept Online's merchandise and provide customers with an exchange or a credit card refund, absorbing the returned merchandise into their own inventory at no charge to Online.
- The two companies engaged in cross-marketing, with Borders store receipts sometimes including Online's web address and Borders employees being encouraged to refer customers to Online's website.
- Online and Borders shared a similar logo, had overlapping corporate officers and directors, and shared some financial and market data.
Procedural Posture:
- The California State Board of Equalization (Board) determined that Borders Online, LLC (Online) was required to collect and remit a use tax on its sales to California customers for the period of April 1, 1998, through September 30, 1999.
- Online filed a petition for redetermination with the Board, which the Board denied.
- Online paid the assessed taxes of $167,667.78 and subsequently filed a claim for a refund, which the Board denied.
- After exhausting its administrative remedies, Online filed a complaint in San Francisco Superior Court (a state trial court) seeking a refund of the paid taxes.
- The Board filed a motion for summary judgment, which the trial court granted, ruling in favor of the Board.
- Online, as the appellant, appealed the trial court's judgment to the California Court of Appeal, First District (an intermediate appellate court).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an out-of-state online retailer have a sufficient physical presence in California to be required to collect and remit use tax when its in-state, affiliated brick-and-mortar stores accept returns of merchandise purchased online?
Opinions:
Majority - Rivera, J.
Yes, an out-of-state online retailer has a sufficient physical presence when an in-state affiliate accepts returns on its behalf. The court held that under California Revenue and Taxation Code § 6203(c)(2), Borders stores acted as Online's 'representative' for the 'purpose of selling.' The court interpreted 'selling' broadly to include not just the solicitation of sales but also 'all activities that are an integral part of making sales.' It reasoned that offering a convenient, local return option was a powerful inducement for customers to purchase from Online, making the return process an integral part of Online’s selling efforts. This agency relationship and the activities performed by Borders on Online's behalf created a physical presence in California, satisfying the 'substantial nexus' requirement of the Commerce Clause as articulated in Quill Corp. v. North Dakota. The court found that Borders's activities were 'significantly associated with [Online’s] ability to establish and maintain a market' in California, thus justifying the state's imposition of a use tax collection duty.
Analysis:
This decision was significant in the context of e-commerce taxation prior to South Dakota v. Wayfair, as it expanded the concept of 'physical presence' for online retailers. It established that the activities of a 'brick-and-mortar' affiliate, such as accepting returns, could create a tax nexus for an otherwise remote seller. The ruling provided states a legal framework to require tax collection from 'click-and-mortar' retailers, influencing how online businesses structured their relationships with physical affiliates to manage tax liability. The case's broad interpretation of 'selling' to include post-transaction customer service that induces future sales set a precedent for looking at the totality of a retailer's marketing and service strategy, rather than just the point of sale, to determine tax nexus.
