California and B&N Reach Settlement on Back Sales Tax

In a significant victory for California's independent booksellers, the state's Board of Equalization (BOE) and Barnes & Noble have settled two cases regarding the collection of sales and use taxes on sales made by Barnesandnoble.com. On Thursday, May 29, the California BOE affirmed and approved a settlement that has B&N paying a settlement of approximately $9 million.

The BOE investigation into whether Barnesandnoble.com had nexus in the state of California was spurred by the Northern California Independent Booksellers Association. "I'm delighted that the BOE pursued this matter to its conclusion, although I'm sorry it took nine years," said Hut Landon, NCIBA executive director. "This case sets a precedent of sorts in that Barnes & Noble argued from the start, up until they assumed total ownership over Barnesandnoble.com, that the two were separate corporations, and therefore the website was not subject to nexus. Our contention from day one was that their website was an arm of Barnes & Noble -- they did have minority ownership at the time, and the two conducted cross-marketing and promotional efforts.... I am pleased that they rejected Barnes & Noble's interpretation of nexus."

Barnes & Noble's contention that its California-based bricks-and-mortar stores did not constitute nexus for Barnesandnoble.com, because they were two legally separate entities, "sounds a lot like Amazon.com's current contention in Texas," added Landon. (At present, the state of Texas is investigating whether Amazon.com's Irving, Texas, distribution facility constitutes a physical presence in the state. Amazon has stated that the facility does not because it is owned by an Amazon subsidiary.)

The $9 million agreement settles two cases: a BOE audit for a four-month period in late 1999 during which Barnesandnoble.com offered online users coupons redeemable in Barnes & Noble stores; and a full-scale audit of the website that the BOE launched in 2003. Barnes & Noble is paying a one-time pre-tax charge of approximately $8.3 million for the audit and $700,000 for the coupons case.

In the summer of 1999, NCIBA and a number of indie booksellers first urged the BOE to investigate whether Barnes & Noble had nexus in the state. They initiated meetings with the chair and the general counsel for the BOE and a number of its investigators.

In November 1999, Landon and other booksellers became aware that Barnes & Noble stores were placing Barnesandnoble.com 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 the BOE in the hopes that they would investigate Barnes & Noble, which the BOE did. "We were like, what else do you need?" Landon told BTW in 2002. "If this isn't a clear case of nexus, what is?"

In September 2002, the BOE ruled that Barnesandnoble.com was obligated to pay California back use taxes for a period of four-plus months, which Barnes & Noble appealed.

A year later, the BOE voted to conduct a full-scale audit of Barnes&Noble.com to determine if the online retailer has nexus in the state of California. In June 2005, the staff of the BOE completed the audit and delivered the opinion to its Board that Barnesandnoble.com has nexus in the state and that the chain retailer owed approximately $20 million in back taxes, sources close to the BOE told BTW at the time. Barnesandnoble.com then sought a settlement with the BOE.

Barnes & Noble currently collects sales tax in the 45 states that collect sales tax. --David Grogan