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Court: Borders Web Ops Must Remit CA Sales Taxes
ScentCone writes "A rather quiet appellate court ruling finds that Borders must start coughing up sales taxes to California. Even though Borders spun off their online business to a separate company (now run by Amazon), has no employees, physical facilities, banking, or other activity in the state, the court found for California. While this is at first alarming (unless you write e-commerce software, in which case this may be the Programmer Permanent Employment Act), the court's reasoning was that despite the separate structures, the Borders brick-and-morter presence in CA, some overlapping board membership, common logos, cross-promotion, etc., meant that the two divisions were too entangled to fend off CA's army of hungry revenuers. Ramifications could include good old print catalog operators, store-less biggies like Amazon that have partnerships with CA companies, and more."
While this is at first alarming (unless you write e-commerce software, in which case this may be the Programmer Permanent Employment Act)
Jeeze, these are activist judges, passing legislation and everything!
Becuase they do not benefit from state and local services such as police and fire.
Do you have any idea how freaking difficult it is to calculate sales tax for all 4500+ taxing jurisdictions in the US?
Borders approached the problem of how to avoid to paying sales tax in CA - an area where they have a substantial physical presence. Essentially this ruling will be largely limited to entities that have a physical presence in a state but want to try to dodge paying sales tax. Essentially the Appellate court side this is one entity masquarading as two.
Thalasar
Because a buyer in one state is not under the jurisdiction of another state.
You are "magically exempt" from a foreign state's vehicle registration fees as well.
KFG
I think their case is pretty weak in being able to nail Amazon with "presence in the state" based on the fact that Amazon is providing an outsourced service for a Borders subsidiary.
I would agree that Borders corporate structure looked suspiciously like it was set up to avoid collecting sales tax by the online division.
Sort of a variant of making your HQ in the Caymans if you are multinational. Except the latter is legal.
"I'd rather be a lightning rod than a seismometer." -Ken Kesey
Which state would charge and receive the sales taxes? Which state does the sale take place in?
These are the reasons there were no sales taxes on out of state mail orders. I guess you want both states to charge sales taxes. If that happens, then people living in states with no sales taxes would order from companies that reside in states with no sales taxes, and the number of internet sales would drop to somthing close to zero.
Just my $0.02 worth.
This means Borders must collect CA sales tax on orders shipping to CA. That's it. They set up this convoluted legal structure to avoid paying that tax and the court said these are substantially the same entity.
Thalasar
Your argument would also apply to people under 18, all of whom seem to pay sales tax.
"I'd rather be a lightning rod than a seismometer." -Ken Kesey
I recall having this conversation with someone in another country about how the US's tax collection works (local/state/federal), and she didn't understand why everything wasn't federal. People abroad (and a lot of people here) don't realize that the decentralized system is what makes America's economy strong. It encourages competition among the states, and keeps them in check. Don't like the tax policy in one state? Move to another state -- and people and businesses do. It also allows experimentation among states. Apply this same argument to the city level as well.
People are also less apt to rip off the local government, because they see it as directly affecting themselves. Ripping off the federal (or even state) government feels a lot more anonymous.
Unfortunately, the US steadily goes in the direction of more central control. -sigh-
Sometimes it's best to just let stupid people be stupid.
taxation is a function of sovereignity. It's entirely a sign of it. When's the last time you paid a tax that didn't go to a government?
When's the last time you paid a tax that didn't go to your (local/state/federal government.
Britains don't pay taxes to Ireland. Californians don't pay taxes to Utah. French don't pay taxes to the Columbians.
All this does not apply to taxes paid while people are in a different country (I.E., even though I'm from the US I still pay VAT in Europe, and anyone from Europe would pay sales tax in the US.)
Fly me to the moon Let me sing among those stars Let me see what spring is like On jupiter and mars
You, as the buyer, are responsible for paying sales tax on out-of-state purchases. In California there's a line on the state income tax form for declaring that. You did pay it, didn't you?
No, it's not.
This law only applies to goods sold to CA residents. The very first sentence of the article states this. If this law applies to you, it means you're a Californian and can vote for your state reps.
"If they send someone here, I'll arrange the usual 'accident.'" -- Alice, "Dilbert"
No. Borders has a substantial physical presence in CA. They then set up a complicated legal structure designed to shield them from paying CA sales tax. The court said, "This is a dodge. You are the same company trying to look like two seperate ones." Your company in Mexico doesn't nor will it ever until you have a substantial physical presence in the state.
Thalasar
They aren't a CA based company, but they have a physical presence in California, which means purchases from the company to residents of California are subject to the CA state tax.
Borders was trying to argue that their online business wasn't connected to their physical presence in California, excempting them from CA state sales tax.
The court rule that the online store was indeed connected to their physical store, and thus wasn't exempt. This, to me, would seem to be the proper interpretation.
You can't even calculate sales taxes by zip code.
In Texas, for example, the sales tax rates in my zip code are 8.25% in the city limits and 6.25% outside the city limits. There are some zip codes that have three different sales tax rates depending on the location within that zip code.
Even if the sales tax is 8.25% in the zip code, the 2% local sales tax may be due to different local taxing authorities depending on the address. For example, you could have a city sales tax and a county sales tax for sales outside the city. So the company would have to be able to determine which taxing jurisdiction in order to properly remit the local sales taxes collected.
Here are, to the best of my knowledge, the Texas sales tax rules:
case 1: If the order is placed to a company in Texas, the sales tax to use is the sales tax where the company is located.
case 2: If the order is taken outside the state by a company who has no business presence in Texas of any kind, they are not required to collect sales taxes. However, if they wish to collect sales taxes, they may, as long as they remit whatever is collected to the state of Texas.
case 3: If the order is taken outside the state by a company who has a single business presence in Texas, the applicable sales tax is that of the location of that business. For example, if they have a store in Dallas and no other presence at all, you pay the 6.25% state sales tax and the 2% local sales tax which goes to Dallas.
case 4: If the order is taken outside the state by a company who has two or more business presences in Texas, the applicable sales tax is that of the destination address. So if the sales tax rate of every store by the company is 8.25% but the destination is in a 6.25% area, the applicable sales tax is 6.25%.
One surprising thing that was explained to me by someone at the Texas Comptroller's Office when I called up to get some clarification of the rules about three years ago is that it is okay if the company charges too much sales tax as long as all the sales tax collected is properly remitted.
Also, in the case of a delivery by UPS or Fed Ex, it goes by the address on the shipping label even if they end up delivering it to another address. Around here, the UPS and Fed Ex drivers rarely deliver anything out to my house. Indeed, most have no idea how to find the place. Instead, they drop it off at my office in town.
I was concerned that the fact that they drop it off at my office instead of my residence would create a problem since anything delivered to my office has a 2% local sales tax rate while anything delivered to my home has no applicable local sales tax. The guy from the Comptroller's Office said that the applicable sales tax was that of the shipping address whether or not it was ultimately delivered elsewhere.
It's not about being a CA company. Most large corporations are headquartered in places like Delaware or Bermuda so if states could only collect from companies that are HQ'd in them the pickings would be mighty slim. It's about having a physical presence in California. If you put a physical store in a state and sell things from it you're subject to collecting and submitting sales tax. If you have a physical store and sell things via the Internet you're required to collect and submit sales tax on things sold over the Internet (or via phone, mail, fax, smoke signals).
Borders was trying to argue that their online sales and their physical stores sales were so separate (despite using the same advertising, logos, etc.) that they did not have to collect CA sales tax for online sales.
I'm not sure what bothers me more - that you don't see the basic glaring flaw in your reasoning here, or that at least one moderator considers this "insightful".
This is a tax on transactions occurring in California. The taxes are levied by California's government against California citizens. Last I heard, California still had elections.
It's not like California is asking for taxes to be paid by some lady in New York who's shopping at Borders.com.
#DeleteChrome
I for would welcome our new California taxes and uh, uhm, oops. Sorry guys. I have no idea what I was saying.
As the operator of a couple of small e-commerce sites, I can tell you flat-out that having to pony up for such software would be the difference between being able to keep those sites running, and having to pull the plug on them.
Never mind the increased cost to my customers of just the taxes themselves. While this might not be the death of e-commerce, it would certainly result in a dramatic narrowing of the online marketplace. Not a good result, any way you look at it (unless through the rapacious eyes of taxing authorities and legislatures...).
Liberty in our Lifetime
The United States Constitution is actually what prohibits state regulation of interstate commerece.
Sales taxes in theory should support the government infrastructure a business uses to conduct itself such as the court system, utility infrastructure if it's public, etc.
A business with no physical presence in State A doesn't derive any benefit from the government in State A when one of it's citizens orders something and they ship it from State B. The only company that actually uses resources from State A is the shipping company, which does pay local taxes on it's employees, property, vehicles, and gasoline proportional to the proportion of the transaction that did happen in State A.
That, and there's that whole pesky no tarrifs on interstate commerce by the states clause in the constitution.
This
In theory, this should be redundant.
California taxpayers are supposed to pay Use Tax anyways, which is based on your purchases from out-of-state sellers. Thus, even if you didn't have to sales tax to Amazon.com, you have to pay (almost) the equivalent amount of tax on your CA 540 form.
Interestingly, although this tax has been on the books for a long time, the state government only added a line for it on 540 personal tax forms last year.
This creates a dilemma - if you are a CA taxpayer who made any out-of-state purchases (mail, telephone, online), you probably owe CA use tax. But most people I know put "0" on this line - and thus committed fraud when they signed the declaration line at the end of their tax form.
This ruling could not possibly be "enforced" on you because you do not have a physical presence in California. If you at some point get one, then of course you'll be subject to California law.
Simple and clean solution: Implement a flat tax for all online purchases for all states (yes, even NH and the other tax-free states). Send the tax to each state based on the ship-to zipcode.
Results: Each state gets a piece of the action and the online stores can't complain about the costs to implement all of the different tax codes all over the nation.
Ok, the first thing you have to understand is who the tax is levied on. It is not levied on the business, the business merely acts as the agent, collecting it for the state ( this is, in fact, my primary philosophical objection to the sales taxes. It forces the businessman to be the tax agent of the state in order to do business at all). Sales taxes are consumer taxes.
If you are in CA, purchasing from a CA store, you are both under the legal jurisdiction of CA. A cop can stand there and make you pay the tax, and the business collect it.
If, however, you call up the CA store from NY a NY cop cannot stand in the CA store and make them collect NY sales tax, which is actually the jurisdiction owed the tax, not CA.
It is the buyer who pays the tax, and thus the location of the buyer that determines to what jurisdiction the tax is due. The buyer is not actually exempt from the tax, simply that the seller cannot be forced to collect the tax, being in a different legal jurisdiction.The buyer, in all likelyhood, still owes the tax, and if he does not pay it is a tax evader in his own jurisdiction.
The business pays its own taxes. It isn't "getting away" with anything, except saving a godawful lot of paperwork for itself.
For jurisdictions, such as NH, that do not levy a consumer sales tax, but rely strictly on taxing businesses directly, all such issues disappear.
KFG
Every legal foreign employee pays income tax in the USA, and in California, without any representation whatsoever. They pay all other taxes as well.
What keeps me going is my inertia.
I expect that many people reading this are opposed to the idea of "taxing the internet". Let's get real here. Sales taxes are not going to go away; and the longer we fight it with an "all or nothing" mentality, the more we risk having truly draconian (and incredibly brain-dead) solutions imposed by Congress or the courts.
There's an easy way for Borders to get around this ruling... it's called:
;-)
Nevada.
So close, and yet so far from the California's revenue authorities.
Taxes are levied by California against everyone, even those
that don't live in CA and can't vote in CA. For example, a
professional athlete that plays one game in CA, owes the
state income tax, regardless of where they life or what
country they are a citizen of.
The fact that said professional athlete played one game in CA means that he worked in CA, so why shouldn't he/she pay income taxes?
Income taxes are owed where the work is performed. Sales taxes are owed where the sale takes place.
Why can't people understand that? This isn't like recompiling a kernel, you know?
Ramifications could include good old print catalog operators, store-less biggies like Amazon that have partnerships with CA companies, and more."
This is just such a wrong statement I don't know where to begin. There is so much case law in the US about mail order and catalogue sales that this particular case has nothing to do with upsetting. It's gone all the way to the Supreme Court.
When will people get it through their heads, if a business has a presences in a state (as defined by law), they are responsible for remitting sales tax on sales made in that state, whether the sale was at a local store, by phone or on the internet. If they don't have a presence in that state, no tax is due.
It's that simple (of course the lawyers get involved with what exactly a "presence" is, but that's besides the point).
So those stupid "we pay the sales tax" sales are illegal in Iowa? I have to wonder how hard this screws over concessions vendors, which almost universally charge a fixed price including tax rather than line-iteming the tax.
Check out my sci-fi/humor trilogy at PatriotsBooks.
Actually, online, mail order and telephone sales are only responsible for the state portion of sales taxes, not the local community portion.
As far as I can tell. Of course, if you do any looking into Iowa sales tax rules, there's an awful lot of grey areas - presumably there so that the department of revenue has something to do.
I can't speak for concessions vendors, but food is generally excluded from sales tax. I think restaurants charge sales tax on food that they prepare, but I'm not sure if a concession stand falls within that?
A fine is a tax you pay for doing wrong and a tax is a fine you pay for doing all right.
If I read this story correctly, the chain of events appears to "maybe" be a bit more interesting (but I am speculating on some of this).
* Borders was apparantly not paying sales tax (speculation)
* They decided to pay the sales tax
* This might have been encourages by the California Tax
Amnesty program (again, speculation)
* ie, no penalties, but still interest
* Ahhhnolds plan to help balance the budget
* Borders then sues the state to get the money back
* They lost
* Borders then appealed
* They lost again (this is the current case)
You are basically right, but you have left out a couple of things. Yes, they paid under the amnesty program. But they were already on CAs radar scope as not paying. Without the amnesty program, they would owe interest and penalties. Interest is relatively cheap, penalties are as high as 25% of the tax due.
They didn't sue the state to get a refund, they filed for it. The refund was denied and they went to tax court.
The tax court upheld the state position that Borders did indeed have Nexus with the State of California and therefore, sales to California residents should be taxed, like every other company doing business in the State of California.
The suprising part is why Borders went this route. Most states, will forgive the back taxes, interest and penalties, if the company voluntarily comes into compliance for future sales. Unless Borders truly thought they had a case, they should have gone that route. From the sounds of it, though, even a first year tax accountant should have been able to advise them to settle out of court.
I'm not trying to justify Borders actions, but what ever happened to the concept of a state cutting its budget deficits by reducing spending? I have no sympathy for CA whatsoever because they put themselves into this hole. It's human behavior that people are more prone to take an illegal action as the stakes rise. It should be no surprise whatsoever that this type of thing is happening. Again, I'm not trying to defend it, but rather explain it.
I don't know how much Borders makes off of each of their businesses, but I'm wondering if there's ever a point where they say "screw it" and closes their brick and morter stores in that state. Sure would fix the nexus problem for them.
If you don't want crime to pay, let the government run it.
Are you sure this is correct?
.
.never realized this and crafted laws the wrong way.
Yes, I have owned a brick and mortar retail store where I did all the paperwork myself, as well as having managed a number of others.
It is also the basis the for Supreme Court ruling exempting businesses for collecting sales taxes for customers in other states.
Neither party is privleged in the transaction, as is seen by states typically also applying sales transactions to exchange of goods for goods (based on fair market value.)
In which case both parties are legally buyers.We aren't dealing with issues of contractual privilege, we are dealing the tax liability. Tax libilities are always explicitly defined.
The relevant law is the one that requires you, as the buyer, to file with the state for each mail order purchase or casual transaction and pay the tax on it.
It's just that most companies charge the consumer (hey, dopey, you voted for the tax, you pay it. We're not!) but sometimes companies do have "we pay your sales tax" sales.
No.
In sales tax states you must acquire a permit from the state allowing you to collect the tax from the consumer.You must collect the tax. In most states you must list the cost of the tax explicitly, you cannot "bundle" it into the price, by law.
In the case of a casual sale the buyer is still repsonsible for paying the tax, such as when you buy a car from a private owner. The DMV will levy the tax against you when you seek to register the car, and the fact that your mom pays it for you as as gift does not alter the fact that you are one legally responsible.
"We'll pay the sales tax for you" is a marketing gimmick, not legal reality, and isn't even legal in some states where it would be considered a fraudulent claim (they've really just lowered the price).
I suppose some states, with ignorant, subgenius politicians. .
But you repeat yourself.
. .
The law is as the law is crafted, however, a sales tax is, by legal definition a tax on the consumer, which is why internet sales companies are "exempt" from them. They do not owe them in the first place. They only collect them. If you do not understand and accept this you will never be able to understand the "mail order loophole."
The problem is not in crafting the law the "wrong way," per se, but rather in using a form of law with consequences they aren't happy about.
A business tax on gross sales is an entirely different legal beasty than a sales tax.In a state with one of these you will not be levied at DMV for the car you bought from your neighbor.
KFG
There's another reason too. States taxing people in other states will tend to tax the bejeezus out of them because they can't vote. Thus, Alaska might place a huge sales tax on oranges but none on salmon or snowballs. New York a few years back got into similar trouble trying to tax people who live in New Jersey who had family members who worked in NYC. This is a very bad thing! Give politicians the ability to tax people who can't vote them out and soon they'll be slaves. Didn't some country once go to war over an issue like that? ;-)
--Brian
Believe it or not, there's software specifically for that purpose.
And in some cases it's wrong, or incomplete if you wish to deal in politician-like double-speak. It's basically impossible to accurately keep up with all the special districts and conditions and twists across the US. Which is why I once had a Fortune 500 company tack onto an order of mine a sales tax to a jurisdiction which I lived just outside of. I was informed that the software claimed I lived in the city, not the unincorporated county, and that to have the sales tax taken off my order I would have to go to the courthouse, get an official map of the local tax jurisdictions, and mail it to them.
That is an absolutely outrageous requirement to place on a consumer. Yet in reality it was not an unreasonable requirement for the company to impose. I was in a zip code that was listed as being in city xxx. In fact, the vast majority of my zip code was located within the city limits, and I was only a few hundred feet outside the city limit, and the company had no practical way to verify my claim. Yet the result was that a company nearly 3,000 miles away me from collected money from me and sent it to a city from which I received ***0*** services, because the company had no practical choice. To take my story at face value would have exposed them to fines & penalties far outweighing the value of my business.
That sucked. And it was the result of laws that put far too much extortionate power in the hands of a two-bit podunk city.
I am a partner in a small specialty by-appointment bookstore in Los Angeles with a strong web presence and average internet sales of about $75 per. We charge 8.25% for orders sent to California addresses even if they're in San Diego (7.75%), San Francisco (8.5%), or Salida (7.375%). Every year without fail we battle some library or museum that insists on paying their local sales tax. They're generally slow payers (not nearly as bad as film studios though) but when we fill out the tax forms in January they ask for 8.25% and we have a healthy fear of audits. Whether a California customer calls, writes, faxes, emails or orders through our website we charge the same as if they were in the store.
The majority of books offered for sale (although not necessarily the most prominently placed) on these mega online bookstores are owned, shelved and shipped by small independent booksellers. They collect the money and deposit it into our account minus their commission and we drop-ship the orders. An order can be shipped across town without the big boys ever seeing the book and without depositing a dime into the state's coffers. Our sale is to the ethereal, tax sheltered Amazon not John Doe.
WARNING - RANT It amazes me that perfectly rational geeks will allow themselves to be fleeced by these online Wal-Marts when they can go to a site like http://addall.com/ or http://bookfinder.com/ and pay up to 25% less for the same books often from the same seller. Our websites might not be as fancy but why order from an ethically questionable corporation when you almost as easily get the exact same thing and pay a little less dealing with an independent bookseller. Plus I think it's nice to get a personal email from a human being thanking me for an order.
What is needed is a modern VAT system: input VAT is reclaimable by companies, so they don't pay tax except on the "value added."
Like in the EU, each state charges its own rate of VAT. If a company sells out-of-state to a registered business it sells ex-VAT. If it sells to an individual, it sells inc-VAT.
This would also have the advantage of interlocking nicely with Canada's GST making cross-border trade easier. Right now, Canadian shoppers get hammered with Sales Tax and then GST on the whole thing (nice that: GST on Sales Tax). With a proper VAT system, Canadians would import without further GST since VAT has been paid already.
Best of all, each State is under pressure to lower VAT (or face loss of sales). It brings in a bit of competition to tax rates. What's good for commerce should be good for Government, right?
K.
Will they have to pay past sales tax?
Unless they reached some sort of settlement, yes.
If so, how do they collect it?
They look at Borders records of gross revenues, multiply by the sales tax rate, and send them a bill. Borders neglected to collect the tax from the end-consumer, but they're still liable for it. From now on, Borders will probably start collecting the tax from the consumer, though, along with raising the prices for everyone to pay for the past-taxes due.