A hearing officer of the New Mexico Taxation and Revenue Department ruled that the activities of the state’s Barnes and Noble stores on behalf of its affiliated online retailer did not establish substantial nexus. (See in the Matter of the Protest of Barnesandnoble.Com LLC to Assessment Issued under Letter Id No. #L1806543104 No. 11-10), http://www.tax.newmexico.gov/search/results.aspx?k=barnesandnoble.com. Thus, the Barnes and Noble online retailer was not required to collect New Mexico use tax from online purchases by New Mexico residents.
This is one of many cases where a state has attempted to impose a use tax collection obligation upon an online retailer that has affiliated local stores in the state. The test in this context is whether the retail stores are acting as agents for the online retailer.
New Mexico’s decision was consistent with Barnes and Noble court rulings in California and Louisiana in holding that Barnes and Noble stores were not agents of the affiliated online seller. In contrast, the California Court of Appeals held that the local Borders stores were agents for the related online seller. The local activity that made the difference for Borders was its return policy.
The California Court of Appeals held that the Borders local stores were agents of the related online seller because they would accept returns of books purchased from the online seller but not competitors. In contrast, the New Mexico ruling and Louisiana court held that Barnes and Noble local stores were not agents of the related online retailer by accepting returns from the online retailer because they also accepted returns from competitors.
The New Mexico ruling noted that Barnes and Noble stores does help promote the online retailer in ways that did not require the online retailer to collect use tax: (a) they share gift cards; (b) they share a customer loyalty program; and (c) the local stores share customer email addresses with the online retailer.
Also, in the California case, Barnes and Noble local stores distributed the online seller’s coupons in the shopping bags it gave customers. The court noted that this activity did not amount to the nexus that would require use tax collection by the online retailer.
Comment. States will continue to try to force online retailers to collect use tax. Therefore, a business that operates in a state through brick and mortar stores and an online seller will have to be careful how it structures the relationship between the two chains of distribution if it does not want its online seller to collect the state’s use tax. Expect that anything a local store does for the online seller may be attacked; including, accepting returns, distributing coupons, sharing gift cards, loyalty programs and email addresses.
By John McCauley: Mr. McCauley is a lawyer based in Carlsbad who provides legal counsel to companies.