N.M. Taxation & Revenue Dep't v. Barnesandnoble.com LLC (In re Barnesandnoble.com LLC)

• Decision Date: 22 June 2012
• Docket Number: No. 31,231.,31,231.
• Citation: 2012 -NMCA- 063,283 P.3d 298
• Parties: In the Matter of the Protest of BARNESANDNOBLE.COM LLC. New Mexico Taxation and Revenue Department, Plaintiff–Appellant, v. Barnesandnoble.com LLC, Defendant–Appellee.
• Court: Court of Appeals of New Mexico

283 P.3d 298

2012 -NMCA- 063

In the Matter of the Protest of BARNESANDNOBLE.COM LLC.

New Mexico Taxation and Revenue Department, Plaintiff–Appellant,

v.Barnesandnoble.com LLC, Defendant–Appellee.

No. 31,231.

Court of Appeals of New Mexico.

April 18, 2012.

Certiorari Granted, June 22, 2012, No. 33,627.

Gary K. King, Attorney General, Tonya Noonan Herring, Special Assistant Attorney General, Santa Fe, NM, for Appellant.

Brann & Isaacson, George S. Isaacson, David W. Bertoni, Lewiston, ME, Brownstein, Hyatt, Farber & Schreck, P.C., Timothy R. Van Valen, Albuquerque, NM, for Appellee.

OPINION

BUSTAMANTE, Judge.

{1} The New Mexico Taxation and Revenue Department (Department) issued an audit assessment to Barnesandnoble.com LLC (Taxpayer) for gross receipts tax (GRT) and interest in the amount of $534,563.11 for sales into New Mexico between January 31, 1998 and July 31, 2005 (the audit period). The sole issue on appeal is whether the hearing officer correctly concluded that Taxpayer did not have a substantial nexus with New Mexico, as required under the Commerce Clause of the U.S. Constitution. Because we conclude that the in-state use of the Barnes & Noble trademarks was sufficient to meet the constitutional standard, we reverse.

I. BACKGROUND

{2} After Taxpayer filed a timely protest, both parties moved for summary judgment. The facts were not disputed, and the parties agreed that the GRT statute applied to Taxpayer's activities. However, Taxpayer argued that application of the statute was unconstitutional because there was no substantial nexus between Taxpayer and New Mexico. Department argued that the GRT statute applied to Taxpayer's sales and that the presence of Barnes & Noble Booksellers, Inc. (Booksellers) stores in New Mexico created a sufficient nexus to permit the tax.

A. Corporate Structure

{3} Taxpayer is a limited liability company organized under the laws of the State of Delaware “with all of its operations, facilities, and personnel located outside of the State of New Mexico.” Taxpayer maintained its own offices separate from those occupied by other Barnes & Noble corporations. Taxpayer did not own or lease property in New Mexico, had no retail stores within the state, and had no sales agents or employees here.

{4} During the audit period, Taxpayer was at all times a wholly owned subsidiary of barnes&noble.com, inc. The ownership of barnes&noble.com, inc. varied during the period; however, at least 40% was owned by B&N.com Holding Corp. at all times. B&N.com Holding Corp. was at all relevant times a wholly owned subsidiary of Barnes & Noble, Inc. (Parent). It follows that during the audit period, Parent had an interest of between 40% and 100% in Taxpayer.

{5} Parent also owned several other companies relevant to our discussion. Most importantly, it owned Booksellers. Booksellers operates physical Barnes & Noble book stores throughout the United States, including three stores in New Mexico. Parent also owned Marketing Services (Minnesota) Corporation, Inc. (MSMC), which provided gift card services to Taxpayer and Booksellers.

B. In-state Activities

{6} Booksellers performed activities at its three in-state stores that Department argues created a substantial nexus between Taxpayer and New Mexico. These include the sales of gift cards, the loyalty program memberships, and a return policy that allowed Booksellers to accept Taxpayer's merchandise.

{7} Both Taxpayer and Booksellers, as well as other retailers, sold Barnes & Noble gift cards. These gift cards could be redeemed either in-store or online. The gift card program was run by MSMC. When Booksellers (or any other vendor) sold a card, it received a small fee from MSMC, and it sent the proceeds from the sale to MSMC. When a card was later redeemed by a customer, MSMC credited the value of the card to the retailer who had honored it. The reverse side of the Barnes & Noble gift cards displayed the address of Taxpayer's website.

{8} Taxpayer and Booksellers also sold memberships to a loyalty program called the “Readers' Advantage Program.” Customers could purchase a membership in this program for $25. Membership entitled customers to discounts at Booksellers' stores and online. Fees went to Parent, who administered the loyalty program and deducted expenses from the fee income. Taxpayer and Booksellers each received a share of the remaining fees that was based on the percentage of discounts they accounted for.

{9} Bookstores also implemented an expansive return policy. Customers could return salable items to Booksellers regardless of their origin. Booksellers provided in-store credit (or, equivalently, gift cards that could only be used in the stores) for such items. Customers could only return items for cash if they could produce a receipt showing that the items had been purchased in-store. Taxpayer provided information about Booksellers' return policy on its website. Taxpayer's website also provided a store locator and descriptions of in-store events.

II. DISCUSSION

{10} Taxpayer prevailed below based on the hearing officer's conclusion that there was not a substantial nexus between Taxpayer and the State of New Mexico. The hearing officer concluded that the activities of Booksellers “did not create and establish and maintain a market for” Taxpayer. Department contends that the decision was in error because “the activities of Booksellers, an in-state affiliate, with a physical presence in this state, helped Taxpayer create, establish[,] and maintain a market in New Mexico.” Taxpayer argues that the hearing officer did not err and that imposition of the GRT would violate the Due Process Clause of the U.S. Constitution.

{11} This Court will set aside the ruling of a hearing officer in a tax appeal if the ruling is found to be an abuse of discretion or if it is not in accordance with the law. SeeNMSA 1978, § 7–1–25(C) (1989). “[T]he trial court abuses discretion when it applies an incorrect standard, incorrect substantive law, or its discretionary decision is premised on a misapprehension of the law.” Aragon v. Brown, 2003–NMCA–126, ¶ 9, 134 N.M. 459, 78 P.3d 913. The sole question on appeal is whether the hearing officer correctly applied the law to the facts when it determined that there was no substantial nexus between Taxpayer and New Mexico. “[O]ur review of the application of the law to the facts is conducted de novo.” State v. Elinski, 1997–NMCA–117, ¶ 8, 124 N.M. 261, 948 P.2d 1209.

A. Commerce Clause

{12} We begin with Department's argument that the hearing officer erred in concluding that no substantial nexus existed to support the assessment of GRT against Taxpayer.Department contends that a substantial nexus exists because (1) Taxpayer and Booksellers had close corporate connections, (2) Taxpayer and Booksellers used common trademarks and logos, and (3) Booksellers' in-state activities helped Taxpayer create and maintain a market in New Mexico. Taxpayer argues that it had no contact with New Mexico and that Booksellers' in-state activities should not be considered because they were not undertaken on Taxpayer's behalf.

{13} Our Supreme Court has set forth a two-part analysis to determine whether the GRT applies in multi-state transactions:

First, we must engage in statutory interpretation to determine if the Legislature intended to tax those receipts under the GRT. Second, if we conclude [in the affirmative], we must determine whether the tax violates the Commerce Clause ... of the United States Constitution.

Kmart Corp. v. Taxation & Revenue Dep't, 2006–NMSC–006, ¶ 11, 139 N.M. 172, 131 P.3d 22. In the instant case, the parties have stipulated that Taxpayer sold property in New Mexico that is subject to the GRT. The sole issue on appeal is whether such a tax violates the Commerce Clause.

{14} It is well settled that under the Commerce Clause, a tax may not be applied to an activity absent a substantial nexus with the taxing state. Dell Catalog Sales L.P. v. Taxation & Revenue Dep't, 2009–NMCA–001, ¶ 40, 145 N.M. 419, 199 P.3d 863 (citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977)). In Quill Corp. v. North Dakota, 504 U.S. 298, 317, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), the Supreme Court reaffirmed the bright-line rule from National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), that a seller must have a physical presence in a state in order to satisfy the substantial nexus requirement. The physical presence requirement is met when “activities performed in this state on behalf of a taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in the taxing state for the sales.” Dell, 2009–NMCA–001, ¶ 43, 145 N.M. 419, 199 P.3d 863 (quoting Tyler Pipe Indus., Inc. v. Wash. State Dep't of Revenue, 483 U.S. 232, 250, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987) (alteration and emphasis omitted)).

{15} The threshold for establishing a physical presence is not high. It can result from the presence of a single employee. See Standard Pressed Steel Co. v. Wash. Dep't of Revenue, 419 U.S. 560, 561–64, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975) (rejecting a commerce clause challenge to a tax on an out-of-state corporation that employed a single person in-state). It does not depend on whether the individual is classified as an employee or an independent contractor. See Tyler Pipe Indus., Inc., 483 U.S. at 249–51, 107 S.Ct. 2810;Scripto, Inc. v. Carson, 362 U.S. 207, 211, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960) (concluding that whether in-state salesmen were independent contractors or employees was “without constitutional significance”). It can be established by the presence of in-state offices even when the activities of those offices are not related to the in-state activity being taxed. Nat'l Geographic Soc'y v. Cal. Bd. of Equalization, 430 U.S. 551, 561, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977) (“[T]he relevant...