Court Rules Borders.com Must Collect Sales Tax
By George Anderson
A ruling by California’s 1st District Court of Appeals says Borders Group must collect sales tax for sales made in that state through the company Web site.
The court ruled that while Borders does not fulfill Internet orders in California, its online operation and physical stores cannot be viewed as separate businesses. For one, the two cross-promote and online customers are given the option of returning merchandise to store locations.
A Supreme Court ruling 1992 said Internet businesses do not have to pay sales taxes to states where they do not have a physical presence.
The appellate court’s ruling would appear to make inevitable that other cross-channel retailers operating in California would now need to collect sales tax also.
Lenny Goldberg, executive director of the California Tax Reform Association, believes the same may apply to online retailers who partner with brick and mortar merchants also. “Any business in California is going to have to collect from their online subsidiary,” he said. “It certainly potentially allows the board to make a case that Amazon has agents and affiliates in California.”
Moderator’s Comment: Is it time for sales made over the Internet to be taxed in the same manner as brick and mortar
operations? What are the pros and cons of taking such an action? –
George Anderson – Moderator
Online Gateway and Merchant accounts for Internet sales are, by and large, already set up to calculate and charge state-by-state sales tax and pay the governments, so the infrastructure is prepared.
The other major issue, in which customers purchase online in order to avoid sales tax, is more cloudy. The addition of sales tax on top of shipping costs may very well make brick-and-mortar retailers more competitive. Over all, though, online retailers usually enjoy the benefits of more selection, more information, and much lower inventory-related costs. I believe they’ll still be very competitive, even with the addition of state sales taxes.
I dislike paying taxes as much as anyone but keep in mind that it’s the consumer who is paying the sales tax, not the retailer. The retailer is the tax collector. And the cost of collecting those taxes and passing them on to the state government is simply a cost of doing business as a retailer. Obviously, the on-line retailer would like the competitive advantage of avoiding those administrative costs.
You can make a case for taxing companies that have a brick and mortar presence in-state, because they work in synergy and derive value from the state. For pure cyberspace plays, I would say no, as they are neither consumers nor users of state services……so what, in effect, would they be paying for?
Taxes, remember, are to pay to support the government for use in infrastructure, courts, roads, police service, fire, etc. If you don’t have a physical presence in-state, it makes it pretty hard to make the argument.
I am sure many state governments would say that it is past time–and many brick-and-mortar retailers would agree, given the extent to which online shopping has (and will continue to) cut into sales. Fortunately, this revenue shortfall for state and local governments has forced the National Governors Association to work together in an effort to streamline state and local tax codes which should make it significantly easier for online retailers to calculate sales tax:
http://www.nga.org/nga/salestax/
Once this initiative gains widespread adoption, it will be much more difficult for online retailers to claim that charging and tracking sales tax is an unreasonable burden.
Most states that have sales taxes include a clause regarding “use tax” on purchases made out of state. This requires the resident to declare their tax free purchases on their income tax statement and add the tax savings to their income tax bill. This means that the increase in online purchases should have resulted in an increase of revenue from the “use tax.” I wonder if this has occurred.
I must say that I can’t believe what my opinion is on this issue. Maybe it’s the temperature, but here goes…
Sales tax exemption on internet sales was at first allowed to exist to allow a fledgling market a chance to spread its wings and learn to fly. It’s doubtful that anyone could make the argument that is still the case today. It’s far from it. The volume of internet sales is expanding by the minute, if not the nanosecond.
The reality is, that as mentioned, sales are sales. So, in that case it’s time to begin to render unto Caesar what is due. Now, the argument is – what is fair? The likely fair resolution would be to tax based on the state sales tax of delivery. However, that would be an administrative nightmare. It should be treated as a sale at the point of origin. If you travel, and using the internet is much like traveling (in a cyber sense), you pay the going rate where you are at the time. That should be the same with sales tax.
Now, think about the battle between the states now on becoming host sites for point of origin. Then again, the flip side could be an off-shore island somewhere. Careful thought needs be considered for any implementation. I’m concerned that without a national approach it could become murky. However, left to any form of government – federal, state and local – it’s likely to be ugly. But, we don’t really have enough litigation as it is – now do we?
Sales are sales, whether online or in person. As much as online retailers like to say they have no physical presence, I argue that they have to have a physical presence in some state, or in many states. From warehouse to web server, from phone support to accounting and reporting, every entity has a physical presence. Whether we think our money is spent wisely or that the bureaucracy is greedy, an online presence is a cheap excuse for a competitive advantage.
The bloated bureaucracy of State Gov’t needs to feed its addiction to taxpayer cash in order to maintain the status quo and, as a result, they have another source.