New Mexico Court Of Appeals Holds Online Retailer Sharing Trademarks With In!State Retailer Has Substantial Nexus For Gross Receipts Tax

On April 18, the New Mexico Court of Appeals held that an out-of-state online bookseller, Barnesandnoble.com LLC (B&N), had substantial nexus for purposes of the New Mexico gross receipts tax based on its shared trademarks with an in-state related party's activities.1 In reversing the hearing officer, the Court found that the in-state related party created goodwill for the shared trademarks, and as a result, helped B&N to create and maintain a market within the state.

Background

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 during the audit period.

Booksellers made sales of gift cards that could be used to make purchases from either Booksellers or B&N, and the reverse side of the gift cards displayed B&N's Web site address. When Booksellers sold a gift card, it sent the proceeds of the sale to a related marketing entity after receiving a small fee payment for making the sale. When the value of the gift card was honored, the related marketing entity credited the value to the retailer that honored it.

Booksellers also sold memberships to a "Readers' Advantage" loyalty program. Customers who enrolled were entitled to discounts at Booksellers' stores and online. Membership fees went to the parent company and Booksellers or B&N received a share of the fees based on the percentage of discounts that applied to their sales.

In addition, Booksellers allowed customers who made purchases from B&N to return the items to Booksellers. 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 expansive return policy and also provided a store locater 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.2 The Department's own hearing officer decided in favor of B&N3 and the Department appealed the case to the Court of Appeals.

Commerce Clause Not Violated

The sole issue before the Court of Appeals was whether the hearing...