1. Explain why the court feels this case is different from other cases in which online retailers have not been taxed.

2. What benefits does an online retailer gain from a physical presence in the state?

3. Were customers of Booksellers and bn.com allowed to interchange their business with the two retailers? 

The facts of this case are not in dispute. Barnesandnoble.com LLC (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. 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. bn.com appealed.

JUDICIAL OPINION

CHÁVEZ, Justice … This case presents the question of whether an out-of-state internet retailer (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 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 (1992). 

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.” 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. 

A vendor that has a physical presence in the taxing state has a substantial nexus with the state. 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.” 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. 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. 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’ ...”