Kepler: Book Chains Get Free Ride Online

Independent booksellers, including Kepler's, protest state's tax system

By David Boyce
Almanac Staff Writer

Independent bookseller Clark Kepler, owner of Kepler's Books in Menlo Park, California, was among the almost 600 booksellers nationwide who recently wrote their state governors calling for the fair and equitable collection of sales tax on online sales. His call to action was recently reported in The Almanac, a local newspaper covering Menlo Park, Atherton, Portola Valley and Woodside, California. The article, reprinted here with permission, presents both an update on the situation in California and nationwide.

With the state and local communities facing the probability of large shortfalls in tax revenues in the coming year, a local merchant is arguing that the time has come to make online businesses as accountable as their bricks-and-mortar cousins.

Clark Kepler, the owner of Kepler's Books in Menlo Park, added his support to a letter from 77 independent California booksellers to Governor Gray Davis, urging him to take whatever steps [are] necessary to force retailers with a physical presence in the state to collect sales taxes for online purchases made from California.

"When companies dodge their legal responsibility to collect sales taxes, they are siphoning money away from essential local services," said Kepler. "The independent booksellers in the state are not asking for special treatment. However, they are looking for their state government to enforce laws uniformly and fairly."

According to a report from the state tax board, California lost $1.2 billion in 2001 in uncollected taxes from retail transactions conducted online or through the mail.

The tax board, which decides which retailers must collect sales taxes, has issued opinions stating that booksellers Borders Online Inc. and Barnes & Noble.com have outstanding tax bills for online sales because both corporations have "a substantial physical presence" within the state.

The American Booksellers Association, to which Kepler's belongs, alleges that the state government is letting online retailers ignore their obligations out of a desire to encourage growth of the Internet economy. In San Mateo County, the sales tax rate is 8.25 percent.

While online transactions are currently taxable, the law apparently has maneuvering room that allows businesses to avoid collecting such taxes. A bill recently introduced in the state Senate would clarify the law. The governor has vetoed such bills in the past but is said to be more open to such legislation now, given the fiscal crisis facing the state.

"It takes courage to stand up and say there's a law here to be enforced," Kepler said in a recent interview with the Almanac. "It's not the government's role to set up an unfair marketplace. If [the government] simply collected the taxes owed now, they'd be consistent with the law.

"This is a lot of intended confusion being used [by the state] to slow this whole process or continue not to collect taxes," Kepler said, adding that while it's particularly unfair to him as a retailer, it's also unfair to local residents because the community misses out on sales tax dollars that would otherwise go to support schools and infrastructure.

Taxes owed

Technically, consumers and businesses should be paying taxes on all purchases not made in a physical store, whether through the Internet or over the telephone. Called use taxes, they are identical to sales taxes, but because it lacks the resources and staff to enforce collection, the state relies on honesty and "good citizenship" in its collection of use tax revenues, said state tax board spokesman Vic Anderson. Every month the state receives about 23 such payments averaging about $5,700 each, Anderson said.

In fiscal year 2000 - 2001, an estimated $145 million in use-tax revenues went unreported from online purchases by consumers, Anderson said. When added to taxes technically owed by consumers and businesses for mail order purchases, unreported use-tax revenues totaled $1.2 billion for the year.

A state-by-state study by the University of Tennessee put California's losses at the state and local levels at $927 million for 2001, with predicted losses of $3.2 billion by 2006 and $3.8 billion by 2011.

The trend does show online purchases growing. In November and December, online sales were estimated at $9.75 billion nationwide in 2001 - 2002, up 20 percent from the previous year, according to Internet data analysis firm comScore Networks.

Online sales of books were $538 million for the second quarter of 2002, up 16 percent from the year before; and $565 million for the third quarter, up 10 percent, according to comScore.

Changes ahead?

If online retailers with the equivalent of a physical presence in California feel something warm on the backs of their necks, it may be the breath of cash-strapped states looking to finally capture this source of revenue. Senate Bill 103, authored by state Senator Dede Alpert (D-San Diego) would clarify the tax responsibility of these retailers.

This bill may have a new friend in the governor. In a January 30 story in the San Jose Mercury News, the governor's spokeswoman, Hilary McLean, noted that "California's fiscal climate has changed; the dot-com economy has changed. While [the governor] didn't favor it in the past, he is willing to review it in the bigger context."

Two retailers likely to find themselves drawing the state's attention are Borders Group and Barnes & Noble. Both booksellers have online presences that, while they have similar names, are established as separate businesses.

The state took issue with these arrangements, alleging that the online companies were not sufficiently separate. In the Borders case, online customers could return purchases to physical stores; with Barnes & Noble, customers could redeem coupons that promoted the online presence and the bricks-and-mortar stores on the same coupon.

Jenie Carlen, the public relations manager for the Borders Group, said in response to an Almanac inquiry that Borders Group disagrees with the state tax board's opinion and "will continue to contest it," explaining that the corporation does not have online sales. Borders.com allied itself with Amazon.com in the spring of 2001 and receives "a percentage of the sales," she said.

Carlen said that the corporation's policy prohibits items bought online to be returned to Borders Books stores because "the purchase is made with Amazon.com."

Actions speak

However, in an informal poll conducted by the Almanac of six Borders Books stores in the Bay Area and three in other major U.S. metropolitan areas, only two clerks, after checking with store managers, said that returns of purchases made through Borders.com would be refused.

Anderson said that in its ongoing enforcement efforts, the tax board takes corporate policy changes into consideration, but added, "We would look very seriously at that policy" to determine its effectiveness.

Barnes & Noble did not respond to the Almanac's inquiries, but the Web site for bn.com notes that online purchases may be returned "to any Barnes & Noble store."

The Web site also notes that sales taxes are levied only on online purchases made from New York, New Jersey, Tennessee, and Nevada. This policy was borne out in an informal inquiry by the Almanac to the bn.com toll-free telephone number, in which the representative said that any purchase made through its Web site from California would not be taxed.

Copyright © 2003 Embarcadero Publishing Company. Reprinted with permission.