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Days of tax-free Net shopping may be over

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Those who believe that death and taxes are the only sure things in life have not spent much time with online retailers, who have largely avoided paying most sales taxes.

But that situation appears to be near an end.

Late last month, a California state appeals court found the bookseller Borders liable for $167,000 in taxes from April 1998 to September 1999 because the company had commingled the operations of its online subsidiary and its stores in that state. The ruling, along with other efforts by state tax collectors aimed at Internet sales, could signal that the era of tax-free online shopping is drawing to a close.

A Supreme Court decision in 1992 said that mail-order merchants, and, by extension, online retailers, need not collect taxes on behalf of their customers' local jurisdictions unless those customers are in a state where the business operates.

Traditional retailers have long complained that Amazon and others have largely avoided state tax collection and have bemoaned that such practices allow the online retailers and catalog companies to sell goods at lower prices. At the same time, government officials in the 45 states that levy sales taxes have lamented the forgone revenues, particularly since 2000, when Internet sales spiked and many local economies slowed.

According to Scott Brandman, a lawyer with the firm of Baker & McKenzie, which is representing Borders in the California case, the appellate court's decision "could be used by states to reach out to new levels they haven't reached out to before."

Brandman said the California court failed to account for the fact that Borders.com and Borders Group were separate corporate entities. Therefore, he said, states could rely on this decision to say that when online companies use an unrelated offline business to promote themselves, the online company would then have to collect taxes in states where the offline business operates.

That could, in theory, include the country's largest online retailer, Amazon.com, which now operates Borders' online store.

Borders had argued that because it set up a separate company to run its online operations--and that company had no offices or staff in California--it was not obliged to collect sales taxes from California residents, even though the company ran 129 Borders and Waldenbooks stores and a distribution center in that state.

The California court said that since Borders' California stores essentially acted as agents for Borders.com--by, among other things,

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