SAY NO TO OUTDOORS RETAIL SUBSIDIES

Article published Sep 12, 2006

Cabela's tax break raises eyebrows
Sales tax exemption gets scrutiny in Idaho, other states

Ken Dey
Idaho Statesman

Idaho officials contend they were only following the law when the Tax Commission ruled that Cabela's Inc. would not have to collect Idaho sales taxes on its online and catalog sales.

But legal and legislative efforts under way nationwide would tighten the tax laws and eliminate the so-called gray area that allow companies like Cabela's to avoid collecting state sales taxes from online customers.

The issue has caught the attention of Idaho legislators.


"I definitely think we need to look at this in the next session. I'm concerned about it, and others are too," said Sen. Brent Hill, R-Rexburg, who will likely be the new chairman of the Senate's Local Government and Taxation Committee when the Legislature convenes in January. "I don't want people to think we're bending over backwards for the big outfits while sacrificing our small businesses and putting them at a competitive disadvantage."


Cabela's successfully argued that the company's online and catalog divisions are separate companies from the company's retail operations and therefore have no "nexus" — a physical presence, such as an office, branch, warehouse or employees — in the state to require the collection of taxes.

The Idaho Tax Commission denied the Idaho Statesman's public records request for additional information about the Cabela's ruling and rulings for other companies, citing the state's taxpayer confidentiality laws.


Deputy Attorney General Ted Spangler, who represents the commission, said rulings aren't required. If other companies are not collecting sales taxes for online and catalog sales, they're doing so because they think they're operating within the law, he said.

Time for a challenge


Idaho isn't alone in giving Cabela's a favorable ruling. The company said it has received such rulings in 11 states where it has retail stores and claimed no nexus for the online operations.

Cabela's says it requests rulings because its customers don't like paying the taxes, and the taxes put the company at a competitive disadvantage with other online retailers with no presence in Idaho that don't collect taxes.

But in Maine, where Cabela's hopes to build, a number of state and business leaders are speaking out against Cabela's request for the tax break because, they say, it would be unfair to other Maine companies that collect sales taxes on online sales.


"States could easily say no," said Michael Mazerov, senior fellow with the Washington, D.C.-based Center on Budget and Policy Priorities, a nonpartisan organization that monitors tax policy and how it affects low-income families. "But you never know when a big economic development deal comes forward how much pressure will be bought to bear to get a ruling like this."

Mazerov said it's a "murky" area of the law and, if tested, he believes the Supreme Court would uphold a state's right to require companies like Cabela's to collect sales taxes.


Idaho's sales tax collection policies are based on a 1992 U.S. Supreme Court ruling in Quill Corp. v. North Dakota. North Dakota wanted the Quill office-products company to collect state sales taxes from its customers despite having no presence in the state.

The Supreme Court ruled that the company must have a nexus before the company can be required to collect sales taxes.

Cracks in Cabela's strategy


Cabela's declined to comment for this story. The company said in its annual report with the U.S. Securities and Exchange Commission that it would challenge any efforts to deny the sales tax exemption in states where Cabela's has no online nexus but conceded that it might not prevail.

California denied a similar exemption for Borders Books and Music, which maintained that its online operation was separate and had no presence in California. Borders appealed, but the denial was upheld by the state's court of appeals. The court ruled in June 2005 that Borders retail and Borders online were not separate companies and couldn't be exempt from collecting sales tax for online purchases. The court cited Borders practices such as allowing customers to return online items to retail stores, imprinting its receipts with the company's online address, referring retail customers to its online site, and using similar logos and shared market and financial data between online and retail.


A similar case against Cabela's is now pending in Texas. Gander Mountain Co., a competing sporting goods company based in Minnesota, alleges that actions by Cabela's do not support the company's contention that its retail operations are separate from online and catalog operations.

The lawsuit alleges that online and catalog customers can return items to a retail store, that catalogs are distributed at retail stores, that retail store employees assist customers in placing catalog orders at the store, and that Cabela's retail stores promote and advertise the Cabela's Web site in the stores. Gander Mountain also alleges that the company's Web site provides information about its retail stores.

Mazerov said the allegations clearly show that Cabela's retail sales representatives are acting as representatives of the Web site.
"To me that should be a no-brainer for nexus," he said.

Changing the laws


Although the Idaho Tax Commission ruled in favor of Cabela's, the commission is supporting changes that would no longer allow Cabela's and others to qualify for an exemption.

As a member of the Interstate Tax Commission, Idaho last month voted in favor of a model statute for states to clarify what actions establish a nexus. The Sales Tax Nexus Provision would conclude that an out-of-state company with no physical presence in a state would still be considered to have a nexus in the state if an online company is related to a retail store within that state for tax and financial purposes. The two also would have to share a similar name, trade name or trademark.

The provision didn't pass but could be brought up again.


Idaho has also been monitoring the Streamlined Sales Tax project, which asks states to simplify sales-tax collection procedures to make it easier for online and catalog sellers to collect the tax. Twenty states have passed legislation to accomplish that, but Idaho hasn't yet pursued legislation. A bill in the U.S. House would make streamlining sales tax procedures a nationwide requirement, but few people believe it will pass this session.

The Streamlined Sales Tax project indirectly addresses the nexus question, but proponents hope that by streamlining sales tax collection, online and catalog companies will be more receptive to collecting the taxes. Many of the larger retailers, including Wal-Mart, Target and Best Buy, support the Streamlined Sales Tax project and already collect sales taxes in states where they have a presence.