A California appeals court has ruled that the online division of bookseller Borders Group Inc. should have collected sales tax on orders from state residents, setting a precedent that other states could follow.
The ruling overturns an advantage that some Web-based retailers have long had over their "bricks-and-mortar" counterparts, experts said.
"It could put at risk the position of a lot of electronic commerce companies that claim they don't have an obligation to pay sales tax," said Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities in the District.
For independent booksellers, the decision gives some hope that more states will pursue these taxes and create a "more level playing field," said Terri Merz, co-owner of Chapters: A Literary Bookstore in the District. Merz called the decision "a great ruling."
A spokeswoman for Borders said the company is reviewing the decision, which applies to sales made before 2001. In that year, Borders outsourced its Web sales to Amazon.com Inc.
According to a 1992 U.S. Supreme Court ruling, companies have to collect state sales taxes only in states where they have a physical presence, such as offices or warehouses.
Amazon.com spokesman Craig Berman said the California decision will not change the company's policy of not charging sales tax for orders shipping to California because the company does not have a physical presence in that state.
Tom Dressler, a spokesman for the California Attorney General's Office, said the ruling should "inject some added caution" in companies planning to sell products online. "The state's going to be aggressive in going after every penny that is due in its coffers," he said.
A California state tax audit found that Borders Online owed more than $167,000 in taxes for sales made between April 1, 1998, and Sept. 30, 1999. The company paid the amount, then sued for a refund. Borders argued that its Web site should not have had to pay state taxes because the online bookseller and the retail chain were different companies.
But a three-judge panel disagreed with the company this week, finding that the two business units were substantially the same because shoppers could return books bought online to Borders retail stores and California-based stores in the retail chain promoted the Borders Web site. The company has not said whether it intends to take the case to the California Supreme Court.
The ruling could encourage other states to become more aggressive in pursuing sales taxes, experts said, but a trade association representing big retailers said members are not worried.
"The case is really so fact-specific that it's difficult to draw any larger significance from it," said Kevin P. Thompson, legislative counsel with the Council on State Taxation.
Mazerov said there has not been much recent movement to collect online sales taxes in Maryland, Virginia and the District, beyond asking consumers to declare such purchases on income tax returns.
"To my knowledge and to my disappointment, none of those areas have been out front in trying to pursue this issue," he said. "None have pursued the kind of litigation that we have with Borders."