Tcl - Online Retailers Netted by Nexus: the Borders Online Case - January 2006 - Intellectual Property and Technology Law

• Publication year: 2006
• Pages: 37
• Citation: Vol. 35 No. 1 Pg. 37

35 Colo.Law. 37 Colorado Lawyer 2006.

2006, January, Pg. 37. TCL - Online Retailers Netted by Nexus: The Borders Online Case - January 2006 - Intellectual Property and Technology Law

The Colorado Lawyer
January 2006
Vol. 35, No. 1 [Page 37]

Articles
Intellectual Property and Technology Law

Online Retailers Netted by Nexus: The Borders Online Case

by Andrew W. Swain, Nathaniel T. Trelease

This column is prepared by the CBA Intellectual Property and Technology Law and Policy Sections. The column provides information of interest to intellectual property and technology attorneys who advise clients on protecting and exploiting various forms of intellectual property in the marketplace.

Column Editors:

Nathaniel T. Trelease, WebCredenza, Inc., Denver - (720) 937-9930, ntrelease@webcredenza.com; Jim Brogan, Cooley Godward, LLP, Broomfield - (720) 566-4190 jbrogan@cooley.com; Wayne Stacy, Cooley Godward, LLP Broomfield - (720) 566-4000, wstacy@cooley.com

About The Authors:

This month's article was written by Andrew W. Swain Denver, special counsel to the Indiana Attorney General - (303) 638-6324, aswain@atg.state.in.us; and Nathaniel T. Trelease, Denver, an attorney at WebCredenza, Inc. - (720) 937-9930, ntrelease@webcredenza.com.

Out-of-state retailers who sell products over the Internet avoid collecting sales taxes on behalf of their customers by not having a physical presence in their customers' states. Attributional nexus will likely change this, netting online retailers in the attributional nexus taxability net.

The taxation of goods and services sold over the Internet ("e-commerce") is a reality. Most persons who buy or sell products on the Internet are surprised to learn this. They will argue the point, repeating the phrase "Internet Tax Freedom Act" ("ITFA")(fn1) as if it were their mantra, certain that it proves their point. One of the most widespread and potentially costly misperceptions about e-commerce is that it cannot be taxed by the forty-five states that, along with the District of Columbia,(fn2) impose state-level sales and use taxes. This error is fostered by the continuing debate in the U.S. Congress and among state legislatures and organized industry groups about the issue, as well as by the news media's inability to accurately explain either the issue or the debate.

The debate does not concern whether states have any authority to tax e-commerce under existing law. Despite certain constitutional and statutory restrictions, states have the authority to impose tax liability or tax collection obligations on Internet sellers in certain circumstances. Instead, the debate is over how the uncertain scope of states' current authority to tax interstate commerce (whether in the form of e-commerce or traditional retail or catalog commerce) should be expanded or restricted. The general fervor in this area reaches many areas. For instance, the U.S. Supreme Court recently invalidated state-imposed bans on the importation of wine directly from out-of-state vineyards.(fn3) Although more a regulatory than a strictly tax issue, the case illustrates ongoing state attempts to regulate and tax interstate commerce enabled by the Internet.

This article discusses the California Court of Appeal's recent decision in Borders Online, LLC v. State Bd. of Equalization(fn4 )and how attributional nexus may change the way in which jurisdictions impose and collect transaction taxes attributable to the sale of goods over the Internet. A portion of this article previously appeared in Business Law Today, a publication of the American Bar Association.(fn5)

The Erosion of States' Tax Bases

Traditional retail businesses have evolved to sell to a customer base expanded by the creation and growth of the Internet. Brick-and-mortar retailers ("in-state retailers") that at one time might have sold products using mail-order catalogs have developed into so-called "click-and-mortar" retailers, such as Borders, Inc. These retailers have in-state stores nationwide, but also sell products over the Internet through separate but related online subsidiaries. The click-and-mortar retailers compete with another species of online retailer, the so-called "click-and-one-brick" retailers, such as Amazon.com ("Amazon"). These retailers have a store or warehouse in one location, but sell to customers throughout the nation.

Often, the debate about the taxation of e-commerce is made to sound as though the states are battling for their fiscal or political survival. States and their political subdivisions are growing increasingly concerned about what they see as an erosion of their individual tax bases caused by retailer evolution and off-line commerce's move online. Products and services sold over the Internet avoid taxation because non-business purchasers rarely remit the use taxes for which they are liable. William Fox and Donald Bruce of the University of Tennessee estimate that state and local taxing authorities lost $16 billion in taxes in 2003 and that, based on current rates, losses for 2008 will be between $21.5 billion and $33.7 billion.(fn6)

Many states fear that, if this trend continues, their tax bases will erode to the point that they are unable to finance basic governmental services. In response to these fears, some taxing jurisdictions are taking aggressive collection positions they have not taken before, positions arguably contrary to existing law. For example, the City of Boulder recently took the position that the Internet Co-op, one of the oldest Internet Service Providers ("ISPs") in Colorado, was required to collect local use tax on its revenues,(fn7) despite the fact that the federal ITFA and Colorado's version of the ITFA(fn8) both seem to preclude this form of taxation.

The Nexus Requirement to Collect Taxes

Regardless of whether businesses are mail-order click-and-mortar, or click-and-one-brick retailers, one question is the same for all: can the local taxing jurisdiction into which the retailer sells and ships a product require the retailer to impose, collect, and remit a sales tax on...