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Borders Online v. State Bd. of Equalization, 129 Cal.App.4th 1179, 29 Cal.Rptr.3d 176, 05 Cal. Daily Op. Serv. 4593, 2005 Daily Journal D.A.R. 6278

Facts

Borders Online, LLC, a Delaware company, sold over $1.5 million in merchandise to California consumers in 1998 and 1999. Customers could return items purchased online to any Borders Books and Music store, which accepted returns and provided refunds or exchanges. The State Board of Equalization determined that Borders was Online's representative in California, requiring Online to collect and remit use taxes for sales made during the disputed period. Online did not own property or have employees in California and did not collect taxes from its California customers.

Online is a limited liability corporation formed under Delaware law in 2001 with headquarters in Michigan. From April 1998 to September 1999, Online sold books, book accessories, magazines, compact discs, videotapes, and similar tangible goods over the Internet to customers, including customers in California.

Issue

Whether Borders acted as an authorized representative of Borders Online, LLC for the purpose of selling goods in California, thereby creating a sufficient nexus for the imposition of use taxes.

The primary questions posed by this appeal are whether Borders's activities on behalf of Online were 'for the purpose of selling' Online's goods and whether, through Borders, Online had a sufficient presence in the state to justify the imposition of the tax collection burden.

Rule

A retailer is considered 'engaged in business in this state' if it has a representative or agent operating in California for the purpose of selling tangible personal property, as defined under California Revenue and Taxation Code section 6203(c)(2).

Section 6203, subdivision (a) requires retailers 'engaged in business in this state' to collect and pay a use tax.

Analysis

The court found that Borders' acceptance of returns on behalf of Online constituted an integral part of the selling process, thus establishing that Borders acted as Online's agent in California. The court reasoned that the return policy was designed to induce sales by providing customers with a convenient return option, which is crucial for online retailers. The Board's interpretation of 'selling' to include all activities integral to making sales was deemed persuasive.

The trial court found that Online's return policy posted on its website provided 'undisputed evidence' 'confirm[ing] that Borders was [Online's] authorized agent or representative for the purpose of accepting returns of Online merchandise from California purchasers.'

Conclusion

The Court of Appeal affirmed the trial court's ruling, concluding that Borders acted as Online's authorized representative in California, and that the imposition of use taxes did not violate the Commerce Clause.

The trial court entered judgment on November 26, 2003, and Online timely appealed.

Who won?

The Board of Equalization prevailed in the case, as the court upheld the Board's determination that Borders acted as Online's agent, justifying the imposition of use taxes.

The trial court concluded that by providing refunds and exchanges to Online's customers pursuant to Online's return policy, Borders was engaged in 'selling' as that term is used in section 6203(c)(2).

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