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Internet Retailer Affiliate Nexus Debate: New Mexico Weighs In

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The first week of June, 2013 marked New Mexico’s decision to rule in New Mexico Taxation and Revenue Department v. (“”), Docket No. 33,627 (June 3, 2013). Pursuant to the ruling, New Mexico was the latest state to take a position on the so-called affiliate nexus debate that has plagued the state and local tax community for several years. The facts of the case are fairly simple. was organized as a Delaware corporation, and it sells books, movies, and other items over the Internet.[1] has no employees or property of any kind in New Mexico.[2] In 2006, New Mexico assessed a gross receipts tax (essentially a sales tax) against on its New Mexico sales.[3] protested the assessment. During the agency appeal, the hearing officer found that lacked “substantial nexus” with New Mexico, and vacated the assessment.[4] New Mexico appealed, and the Appellate Court in New Mexico found that substantial nexus existed and upheld the tax assessment.[5] The New Mexico Supreme Court granted certiorari and entertained the case.

At issue in the case was whether New Mexico exceeded its taxation authority by imposing a tax on a corporation that lacked nexus with the state. Under the United States Constitution, Congress alone has the power “[t]o regulate Commerce . . . among the several states.”[6] As many of you learned in college or in law school, by implication this also means that states cannot interfere with interstate commerce. This concept is known as the ‘negative’ or ‘dormant’ Commerce Clause.

In 1977, Complete Auto came along and said that a state may only tax an actor “when the tax is applied to an activity with substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to services provided by the state.”[7] In 1992, Quill came down to describe “when the tax is applied to an activity with substantial nexus with the taxing state.”[8] Quill said that, in order to have ‘nexus’, a company must have some physical presence in that state. There have been no cases to elaborate on this concept since 1992, and one can easily see the changes in commerce (particularly with the invention of the Internet) in the last 20 years.

Think about the nexus physical presence rule in the context of this case. Does have a physical presence in New Mexico? Shouldn’t that be the inquiry? What about the fact that a related entity, Barnes & Noble (“Booksellers”) has physical stores and employees in New Mexico? Should that make a difference? These are exactly the questions the New Mexico Supreme Court had to answer by taking on this case.

In my view, as a state and local tax attorney, the Court started its analysis correctly. It correctly cited the commerce clause, Complete Auto, and Quill, as most affiliate nexus cases tend to do. The Court then stated, although it is undisputed that has no physical presence in New Mexico, that is not the end of the inquiry because the “U.S. Supreme Court has consistently taken the functional approach to the substantial nexus analysis, and it has been willing to find substantial nexus even where the business . . . had neither property nor regular employees in the taxing state.”[9] In short, the Court started its analysis by stating that the nature and extent of the Taxpayer’s business in a state is determinative of whether it has nexus.

While this is a true statement, the court seems to mean that, despite the ruling in Quill, the US Supreme Court has taken the approach. However, it is worth reiterating that there have been no US Supreme Court cases interpreting nexus from a sales tax perspective since 1992. I can see how one can differ on the reading of that statement, but it seems like an end around by the court in my view. My analysis would be different if the cases below came after Quill. However, being that Quill, albeit somewhat dated itself, is the most recent case, the test is physical presence of the company being assessed.

In any event, the court went on to Scripto, Inc. v. Carson. In Scripto, a pre-Quill opinion, a company had independent contractors solicit sales in Florida on its behalf.[10] The U.S. Supreme Court said that 10 independent contractors constituted nexus because the Taxpayer had physical presence (its own agents) in Florida. Similarly, the court reasoned that, in 1960, 30 years prior to Quill, Tyler Pipe ruled that if a company hires sales representatives to solicit sales in a state, then that also created substantial nexus. While both cases are cited correctly, both predate Quill, and both are consistent with Quill to some extent because the company in both cases had agents in the state in which the assessments were made.

Analogizing to the current situation, New Mexico upheld the tax by determining that Booksellers engaged in activities that benefitted and maintained the market of in New Mexico. In addition, Booksellers and had a common parent in Barnes and Noble, Inc. used Barnes and Noble trademarks and customers had no way of knowing the difference between the two companies. I assume that means that the court found that had some physical presence in New Mexico through its affiliate with Barnes and Noble? Is this what Quill meant when it established the so-called bright line physical presence? Your guess is as good as mine, but to me this situation does not seem to be consistent with Quill.

While the court would have been justified to stop there, it continued on and lost me to some extent. The New Mexico Supreme Court cited a similar case, Borders Online, LLC v. State Board of Equalization, an appellate decision out of California. While the facts were similar, I find it interesting that the Supreme Court in New Mexico looked to California for guidance.

In fact, the court even admits that other states have reached different conclusions. The court went on to put its foot in its mouth by writing an extremely “helpful” line of logic as follows:

We recognize that courts in several states have reached a different conclusion, holding that the presence of affiliated brick-and-mortar stores in a state does not create a nexus that would allow the state to tax catalogue or online sales. See SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220, 585 A.2d 666, 668 (Conn.1991) (refusing to impute in-state presence of Saks Fifth Avenue stores to affiliated SFA Folio catalogue corporation); SFA Folio Collections, Inc. v. Tracy, 73 Ohio St.3d 119, 652 N.E.2d 693, 695 (court's fact description outside body of opinion), 698 (Ohio 1995) (per curiam) (same); Bloomingdale's By Mail, Ltd. v. Commonwealth, Dep't of Revenue, 130 Pa.Cmwlth. 190, 567 A.2d 773, 778–79 (Pa.Commw.Ct.1989) (refusing to impute activities of Bloomingdale's stores to Bloomingdale's by Mail catalogue sales). However, we must follow the standard set forth by the U.S. Supreme Court in Tyler Pipe U.S., 483 U.S. at 250. Bannon, Tracy, and Bloomingdale's do not cite Tyler Pipe U.S. or attempt to apply its rule. See generally Bannon, 217 Conn. 220, 585 A.2d 666; Tracy, 73 Ohio St.3d 119, 652 N.E.2d 693; Bloomingdale's, 130 Pa.Cmwlth. 190, 567 A.2d 773.

I read this to mean that Connecticut, Ohio, and Pennsylvania all ruled that nexus does not exist in a similar factual scenario. However, being that those courts did not cite Tyler Pipe, they do not apply. Conversely, California cited Tyler Pipe, and, therefore, that case is persuasive. The court does not waste any words on the fact that perhaps Tyler Pipe does not even apply or why this is relevant. Rather, the court summarily dismissed the case’s application it did not like and accepted the California case as good law.

In another well-reasoned explanation, the court went on to discuss the resounding, powerful, and earth moving decision from a Federal District Court in Louisiana. While I have not seen the brief or memo addressing summary judgment, I imagine this was argued and briefed in the case. In St. Tammany Parish Tax Collector v., the court required that the brick-and-mortar establishment must solicit sales for the online retailer in order to create nexus. However, this case was also shot down because it does not read Tyler Pipe to require such solicitation.

The New Mexico Supreme Court opinion is somewhat unsettling from the view point of a state and local tax attorney or any professional who is up to speed on the nexus dilemma. On one hand, courts are saying physical presence is required under Quill,and on the other courts are circumventing the physical presence requirement by citing pre-Quill opinions or other states’ interpretations of Quill. This case seems to be another opinion in which the court reaches a conclusion and then fills in the gaps with conclusory logic to justify its result.

Undoubtedly, the courts are in a difficult position. They are left with no US Supreme Court guidance in an area of the law which has begged for an up to date opinion. Further, as state and local tax practitioners, we are reminded by the language in Quill that begged Congressional action over 20 years ago. Despite that plea, Congress has refused to act, and the United States Supreme Court refuses to hear a case. Does the inaction by Congress and by the Court mean that they are satisfied with the recent developments in constitutional nexus jurisprudence? Perhaps they both believe the courts are getting the decisions correct, and there is no need for interference. More likely, however, the governments are politically pressured by what may be construed as a new tax and continues to balk for that reason. Only time will tell, and, until that time comes, states have wide latitude to continue to extort money from businesses across the country.

[1] Id. at 2.

[2] Id. at 3.

[3] Id. at 2.

[4] Id.

[5] N.M. Taxation & Revenue Dept. v. LLC, 283 P. 3d 298 (N.M. Ct. App. 2012).

[6] U.S. Const. Art. 1, section 8, cl. 3.

[7] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

[8] Quill Corp. v. North Dakota, 504 U.S. 315 (1992).

[9], LLC, Docket No. 33,627, at 3.

[10] Id. at 209.

About the Author: Mr. Donnini is a multi-state sales and use tax attorney and a shareholder in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog .

Questions? If you have any questions please do not hesitate to contact him via email at or call 954-642-9390.

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