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In re Borders, Online, Inc.

California Board of Equalization holds that Borders Online Inc. ("Borders Online"), an out-of-state corporation, is obligated to collect California state use tax on sales of tangible products which are shipped from out-of-state locations to California residents.  Court holds that Borders Online has sufficient contacts with California to permit it to impose this obligation by virtue of the fact that Borders, Inc., an affiliated but distinct entity, agreed to and did accept returns from Borders Online's customers at Borders, Inc.'s brick and mortar stores located in California.

Borders Online is an out-of-state corporation which does not operate a place of business in California.  Borders Online sells tangible property to consumers over the Internet.  Goods sold to California residents are delivered to them by common carrier from out-of-state locations.  Customers of Borders Online can return merchandise they purchase at any California "brick and mortar" store of Borders, Inc., an affiliated but separate entity.  While any consumer can return any item Borders, Inc. stocks for a store credit, regardless of where they purchased it, customers of Borders Online can receive a cash refund upon presentation of a packing slip.  For a period of time, this return policy was posted on Borders Online's web site.

California Rev. and Tax Code §6203 imposes a "use tax collection obligation on 'every retailer engaged in business in [California] and making sales of tangible personal property for storage, use or other consumption in this state…'".  The California Board of Equalization held that as a result of its contacts with the forum, Borders Online was a retailer engaged in business under the Tax Code, and hence obligated to collect use tax on its sales to California residents.

Under the Tax Code (6203(c)(2)), a retailer is engaged in business in California if it (1) has a representative or agent (2) operating in California under its authority, (3) who, in California, engages in selling, delivering, installing, assembling or taking orders for tangible property.

The Board of Equalization held that, by virtue of its agreement to handle returns for Borders Online, Borders, Inc. was an authorized representative of Borders Online present in California.  This conclusion was buttressed by the preferential treatment accorded Borders Online's customers, and the return policy posted on Borders Online's web site.

The Board of Equalization also found that Borders, Inc. was engaged in "selling" within the meaning of the Tax Code by virtue of its agreement to handle returns for Borders Online.  Said the Court: 

[W]e conclude that, when accomplished through an authorized representative, the taking of returns constitutes "selling" under subdivision (c)(2) of Section 6203.  Because neither the Sales and Use Tax Law in general, nor Section 6203 in specific, contains a definition of "selling," following the accepted canons of statutory construction, we construe this term according to its common usage.  In other words, "selling" is inclusive of all activities that are an integral part of making sales.

When out-of-state retailers that make offers of sale to potential customers in California authorize in-state representatives to take returns, these retailers acknowledge that the taking of returns is an integral part of their selling efforts.  Such an acknowledgement comports with common sense because the provision of convenient and trustworthy return procedures can be crucial to an out-of-state retailer's ability to make sales.  This is especially evident in the realm of e-commerce.

The Board of Equalization accordingly held that Borders Online was obligated to collect use tax on its sales to California residents, finding that its contacts with California, via its return policy, were sufficient to satisfy the requirements of Quill Corp. v. North Dakota, 504 US 298 (1992).

The full text of the California Board of Equalization's Memorandum Opinion can be found at the Board's web site.