Westly Joined Backer’s Tax Fight

Controller Steve Westly aided retailer Barnes & Noble’s fight to avoid a multimillion-dollar California tax bill at the same time he was arranging a fundraiser at the chain’s East Coast headquarters.

Using his position on a state tax board, Westly joined Barnes & Noble’s push in 2004 to be forgiven as much as $22.8 million in sales taxes, interest and penalties -- money owed for years of not collecting sales tax on goods sold online. Westly, a Democrat, has been campaigning for governor as an opponent of corporate tax loopholes.

Barnes & Noble has more than 100 stores in California. But it has contended that because its online operation is based elsewhere, its Internet sales are not subject to California taxes. State auditors have rejected that argument, and the company took the case to court.

Westly began lobbying the tax board to overrule the auditors and settle the case at a time when the state was already extracting back sales taxes from other businesses with far more tenuous connections to California. His effort ultimately failed; the case remains in court.

In a March 14, 2004, e-mail obtained by The Times, Westly informed one of his fundraisers that barnesandnoble.com President Marie J. Toulantis was pleased by his efforts at the tax board, making it a good time to ask for her help in raising campaign cash.

“We have followed up with Marie, the president of Barnes & Noble -- and she is reportedly happy.... Could you please call her to see if she would help with our upcoming trip,” says the e-mail to Chicago-based fund-raiser David Rosen. Westly was planning a trip east in April to solicit campaign donations.

In his message to Rosen, the controller attached a string of e-mails written by state employees on state e-mail accounts documenting steps his office had taken on Barnes & Noble’s behalf, mostly lobbying to get the company’s case on the tax board’s agenda.

Westly, who made a fortune as an early executive with the online auction phenomenon EBay, left for the East Coast on April 27, 2004. He collected tens of thousands of dollars from an array of donors, including many who attended a luncheon at Barnes & Noble’s New York City offices.

His largest check from that event -- $5,000 -- came from Laura Riggio, wife of Stephen Riggio, chief executive officer of Barnes & Noble, the nation’s largest bookseller.

Westly had been pushing California to let barnesandnoble.com off the hook for back taxes if the company agreed to collect and pay sales taxes to the state in the future.

That effort stalled soon after Westly’s trip, when the other four members of the tax panel, the state Board of Equalization, refused to go along.

Barnesandnoble.com has since begun voluntarily collecting tax on its current sales.

Competitor Borders, meanwhile, was ordered by a state appeals court last spring to pay taxes on its past Internet sales.

Westly spokesman Yusef Robb said it was appropriate for the controller to enlist Barnes & Noble in his quest for campaign cash while lobbying California’s tax board to settle the case. “Why shouldn’t he?” Robb said.

He asserted that Westly “maintains the brightest of lines between the state controller’s office and anything even remotely political.”

Robb defended Westly’s decision to forward the state e-mails to the fundraiser, saying, “These are public records.”

California law bars Board of Equalization members from taking campaign contributions of more than $250 from individuals or corporations that have matters pending before the panel.

Westly took money from Barnes & Noble executives and the spouse of one executive but not directly from the company. And the company’s case never reached the board for a vote.

But the state’s independent booksellers, whose business suffered as online competitors offered customers tax-free purchases, say they are outraged by Westly’s actions.

“This is currying political favors for money.... I don’t know how you can interpret it any other way,” said Hut Landon, executive director of the Northern California Independent Booksellers Assn.

“Isn’t the controller’s job to look after the financial well-being of the state? This is unconscionable,” Landon said.

Robb said the deal that Barnes & Noble sought would have involved paying some portion of back taxes.

Two Board of Equalization members said the only proposal that ever came before them involved the company paying none.

“I took their offer to be: We give in to them,” said board member Bill Leonard, a Republican whose votes often side with business.

“We had already made everyone else pay the tax. We hadn’t let anybody off. I wanted equal treatment.”

Leonard said he did not speak directly with Westly, but when Barnes & Noble representatives approached him with the proposal, “they implied the controller was already onboard and they were looking for two more votes.”

Board member Carole Migden, a Democratic state senator from San Francisco and co-chairwoman of Westly’s gubernatorial campaign, also said she saw no proposal that Barnes & Noble pay any back taxes.

Westly’s East Coast fundraising trip in the spring of 2004 took him from New York to Washington, D.C. His official calendar shows that on his first full day in New York he made six stops, starting at 9:30 a.m. and ending with a 5:30 p.m. cocktail party fundraiser.

The next day, April 29, Westly had at least three events, including the luncheon at Barnes & Noble headquarters.

The bookseller’s executives gave $8,700; members of a law firm and an accounting firm that represent the company gave several thousand more.

The controller then flew for a day to Washington, where he met other donors and at least one lobbyist. Westly reported raising a combined $57,000 from East Coast donors on the trip.

In a telephone interview, Barnes & Noble Senior Vice President Mary Ellen Keating, who attended the luncheon, said the event was organized by Toulantis, who oversees the company’s Internet sales.

She said Toulantis had met Westly at an event -- Keating wasn’t sure where or when -- and requested his help getting Barnes & Noble’s case on the Board of Equalization agenda.

Keating said Westly did not do the company any special favors. The e-mail he forwarded to Rosen, she says, merely reflected his staff’s efforts to get the company’s case on the board agenda.

“What he did was facilitate her coming out and meeting with members of the board to get our case heard,” Keating said.

“What he simply did was facilitate getting us on the calendar.”