Taxation v. Barnesandnoble.Com LLC

• Decision Date: 03 June 2013
• Docket Number: No. 33,627.,33,627.
• Citation: 303 P.3d 824
• Parties: NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Plaintiff–Respondent, v. BARNESANDNOBLE.COM LLC, Defendant–Petitioner.
• Court: New Mexico Supreme Court

303 P.3d 824

NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Plaintiff–Respondent,

v.BARNESANDNOBLE.COM LLC, Defendant–Petitioner.

No. 33,627.

Supreme Court of New Mexico.

June 3, 2013.

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

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

Shirley K. Sicilian, Sheldon H. Laskin, Washington, DC, Bruce J. Fort, Santa Fe, NM, for Amicus Curiae, Multistate Tax Commission.

Sutherland, Asbill & Brennan, L.L.P., F. Barry McCabe, Atlanta, GA, Jeffrey A. Friedman, Michele Borens, Washington, DC, for Amicus Curiae, Amazon.com, Inc.

OPINION

CHÁVEZ, Justice.

{1} This case presents the question of whether an out-of-state internet retailer, Barnesandnoble.com LLC (bn.com), which has no physical presence in New Mexico other than through stores owned by a sister corporation, Barnes & Noble Booksellers, Inc. (Booksellers), is subject to New Mexico gross receipts tax on its sales to New Mexico residents without offending the federal Commerce Clause. The answer to this question depends on whether Booksellers engaged in activities in this state on behalf of bn.com that were significantly associated with bn.com's ability to establish and maintain a market for its sales in New Mexico, thus creating a substantial nexus between bn.com and New Mexico. We conclude that Booksellers did engage in such activities, which include (1) Booksellers' promotion of bn.com through sales of gift cards redeemable at bn.com and bearing bn.com's name, (2) Booksellers' policy of sharing customers' email addresses with bn.com, (3) Booksellers' implicit endorsement of bn.com through the companies' shared loyalty program and Booksellers' return policy, and (4) Booksellers' in-state use of Barnes & Noble logos and trademarks, which bn.com also used. Therefore, we hold that Booksellers' in-state activities were sufficient to create a substantial nexus between bn.com and the State of New Mexico, so that the state may tax bn.com's sales to customers in New Mexico without offending the federal Commerce Clause.

BACKGROUND

{2} The facts of this case are not in dispute. Bn.com is a Delaware corporation that sells books, movies, and other media over the internet. In 2006, the New Mexico Taxation and Revenue Department (the Department) assessed gross receipts tax against bn.com on its sales to New Mexico residents during a period from January 1998 through July 2005. SeeNMSA 1978, §§ 7–9–1 to –114 (1966, as amended through 2012) (the Gross Receipts and Compensating Tax Act). Bn.com protested the assessment, and a hearing officer granted summary judgment to bn.com, finding that it lacked a substantial nexus with the State of New Mexico, and therefore it could not constitutionally be required to pay the tax. The Department appealed, and the Court of Appeals held that bn.com had a substantial nexus with the state because of its use of Barnes & Noble trademarks and cross-marketing activities with Booksellers' stores. N.M. Taxation & Revenue Dep't v. Barnesandnoble. com LLC (In re Barnesandnoble.com LLC), 2012–NMCA–063, ¶¶ 34–35, 283 P.3d 298. We granted certiorari and now affirm. Although we agree with the holding of the Court of Appeals, we emphasize that our holding does not rest exclusively on bn.com's use of Barnes & Noble trademarks; we conclude that there are several additional reasons to hold that bn.com had a substantial nexus with the State of New Mexico.

DISCUSSION

{3} The parties agree that this appeal concerns the application of the law to the undisputed facts, and therefore the standard of review is de novo. Sonic Indus. v. State, 2006–NMSC–038, ¶ 7, 140 N.M. 212, 141 P.3d 1266.

{4} The federal constitutional issue in this case stems from the Commerce Clause, which authorizes Congress “[t]o regulate Commerce ... among the several States.” U.S. Const. art. I, § 8, cl. 3. The Commerce Clause has been interpreted not only as an affirmative grant of power to Congress, but also as a limitation on state actions that interfere with interstate commerce. Quill Corp. v. N.D. ex rel. Heitkamp, 504 U.S. 298, 309, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). In this form, it is known as “the ‘negative’ or ‘dormant’ Commerce Clause.” Id. State taxation of interstate commerce may impose burdens that violate the dormant Commerce Clause. Id.

{5} In the absence of specific federal authorization, the Commerce Clause allows a state to tax an actor in interstate commerce “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Of these requirements, the only issue in this case is in the substantial nexus. If bn.com's actual sales have a substantial nexus with New Mexico, New Mexico may constitutionally tax those sales.

{6} A vendor that has a physical presence in the taxing state has a substantial nexus with the state. Quill Corp., 504 U.S. at 315, 317–18, 112 S.Ct. 1904. The key distinction is “between mail-order sellers with [a physical presence in the taxing] State and those ... who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business.” Id. at 311, 112 S.Ct. 1904 (alterations in original) (quoting Nat'l Geographic Soc'y v. Cal. Bd. of Equalization, 430 U.S. 551, 559, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977) (internal quotation marks omitted)). The facts in Quill Corp. concern a vendor that did not have a physical presence in the taxing state of North Dakota and Quill Corp. sold its products by mail; it had no offices, employees, or significant property in North Dakota. 504 U.S. at 302, 112 S.Ct. 1904. Therefore, the U.S. Supreme Court held that the company lacked a substantial nexus with North Dakota, and North Dakota could not require the company to pay a use tax to the state on its sales. Id. at 301–02, 112 S.Ct. 1904. The Court explained that there is a “safe harbor for vendors ‘whose only connection with customers in the [taxing] State is by common carrier or the United States mail’ ... [and] such vendors are free from state-imposed duties to collect sales and use taxes.” Id. at 315, 112 S.Ct. 1904 (first alteration in original) (quoting Nat'l Bellas Hess, Inc. v. Dep't of Revenue of Ill., 386 U.S. 753, 758, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), overruled on other grounds by Quill Corp., 504 U.S. at 306–08, 112 S.Ct. 1904).

{7} In this case, the parties agree that bn.com itself has no employees or property in New Mexico, but that is not the end of our inquiry. The U.S. Supreme Court has consistently taken a functional approach to the substantial nexus analysis, and it has been willing to find a substantial nexus even where the business in question had neither property nor regular employees in the taxing state. In Scripto, Inc. v. Carson, 362 U.S. 207, 208–09, 211, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960), the Court rejected a business's argument that it had no substantial nexus with Florida because it had no full-time employees in the state. The business had contracted with ten independent “wholesalers or jobbers” in Florida to solicit orders on its behalf. Id. at 209, 80 S.Ct. 619. The Court held that the designation of the agents as independent contractors, rather than employees, was “without constitutional significance,” and what mattered was “the nature and extent” of the taxpayer's business in the state. Id. at 211–12, 80 S.Ct. 619.

{8} The Supreme Court reaffirmed and expanded Scripto in Tyler Pipe Industries, Inc. v. Washington State Dep't of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987)(Tyler Pipe U.S.). In Tyler Pipe U.S., an out-of-state manufacturer challenged the authority of the State of Washington to impose a tax on its sales within the state. 483 U.S. at 234, 107 S.Ct. 2810. The manufacturer “maintain[ed] no office, own[ed] no property, and ha[d] no employees residing in the State of Washington.” Id. at 249, 107 S.Ct. 2810. However, the manufacturer hired sales representatives within the state who called on customers, solicited orders, and “maintain[ed] and improve[d] the [manufacturer's] name recognition, market share, goodwill, and individual customer relations” in Washington. Id. (quoting Tyler Pipe Indus., Inc. v. State, Dep't of Revenue, 105 Wash.2d 318, 715 P.2d 123, 127 (1986)(Tyler Pipe Wash.) (en banc) (internal quotation marks omitted), holding modified on other grounds by Digital Equip. Corp. v. State, Dep't of Revenue, 129 Wash.2d 177, 916 P.2d 933, 941 (1996) (en banc)). The U.S. Supreme Court held that even though the manufacturer formally had no property or employees within the state, the sales representatives' in-state activities created a nexus sufficient to allow the state to tax the manufacturer. Tyler Pipe U.S., 483 U.S. at 249–51, 107 S.Ct. 2810. The Court held that “the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales.” Id. at 250, 107 S.Ct. 2810 (quoting Tyler Pipe Wash., 715 P.2d at 126 (internal quotation marks omitted)). Therefore, the question in this case is whether Booksellers performed activities on behalf of bn.com that are significantly associated with bn.com's ability to establish and maintain a market for its sales in New Mexico.

{9} Although bn.com had no property in New Mexico, Booksellers performed activities in New Mexico for bn.com's benefit. Booksellers operated three stores in New Mexico during the audit period. Bn.com and Booksellers are separate corporations, but they...