On September 12, 2002, the California Board of Equalization ("BOE") determined that Barnes & Noble.com should have collected use tax on its internet sales during the audit period November 15, 1999 through March 31, 2000 because it was a "retailer engaged in business" in California under Section 6203(c)(2) of California’s Revenue and Taxation Code.
Advertising Assistance From "Bricks And Mortar" Affiliate Stores
Barnes & Noble.com is a Delaware limited liability company which makes online retail sales of books, videos, music, and computer software. It has no physical presence in California and delivers merchandise to its California customers by common carrier or U.S. Postal Service. Barnes & Noble.com is a separate and distinct legal entity from Barnes & Noble Book Sellers, Inc. ("Book Sellers"), a corporate affiliate that sells similar goods in "bricks and mortar" stores throughout the country, including stores in California.
During the audit period, Book Sellers distributed coupons on behalf of Barnes & Noble.com that could only be used to purchase merchandise from the Internet retailer. They were placed in special promotional shopping bags that had the "Barnes & Noble" logo printed one side and the "bn.com" logo on the other side. Barnes & Noble.com paid for printing its logo on the bags. Book Sellers’ stores distributed the special bags with coupons starting on November 12, 1999, and continued through December 19, 1999.
The BOE asserted that Barnes & Noble.com was a retailer engaged in business in California as a result of these promotional activities.
Statutory Tests
Revenue and Taxation Code section ("Section") 6203 imposes a use tax collection obligation on ". . . every retailer engaged in business in this state and making sales of tangible personal property for storage, use, or other consumption in this state. . . ." Under subdivision (c)(2) of Section 6203, the meaning of "retailer engaged in business in this state" includes:
"[a]ny retailer having any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state under the authority of the retailer or its subsidiary or the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property."
Barnes & Noble.com did not dispute that it was a retailer, but did contend that the additional requirements under Subdivision (c)(2) were not satisfied in this case because it did not have persons or entities in California "selling" or "taking orders" on its behalf.
In analyzing the statutes, the BOE held:
". . . the out-of-state retailer must have a representative, agent, salesperson, canvasser, independent contractor or solicitor (hereafter, collectively, representative). Second, this representative must be operating in California under the authority of the out-of-state retailer or its subsidiary (i.e., the in-state representative must be authorized to act on the out-of- state retailer’s behalf). Third, the out-ofstate retailer’s authorized representative’s operations in California must include one of the following activities: selling, delivering, installing, assembling or taking orders for tangible personal property.
The BOE found that each of the three requirements were satisfied and affirmed the assessment against Barnes & Noble.com.
Authorized Representative
Because Book Sellers was the authorized representative to distribute the coupons in special promotional shopping bags, the BOE found that ". . . this conduct also suffices to establish that Book Sellers was [Barnes & Noble.com’s] authorized representative in [California] . . ."
Selling Activity
Barnes & Noble.com argued that the distribution of coupons in the promotional shopping bags was not "selling" under Subdivision (c)(2) of Section 6203. The BOE relied upon its recent decision in Borders Online, Inc., issued on September 26, 2001, to reject this argument.
Barnes & Noble.com contended that "selling" did not include the preliminary and promotional activities of coupon distribution. The BOE declined to adopt that argument, finding that "sale" and "selling" were not the same words and had distinctive meanings. When Book Sellers’ employees physically handed out coupons for discounted sales to their customers, who were potential customers of Barnes & Noble.com, there was sufficient "selling" activity under the statute to uphold the assessment under Section 6203(c)(2).
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