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San Francisco (AP)�California’s 1st District Court of Appeal, in ruling against Borders Group Inc., has set 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. Borders Online v. State Bd. of Equalization, No. A105488. Whether California tax collectors use the precedent to go after not only Borders but Barnes & Noble Inc., Amazon.com and other online retailers remains to be seen. But independent booksellers have been cheering, saying that the ruling should remove their Internet competitors’ unfair advantage. Businesses can avoid paying sales taxes to states where they have no physical presence, according to the 1992 U.S. Supreme Court ruling, Quill v. North Dakota, 504 U.S. 298. Borders Group Inc. says that it has never collected sales tax for books and music sold over the Internet to California residents, even though the Ann Arbor, Mich.-based corporate parent operates 129 California stores under the Borders and Waldenbooks brands, as well as a 414,000-square-foot distribution center in the state. Borders says it doesn’t have to collect California sales taxes because its online division-since outsourced to Amazon.com-doesn’t own or lease property in the state. None of the online division’s employees or bank accounts are in California and all Internet orders were received and processed outside the state. The intermediate California appellate court has now ruled that Borders’ Web site and retail stores are 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. The decision could lead to similar rulings by the State Board of Equalization against New York-based Barnes & Noble Inc. and maybe even Seattle-based Amazon.com Inc., which handles online sales for Borders and other affiliates, paying them a cut of the profits, said Lenny Goldberg, executive director of the California Tax Reform Association. “Any business in California is going to have to collect from their online subsidiary,” said Goldberg, who also lobbies for the Northern California Independent Booksellers Association. “It certainly potentially allows the board to make a case that Amazon has agents and affiliates in California.” A state audit of more than $1.5 million in sales by Borders Online between April 1, 1998, and Sept. 30, 1999, found that the company owed more than $167,000 in taxes. The company paid up, then asked for a refund. The board denied the request and Borders Online sued, losing in a lower court as well. Borders hasn’t decided whether to appeal to the California Supreme Court. States and local governments have lost $15.5 billion in sales tax revenues because of Internet sales, according to conservative estimates by researchers at the University of Tennessee. The loss is projected to increase to $21.5 billion by 2008 as e-commerce continues to grow. Borders is also fighting online sales tax disputes in Nevada and Illinois, according to documents filed with the Securities and Exchange Commission, and has warned that profits might drop if it is forced to pay taxes on its past online sales. But the company said any adverse rulings won’t affect its ability to pay its bills or undermine its financial strength. Borders earned $131.9 million on sales of $3.9 billion last year. “The notion that these were separate companies was nothing more than a tax dodge,” said Oren Teicher, chief operating officer for the American Booksellers Association, a Tarrytown, N.Y.-based nonprofit organization of independently owned bookstores.

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