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California Sales Tax Ruling
Many national chains, despite having nexus (i.e., a physical presence) in every state by virtue of their stores, have claimed their e-commerce sites were distinct legal entities, unrelated to their bricks-and-mortar stores and therefore were exempt from collecting sales taxes. This practice is known as "entity isolation."
A more accurate description, according to the Northern California Independent Booksellers Association (NCIBA), is tax evasion. For several years, the NCIBA pressed state officials to enforce California's sales tax law and thereby level the playing field for all retailers with nexus in the state.
In September 2001, they scored their first victory when the California Board of Equalization (BOE) ordered Borders.com to collect tax on all of its California sales. The BOE, the state agency in charge of taxes and fees, ruled that Borders stores have been acting as the authorized representative of Borders.com by accepting returns of merchandise purchased online and giving customers cash back.
The Supreme Court held in Quill that nexus in a state is established either when an out-of-state company itself or its authorized representative has a substantial physical presence in the state. Borders.com had argued that the Borders bookstore chain is an independent third party that takes returns on behalf of Borders.com through a contractual arrangement.
According to NCIBA and other advocates of sales tax fairness, clicks-and-mortar retailers are obligated in most states under existing law to collect sales tax. But, until this decision, enforcement officials nationwide failed to take action against these companies.
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