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St. Tammany Parish Tax Collector v. Barnesandnoble.com, et al.

Civ. Act. No. 05-5695 (E.D. La., March 22, 2007).

Online Bookseller Not Obligated To Collect Local Sales Tax

Court holds that the online bookseller Barnesandnoble.com was not obligated to collect local sales and use taxes on sales made to St. Tammany parish residents, a location in which Barnesandnoble.com has no physical presence.  The Court holds that neither the presence of a retail store in the parish owned by a sister corporation, Barnes and Noble Booksellers Inc.  (“Booksellers”), nor the activities Booksellers engaged in in conjunction with Barnesandnoble.com, created a nexus with the forum sufficient to permit Louisiana to impose such an obligation on Barnesandnoble.com.  Nor, held the Court, were such activities sufficient to permit Booksellers’ presence to be attributed to Barnesandnoble.com for tax purposes under the ‘attributional nexus test.’ 

The Court reached this result notwithstanding the fact that: (1) both Barnesandnoble.com and Booksellers sold their respective customers membership in a ‘customer rewards’ program that permitted the customer to use the purchased membership rewards at either retailer; (2) Booksellers sold gift cards that could be used at Barnesandnoble.com, and Barnesandnoble.com sold gift cards that could be used at Booksellers; (3) Booksellers took in-store orders for products that it did not have in stock, that were shipped by Barnesandnoble.com, for which it was paid a commission; (4) both Booksellers and Barnesandnoble.com engaged in cross-promotional activities; and (5) Booksellers accepted returns of merchandise purchased from Barnesandnoble.com on terms more favorable than those offered to customers who purchased products from other suppliers.

Relationship Between Barnes and Noble.com and Barnes and Noble Booksellers

Defendant Barnesandnoble.com is an online seller of books with no physical presence in St. Tammany Parish (“Parish”).  Sales to Parish residents are delivered by common carrier.

Barnes and Noble Booksellers Inc. (“Booksellers”) is a sister corporation that has a retail outlet in the Parish.  During the time period at issue, Booksellers was either wholly or partially owned by the same entity that owned Barnesandnoble.com.  Despite this common ownership, Booksellers and Barnesandnoble.com did not share management, employees or offices.
 Booksellers and Barnesandnoble.com do, however, maintain a business relationship.  Both companies participate in a customer loyalty program in which they sell consumers $25 memberships that can be used to obtain discounts at both Barnesandnoble.com and Booksellers.  The proceeds of this program are distributed to participating retailers pro rata based on the percentage of overall discounts they actually provide consumers.  Contact information obtained as a result of customer participation in this program is shared and used by both entities for marketing purposes.

Both companies also sell gift cards that can be redeemed for merchandise of the other retailer.  Each company receives a fee on its sale of the gift card, as well as revenues generated when the gift card is used to purchase merchandise from their  establishment.

Booksellers also sells books at its retail locations that it does not have in-stock, which are shipped by other suppliers, including Barnesandnoble.com.  When such sales are fulfilled by Barnesandnoble.com, Booksellers pays it both the wholesale price of the book, plus a commission.  The customer, in turn, pays Booksellers for the book, who collects sales taxes on the sale.

The parties also engage in cross-promotional activities.  Barnesandnoble.com’s website offers a store locator that permits consumers to locate retail stores operated by Booksellers.  It also provides consumers with information about events that take place at Booksellers’ retail locations.  Booksellers, on the other hand, promotes Barnesandnoble.com in in-store advertisements of both the gift card and customer loyalty membership program.

Finally, Booksellers has a more favorable return policy for customers of Barnesandnoble.com than other retailers.  Customers of Barnesandnoble.com can return merchandise they purchased at Booksellers locations and receive in-store credit equal to the price they paid for the merchandise.  Customers of other retailers, however, will only receive on returns a store credit equal to the merchandise’s current in-store sales price.  In the store manager’s discretion, this credit can be increased to the price originally paid by the consumer for the item.

Plaintiff, the St. Tammany Parish Tax Collector, commenced this suit, seeking to impose on Barnesandnoble.com the obligation to collect local sales and use taxes on its sales to local consumers.   

Substantial Nexus

Out-of-state entities can be compelled to collect local state sales and use taxes on activities that have a substantial nexus to the taxing jurisdiction.  As explained by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a state may impose such obligations when the “tax (1) is applied to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the State.”

Attributional Nexus

States may also impose tax obligations on out-of-state entities when the activities of in-state representatives “performed in [the taxing jurisdiction] on behalf of the taxpayer [were] significantly associated with the taxpayer’s ability to establish and maintain a market … for sales.”  Courts, applying this ‘attributional nexus test,’ have held that local jurisdictions can impose tax obligations on out-of-state entities when in-state sales people, working as either independent brokers, or for an independent contractor, arrange for the sale of the out-of-state entities’ products to in-state customers.  See e.g. Scripto, Inc. v. Carson, 362 US 207 (1960) and Tyler Pipe Industries Inc v. Wash State Dept. of Revenue, 483 US 232 (1987).

Barnes and Noble.com Cannot Be Compelled To Collect Sales And Use Taxes Because It Has Nn Substantial Nexus With The Forum

The Court held that Booksellers’ relationship with Barnesandnoble.com was insufficient to establish that Barnesandnoble.com had a substantial nexus with the Parish or to permit it to impose an obligation to collect sales and use taxes. 

The parties’ joint participation in the gift card and customer loyalty programs was insufficient to establish such nexus both because “the revenue is divided on a pro-rata basis among all participating retailers” and because “neither of these programs produces revenue to [Barnesandnoble.com] by virtue of sales made or orders taken by the entity that is physically present in the Parish.”  Nor were the in-state sales made by Booksellers to its customers, which were fulfilled by Barnesandnoble.com, sufficient, particularly in light of the fact that Booksellers collected local sales taxes on such sales.
The Court further held that the parties’ cross-promotional activities, including the promotion of the gift card and customer loyalty programs, were insufficient to establish the requisite nexus.  In reaching this result, the Court relied on cases which held that a substantial nexus for tax purposes was not established by an in-state retailer’s distribution in its stores of the catalogs of out-of-state mail order retailers.  SFA Folio Collections v Bannon, 217 Conn. 220 (1991) and SFA Folio Collections v. Tracy, 73 Ohio St. 3d 119 (1995).

Finally, the Court held that the preferential return policy afforded by Booksellers to Barnesandnoble.com customers was also insufficient to establish a substantial nexus.  Here, the Court relied on decisions in SFA Folio Collections v. Tracy, 73 Ohio St. 3d 119 (1995) and Bloomingdale’s by Mail v. Pennsylvania, where “courts rejected the argument that a preferential return policy established substantial nexus.”

The Court also held that “the nature and extent of the activities performed by Booksellers on behalf of [Barnesandnoble.com] within St. Tammany Parish were insufficient to treat Booksellers as acting as a marketing presence for [Barnesandnoble.com] in the Parish.”  Said the Court:

The activities of Booksellers in St. Tammany Parish on behalf of Online were not of the order of magnitude necessary to establish that Booksellers marketed Online’s products on Online’s behalf in the Parish.  The existence of a close corporate relationship between companies and a common corporate name does not mean that the physical presence of one is imputed to the other.

The Court accordingly ruled for Barnesandnoble.com, and found it had no obligation to collect local sales and use taxes.

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