June 14, 2005

Taxing Internet Sales

The US Supreme Court has determined that under the Constitution, in order for an internet sales transaction to be taxed by a state - just like a normal sales tax - a business must have a physical presence in the state. For example, when someone in California purchases a CD or book from Washington based Amazon.com, California can't make Amazon.com pay its state sales tax because it doesn't have a physical presence in California. As you can imagine, the determination of "physical presence" can be a contentious point. With this, it's worth taking note of a recent decision by California's 1st District Court of Appeal in San Francisco about internet book retailer Borders:

An appellate court ruling against Borders Group Inc. sets a precedent that could enable California to force some major Internet retailers to start paying state sales tax for books, music and other goods sold online to state residents.

In more detail:

California's 1st District Court of Appeal in San Francisco rejected that argument, ruling on May 31 that the Borders' Web site and retail stores have been too intertwined to call themselves separate companies. The three-judge panel cited in-store advertising for the Web site, receipts that said "Visit us online at www.borders.com" and the ability of customers to return online merchandise at retail stores.

The judges also noted that the companies had board members in common and shared a similar logo.

This decision appears to broaden the "physical presence" definition and could have major implications for California's tax code. For more information on taxing internet sales and its tax policy implications, be sure to read ITEP's Policy Brief "Should States Be Allowed to Tax Internet Sales?"


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