Holiday Coupons Offer Barnes & Noble No Discount on Sales Tax

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On Thursday, September 12, the California Board of Equalization (BOE) issued a Memorandum Opinion stating that was obligated to pay California back use taxes for a period of four-plus months -- from November 15, 1999, to March 31, 2000. BOE ruled that, because the bricks-and-mortar Barnes & Noble stores were offering customers coupons that discounted purchases made at its online store, had established a physical presence, or nexus, in the state of California.

While the short timeframe of the decision was disappointing, Hut Landon, executive director for the Northern California Independent Booksellers Association (NCIBA), noted that "the thing that was encouraging is the [memorandum]'s definition of selling." He explained, "Barnes & Noble said that the handing out of coupons is not selling and the Board basically said, 'Of course it's selling. You're giving a discount, an incentive to selling.' The fact that they rejected Barnes & Noble's argument I think sets a precedent, and it's important to have that on the record."

Lenny Goldberg, executive director for California Tax Reform Associates and former lobbyist for NCIBA, said, "[BOE] did the right thing in regards to this [coupon issue], but even if [B&N] is not using coupons, they still should collect sales tax."

In the memorandum, the Board wrote that Barnes & Noble stores' distribution of the discount coupons "were an integral part of []'s selling tangible personal property. Therefore, due to [Barnes & Noble]'s actions in California as []'s authorized in-state representative, [] was a 'retailer engaged in business in this state'…. Accordingly, [] was obligated to collect, and remit use tax from []'s California customers…" (To read BOE's Memorandum Opinion in full, click here.)

BOE rendered a similar assessment covering a 17-month period against Borders Online, Inc., in 2001. Borders was assessed back use taxes because its California stores accepted returns of purchases.

BOE's assessment of use tax means that will have to pay to California tax money that should have already been collected from customers, Goldberg explained. "So, it's a liability for them," he said, and added: "Hopefully, this will be cautionary to those who see gray areas in the tax laws."

California booksellers have been trying to clarify those gray areas for almost three years now, said Landon. "We were tired of the fact that Barnes & Noble and Borders [Online, Inc.], to give two examples, weren't collecting sales tax from online sales," he explained.

Both retailing giants argued that their online presence was a different entity from their bricks-and-mortar stores -- therefore, the online stores were not required to pay California state tax. NCIBA countered that since these large online retailers were promoted in their bricks-and-mortar stores they therefore had established under the current California state law nexus in California.

In the summer and fall of 1999, NCIBA, along with Neal Coonerty, owner of Bookshop Santa Cruz; Bill Petrocelli, co-owner of Book Passage, Corte Madera; and Andy Ross, owner of Cody's Books in Berkeley, initiated meetings with the chair and the general counsel for BOE and a number of their investigators. Soon after that meeting, Ross told BTW that BOE seemed to be "influenced more by politics than by the law."

Receiving no satisfaction from the 1999 meetings, "we decided to go the legislative route" to clarify California's tax law, Landon said.

In the meantime, in November 1999, Landon and some other booksellers became aware that Barnes & Noble stores were placing coupons in customers' shopping bags. The coupons, a limited, holiday promotion, offered customers a $5 discount on online purchases of $25 or more. NCIBA sent the coupons to BOE in the hopes that they would investigate Barnes & Noble. "We were like, what else do you need?" Landon said. "If this isn't a clear case of nexus, what is?"

In January 2000 -- due largely in part to the work of Goldberg, NCIBA, and the Southern California Booksellers Association -- Assemblywoman Carole Migden (D-San Francisco) and Dion Aroner (D-Berkeley) introduced an e-fairness bill that clarified California state tax law to ensure that online retailers with bricks-and-mortar stores in the state would collect sales tax.

The bill eventually made it all the way to the desk of California Governor Gray Davis. However, on September 25, 2000, Davis vetoed the bill, citing that he did not wish to hinder the growth of the Internet. "[The Governor] said he didn't want to set a dangerous precedent," Landon said. "Except that the legislation was merely a clarification of the existing tax law."

Still, NCIBA "raised awareness" of the issue -- that even under current tax laws, these online retailers were still required to pay sales tax.

While NCIBA didn't get the legislation it wanted, early last year, BOE decided that NCIBA's complaints regarding Barnes & Noble's holiday discount coupons were valid and rendered the assessment of back taxes. Though it is not clear when the assessment was made -- it was done privately -- Barnes & Noble appealed the decision and there was a public hearing before BOE in February 2002. The appeal was denied, and the Board's Memorandum Opinion was issued last week.

Landon stressed NCIBA would continue its fight for e-fairness. The fair application of sales tax on the Internet, "affects all bricks-and-mortar stores that are competing with online businesses," he said. "The consequence of lost sales tax revenue to the community means that everyone should be concerned." Presently, Barnes & Noble is still cross promoting its Web site in its bricks-and-mortar stores, he said.

Landon said that NCIBA is going to do more research on the tax issue and take up the issue again this November -- that is when three of the four elected seats on BOE are up for election. Furthermore, Carole Migden -- whose term on the assembly is up in November -- is running for one of the seats and, currently, is favored by many in the state to win a seat on the Board, he said. "After the election, NCIBA plans to meet with the new BOE to revisit this issue of nexus and sales tax, particularly given the economic state that California's in," Landon said.

Said Goldberg, "In this whole area -- like Wal-Mart or Target -- where you have drop-dead nexus, the state will have to come up with a clearer [tax] policy. If you're selling products under the same name as the affiliated [online] company, you have nexus. This has yet to be clarified in any state except Arkansas." --David Grogan