Opinion
Case No. CGC-06-456465.
Date: September 7, 2007 9:30 a.m., Dept: 301. Filed October 12, 2007.
Action filed in Santa Clara County on December 16, 2004, Cross-Complaint Filed: October 19, 2006, Trial Date: October 9, 2007.
ORDER GRANTING PLAINTIFF, BARNESANDNOBLE.COM, LLC'S MOTION FOR SUMMARY JUDGMENT AND DENYING STATE BOARD OF EQUALIZATION'S MOTION FOR SUMMARY JUDGMENT
This case comes before the Superior Court on the parties' cross-motions for summary judgment or, in the alternative, for adjudication of the facts. For reasons described below, the Court grants summary judgment in favor of Plaintiff, barnesandnoble.com llc ("bn.com" or "Plaintiff"), both on its Complaint for Refund and on the counterclaim for interest asserted by the Defendant California State Board of Equalization (the "Board" or "Defendant") and denies Defendant's motion. The matter was heard by the Court on September 7, 2007, in Department 301, the Honorable Peter J. Busch, presiding. George Isaacson, Esq. and Michelle Tidalgo, Esq. appeared on behalf of bn.com, and David Lew, Esq., Deputy Attorney General, appeared on behalf of the Board.
Having examined and reviewed the filed pleadings, briefs, stipulations of fact, exhibits and declarations submitted by the parties in support of and in opposition to the cross-motions, and having considered all oral argument presented at the hearing, and good cause appearing, this Court makes the following findings:
I. NO TRIABLE ISSUE OF MATERIAL FACT
The Court finds no triable issue of material fact exists as to each party's respective motion for summary judgment in light of the parties having stipulated to all the relevant facts.
II. UNDISPUTED EVIDENCE
Plaintiff is a Delaware limited liability company with operations, facilities, and personnel located outside of California. [Statement Of Undisputed Facts In Support Of Plaintiffs Motion For Summary Judgment ("SUF") ¶ 1]. It sells books, music, and movies to consumers across the United States via the internet only. [SUF ¶ 2]. All customer orders are accepted outside of California, and all products are delivered by means of common carrier from locations outside of California. [SUF ¶ 5].
During the relevant tax period, Barnes Noble, Inc. ("BN") was a minority owner of Plaintiff. [SUF ¶ 6]. BN owned 40% of Plaintiff. [ Id.] Bertelsmann AG, a German company unrelated to BN, owned 40% of Plaintiff. [ Id.]. The remaining 20% of Plaintiff was owned by barnesandnoble.com, inc., the shares of which were publicly traded. [ Id.]. In part as a result of this ownership arrangement, BN neither directed nor controlled the operations of Plaintiff. [SUF ¶ 7-9, 62, 64]. Plaintiff operates as a separate and distinct legal entity from BN and its subsidiaries and affiliates. [SUF ¶¶ 19, 21]. Its offices were physically separate from and at a location different from BN and its affiliates and subsidiaries. [SUF ¶¶ 9]. Plaintiff's management was separate and independent from BN and its affiliates and subsidiaries. [ Id.]. It maintained and shared with no other companies, its own employees, warehouses and fulfillment centers, inventory of products, equipment, and computer systems. [ Id.] Plaintiff's officers were responsible for all aspects of the management and operation of its business. [ Id.].
Booksellers is a wholly-owned subsidiary of BN which operates retail stores across the United States, including in California. [SUF ¶¶ 19, 21]. In the relevant time period, apart from the inclusion of coupons in shopping bags — discussed below — there were no connections or relationships of any kind between Plaintiff and Booksellers. [ Id.]. Booksellers had no ownership interest, or operational role, in any activities of, or decision-making by, Plaintiff; likewise, Plaintiff has no ownership interest, or operational role, in any activities of, or decision-making by, Booksellers. [ Id.]. Booksellers and Plaintiff did not share personnel, inventory, property, facilities, management, or information systems of any kind. [ Id.]. Booksellers' stores did not accept returns of products purchased from Plaintiff, nor did they provide any unique or preferential services to Plaintiff's customers or make customer referrals to Plaintiff. [SUF ¶¶ 23, 24].
Beginning in mid-November of 1999 and ending on December 19, 1999, Booksellers used shopping bags that had pre-inserted coupons for a $5 discount on any one online purchase of $25 or more from Plaintiff. [SUF ¶¶ 34, 37]. The shopping bags were imprinted with Booksellers' logo on one side, and bn.com's logo on the other. [SUF ¶ 36]. Plaintiff paid for the printing of the coupons and the incremental cost associated with the placement of its logo on the shopping bags. [ Id.]. The coupons were placed in the shopping bags by an unrelated vendor located in New Jersey, and sent by that vendor to Booksellers' retail stores across the United States as part of a national advertising program. [SUF ¶¶ 35, 43, 44].
On September 26, 2001, the Board issued its Memorandum Decision in the case of Borders Online, LLC, revealing, for the first time, its interpretation of the term "selling" in Revenue and Taxation Code ("RTC") Section 6203(c) as "inclusive of all activities that are an integral part of making sales." Request For Judicial Notice In Support Of Plaintiff's Motion For Summary Judgment, Or In The Alternative Summary Adjudication Of Issues, Exh. A. In the instant case, the Board applied this interpretation of "selling" to Plaintiff, finding that the inclusion of coupons in shopping bags was an integral part of making sales. At no time during proceedings below did the Board or its staff identify or assert against Plaintiff any other issues or activities allegedly giving rise to use tax registration, collection, or remittance obligations. [SUF ¶ 54]. On the basis of the coupons alone, the Board found that Plaintiff was a "retailer engaged in business in the state" under RTC § 6203(c) with a "substantial nexus" in California as required by the Commerce Clause. [ Id.].
III. VIOLATION OF STATE LAW
The Board's sole contention in support of the tax determination is that, by using shopping bags with pre-inserted coupons issued by Plaintiff, Barnes Noble retail stores acted as (1) "agents" or "representatives" of Plaintiff (2) engaged in "selling" on its behalf under RTC § 6203(c)(2). Unless both of these enumerated requirements are met, the tax determination against Plaintiff is unlawful and a refund must be granted.
a. "Agent" or "Representative"
The Court finds that Barnes Noble retail stores did not act as "agents" or "representatives" of Plaintiff. On this basis, the Court grants summary judgment in favor of the Plaintiff on its Complaint for Refund and the Board's counterclaim.
As a preliminary matter, the Court can discern no meaningful difference between the terms "agent" and "representative." Likewise, both parties concede that the terms are interchangeable, the Board taking the position during oral argument, and presumably during enforcement, that the two terms are synonomous. The Court of Appeal in Borders Online LLC v. State Bd. of Equalization (2005) 129 Cal.App.4th, impliedly reached a similar conclusion, holding that, for purposes of RTC § 6203(c)(2), the instate person or company must stand for, act on behalf of, or represent another "called a principal," defining an agent as someone who represents another.
The two cases relied upon by the Board in support of its position reinforce the conclusion that the requisite agency relationship does not exist here. In Borders Online, supra, the two corporations, Borders Online, LLC ("Online") and Borders Inc. ("Borders") were wholly-owned subsidiaries of the same parent, Borders Group, Inc. ( Borders Online LLC v. State Board of Equalization, supra, 129 Cal.App.4th at p. 1185), with substantially overlapping boards of directors and corporate officers. Borders' stores provided "unique and preferential services" to the customers of Online, including the acceptance of returns of merchandise purchased from Online on special, favorable terms. Based on the exclusivity and extent of the relationship between Borders and Online, and actual solicitation of sales for Online by Borders' store personnel, the Court of Appeal affirmed the Board's determination that Borders had acted on behalf of Online as its authorized "representative" in California under California law. Id. at pp. 1194-95. None of these facts are present here.
Unlike Borders Online, there is no evidence that the same people controlled both Plaintiff and Booksellers. Plaintiff is partially owned by Barnes Noble, Inc. and Booksellers is fully owned by Barnes Noble, Inc. While Plaintiff and Barnes Noble had two common members of their respective boards of directors, including the same chairman, there is no evidence that Plaintiff and Booksellers shared any directors or officers. Nor is there evidence that Barnes Noble, Inc. had actual control over both Plaintiff and Booksellers. Thus, the fact that Plaintiff and Booksellers are sister corporations does not support a finding that Booksellers was Plaintiff's agent.
In the other case on which the Board relies, Scholastic Book Clubs, Inc. v. State Bd. of Equalization (1989) 207 Cal.App.3d 734, public and private school personnel engaged in a wide range of in-state services for an out-of-state retailer, including collecting orders and payments from customers and delivering products to those customers, and thus were deemed to be agents of the taxpayer. This is a far cry from the passive distribution of coupons.
The cases dealing with RTC § 6203 and agency do not provide a useful test of the meaning of "agency" in this context. Therefore, based on the definition of agency in Borders Online, the Court must look to general principals of agency to determine whether Booksellers was Plaintiff's agent. Here, the undisputed evidence shows that the Barnes Noble retail stores passively distributed coupons issued by Plaintiff, much like a person on a street corner might hand out flyers or coupons. The concept of agency requires something significantly more than simply passing out information at somebody else's request. An essential element is that the agent (or representative) must have the authority to bind the principal, authority held neither by Barnes Noble retail stores nor the hypothetical person on the street corner handing out promotional material. Booksellers had no input in creating the coupon program. Booksellers had no authority to adjust the terms of the coupons or to redeem them. Booksellers could not accept returns of books purchased from Plaintiff with the coupons. Booksellers did not solicit sales and could not accept orders for Plaintiff. Booksellers had no authority to accept anything from customers that would be passed on to Plaintiff. With regards to Plaintiff, Booksellers could do nothing but pass out the coupons created and distributed by Plaintiff. Booksellers could not speak for or bind Plaintiff on any subject whatsoever. Thus, the Court finds that Booksellers was not Plaintiff's agent for the purposes of RTC § 6203.
The Board argued that Booksellers was Plaintiff's agent because both companies shared the name Barnes Noble and both companies would benefit from increasing the reputation of the Barnes Noble brand name. While Booksellers may have benefited from passing out the coupons because the coupons could have increased the reputation of the Barnes Nobles brand name, this fact is not sufficient to show an agency relationship. This brand name similarity may explain why Booksellers was willing to pass out the coupons without compensation. These facts, however, cannot make Booksellers Plaintiff's agent because they do not show that Booksellers was authorized to bind or control Plaintiff in any way.
Finally, the Board argued that Booksellers gave Plaintiff preferential treatment because Booksellers did not pass out coupons from any company other than Plaintiff. The evidence only shows that Booksellers did not pass out coupons from other companies during the tax period. There is no evidence that Booksellers did not pass out coupons from other companies during another time period or that Booksellers would not offer this service to any other company. In any event, even if this were only a one-time operation, that would not alter the agency analysis.
b. "Selling"
Plaintiff's efforts to induce Booksellers' customers in California to make purchases from its web site by authorizing Booksellers' employees to hand out promotional discount coupons for bn.com merchandise constituted "selling," as that statutory term has been expressly defined by the First District Court of Appeal in Borders Online v. State Bd. of Equalization (2005) 129 Cal.App.4th 1179, 1192-1193.
The definition of the term "selling" that the Board applied in this case does not implicate the notice and hearing provisions of the California Administrative Procedures Act (APA). (Govt. Code, § 11340.5, et seq.) Because the Boards's statutory interpretation of "selling" has been conclusively adopted as law in Borders Online, the Court of Appeal's definition of that term now controls the outcome of this case. Accordingly, the interpretation of that term, as first applied by the Board in its memorandum opinion, is now a matter of settled decisional law. But "selling" activity in California would subject Plaintiff to the Board's jurisdiction only if carried out by Plaintiff's "agent," which, as explained above, it was not.
IV. VIOLATION OF THE COMMERCE CLAUSE AND FIRST AMENEMNT VIOLATIONS
Because the Court concludes that the Board cannot establish a statutory basis for Plaintiff's liability, the Court need not address whether the taxation would violate the United States Constitution.
V. EVIDENTIARY RULINGS
The Court considered only the evidence to which the parties stipulated except that, no opposition having been filed by the Board, Plaintiff's request for judicial notice in support of its motion is granted.
Therefore, the Court grants Plaintiff's motion for summary judgment and denies the Board's motion for summary judgment.
IT IS SO ORDERED.