Barnesandnoble.com Owes New Mexico $534,000 in Sales Taxes

A nationally known online bookseller must pay more than a half million dollars in taxes for books, music and movies bought by customers in New Mexico, the state Court of Appeals has ruled in a dispute over the state's power to tax corporate chains and Internet shopping.

The court's decision came Wednesday in a case involving an out-of-state online business, Barnes&nobles.com, LLC, which was part of the corporate family of bookseller Barnes & Noble Inc.

The online retailer was assessed gross receipts taxes in 2006 of $534,563 for sales from 1998 to 2005. The company protested and a state agency hearing officer agreed with the company that it wasn't required to collect and pay the tax because it had no presence in the state or what is known as a "substantial nexus" with New Mexico.

The online retailer was organized under Delaware laws and it had no employees or offices in the state. However, a separate Barnes and Noble company operates three bookstores in New Mexico, with the first of those started in Albuquerque in 1996 and the most recent in Las Cruces in 2003.

Traditionally, online retailers have been required to collect taxes on sales to customers in New Mexico if the company has a physical store, a warehouse or other facilities in the state.

The Department of Taxation and Revenue contended that activities at the in-state stores, including gift cards that could be redeemed online and a membership plan that offered online discounts, created the necessary connection to New Mexico to require the Internet retailer to collect and pay the state's tax. Books purchased online also could be returned for credit at the Barnes & Noble stores in New Mexico.

The Court of Appeals said those activities alone weren't enough to justify taxing the online sales, but it concluded the "in-state use of the Barnes & Noble's trademarks was sufficient to meet the constitutional standard" to permit the New Mexico tax.

Because the trademarks were licensed to the online retailer and the company with in-state stores, Barnes & Noble "was in effect telling customers to consider taxpayers (the online retailer) and booksellers to be one and the same," the court said.

"The goodwill developed both directly, by in-store activities promoting taxpayer's website, and indirectly, by consumers' increased awareness of Barnes & Noble due to the presence of in-state stores, helped to establish and maintain a market in New Mexico for taxpayer," the court said.

Attorneys for Barnes & Noble did not immediately return telephone and email messages on Thursday seeking comment on the court ruling and whether their client plans to appeal the decision to the state Supreme Court.

Text of the opinion is available at http://op.bna.com/dt.nsf/r?Open=vmar-8tjtkm.