A California mattress retailer claims it is losing money over a competitor’s failure to collect sales tax.
Multichannel mattress retailer Ortho Mattress Inc. has sued online-only mattress retailer US-Mattress.com, a subsidiary of Bedding Pros LLC, for not collecting sales tax in California. Bedding Pros is No. 433 in the Internet Retailer 2017 Top 500.
Ortho Mattress, which operates more than 60 stores in southern California, filed its complaint in the California Superior Court at the end of June that alleges US-Mattress, which is based in Michigan, has a physical presence in California, which would mean it would be required to collect sales tax. US-Mattress says it does not have a physical presence in the state.
Ortho Mattress alleges US-Mattress “engages California-based representatives, agents, salespersons, canvassers, independent contractors, solicitors, and/or vendors to operate in California on its behalf and under its direct authority for the purpose of selling, delivering, installing, assembling, or taking orders for tangible personal property. For example, US-Mattress engages California-based vendors to deliver, install, and assemble mattresses and related bedding supplies purchased through its online platform.”
The U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota prohibits states from requiring merchants to collect taxes unless they have a physical presence, or “nexus” in legal terms, in the state. Still, several states have tried to force out-of-state online retailers to collect sales tax, even though the Quill decision means that only companies with an office, store, warehouse or other physical presence in a state can be required to collect and remit a state’s sales tax. The “No Regulation Without Representation Act” is a response to those states’ actions, and last week the bill had a hearing before the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial, and Antitrust Law.
For online retailers, a physical presence usually means a warehouse. The parent company of US-Mattress, Bedding Pros, does collect sales tax in three states—Michigan, North Carolina and Utah—where the retailer has stores or e-commerce fulfillment centers, according to Top500Guide.com.
Joe Nashif, president of US-Mattress, says the retailer doesn’t have a fulfillment center in California. “We intend to fight the lawsuit, since it is without merit, but it’s too early for us to comment any further at this time,” Nashif tells Internet Retailer.
Ken Karmin, CEO of Ortho Mattress, however, says he is convinced his competitor does have a warehouse in California. In the lawsuit, Ortho Mattress cites the California State Board of Equalization’s Publication 109 on Internet Sales, written in October 2016, that calls for out-of-state retailers to collect sales tax in the following cases:
“Has persons operating in California under its authority for the purpose of selling, delivering, installing, assembling, or the taking of orders for tangible personal property, or derives rentals from a lease of tangible personal property (including vehicles, vessels and aircraft) situated in California.”
US-Mattress does offer in-home setup, in which the retailer will bring the mattress into the customer’s house, unpack it and take away the packaging. The retailer also offers removal of a customer’s old mattress, according to its website.
Steve DelBianco, executive director of NetChoice, a national trade association representing online retailers, says nexus has not been applied before to shipping carriers, retailers that offer “white glove” delivery inside a home or retailers that remove trash from homes.
“It’s an attempt to stretch the definition of a physical presence to include that of a common carrier,” says DelBianco, who declined to comment specifically about this case.
The majority of Ortho Mattress’s sales are in stores, and less than 10% are online, Karmin says. Because US-Mattress does not collect sales tax in California, the web merchant can charge less for its products and that gives it an unfair advantage, Karmin says.
“It drives our prices down,” Karmin says. “Consumers demand that we also offer beds without sales tax–so we end up matching [prices].”
Karmin estimates his company’s revenue is reduced 10%-12% annually because Ortho Mattress is compelled to match prices from US-Mattress, which doesn’t collect sales tax in California.