New Mexico Supreme Court Holds Online Retailer Has Substantial Nexus For Gross Receipts Tax Due To In-State Retailer’s Activities

On June 3, the New Mexico Supreme Court held that an out-of-state online bookseller, LLC (B&N), had substantial nexus for purposes of the New Mexico gross receipts tax based on the in-state activities of its related entity.1 In affirming the Court of Appeals, the Supreme Court determined that the related entity's activities in New Mexico were significantly associated with B&N's ability to establish and maintain a market in the state. The Court of Appeals' holding primarily relied on the use of common trademarks, but the Supreme Court explained that there were additional reasons that B&N had substantial nexus with New Mexico. The finding of substantial nexus was further supported by the related entity's following activities: (i) the promotion of B&N through the sale of gift cards; (ii) the sharing of customers' email addresses with B&N; and (iii) the implicit endorsement of B&N through the companies' shared loyalty programs and the product return policy.


B&N, an Internet-based retailer of books, music, online courses, and movies with a broad multistate customer base, had no physical presence in New Mexico during the audit period giving rise to the litigation. B&N shipped all products to New Mexico customers from a point outside the state through the U.S. Postal Service or a third-party common carrier. However, Barnes & Noble Booksellers, Inc. (Booksellers), related to B&N through common ownership by a corporate parent, owned and operated three retail stores in New Mexico.2

During the audit period, Booksellers sold gift cards displaying B&N's Web address that could be used either at Booksellers or B&N. In addition, Booksellers sold memberships in a loyalty program that also gave customers a discount at B&N. Booksellers shared customer's email addresses with B&N. Further, Booksellers and B&N shared common trademarks.

Booksellers accepted the return of items that customers purchased from B&N. For online purchases that were returned, Booksellers provided an in-store credit or gift cards that could be redeemed in stores. B&N's Web site provided information about the return policy and also provided a store locator and descriptions of in-store events.

The New Mexico Taxation and Revenue Department issued an assessment for gross receipts tax and interest against B&N for sales into the state during the audit period, January 31, 1998 through July 31, 2005. B&N protested the assessment based on the position that Booksellers' activities could not be attributed to B&N and could not cause B&N to have "substantial nexus" under Quill.3 After the Department's own hearing officer decided in favor of B&N,4 the Department appealed the case to the Court of Appeals.

The Court of Appeals held that B&N...

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