PetSmart acquired Pet360 for $130 million in cash and up to $30 million more in future performance-based payments.
The case turned on the retailer’s use of its trademark online and offline.
Some retail chains have separated their online operations from their stores in order to avoid having to collect sales tax online. But that strategy may not work in New Mexico for books retailer Barnes & Noble Inc.
The New Mexico State Court of Appeals has found that Barnes & Noble owes the state more than a half-million dollars in uncollected sales tax and interest for a 7 1/2-year period during which the retailer was audited between 1998 and 2005.
The court’s action came in a case brought by the New Mexico Department of Taxation and Revenue against BarnesandNoble.com LLC, a subsidiary of B&N Holding Corp., which was being audited. B&N Holding Corp. is itself a subsidiary of the retail chain Barnes & Noble Inc.
The state taxation department had contended that the parent retail company’s presence of three bricks-and-mortar stores in the state established a physical presence in the state requiring the online retailer to collect and remit sales tax on sales to state residents. Under federal law, states can require retailers to collect sales tax only if a retailer maintains an in-state physical presence, or nexus in legal terms, such as stores or distribution centers.
Although the court said the presence of the parent company’s stores did not alone create a nexus for its subsidiary’s e-commerce sales, it found that the shared trademark between the online and offline operations did create nexus.
“In fact, consumers saw only one entity, Barnes & Noble,” the court said. It added: “This created a substantial nexus between Taxpayer [BarnesandNoble.com Inc.] and New Mexico sufficient to support the imposition of gross receipt taxes.”
The court found that the retailer owes the state $534,563.11 in uncollected sales tax and interest on online sales to New Mexico residents between Jan. 31, 1998, and July 31, 2005.
Although the court also found that the retailer’s in-state sale of gift cards were not alone a basis for nexus, it said the gift card business increased the value of the retailer’s web site.
“These activities standing alone do not create a sufficient nexus,” the court said. But it added: “As cross-marketing activities performed at in-state stores and explicitly mentioning the Barnes & Noble web site—in the context of creating and enhancing goodwill not only for the Barnes & Noble trademarks but explicitly for [BarnesandNoble.com Inc.’s] business,” the gift card offers were evidence of value added to the retailer’s online operations.
Attorneys for Barnes & Noble did not immediately return a request for comment. A spokesman for the state taxation department said the department would not comment on the case because it is likely to be appealed to the state Supreme Court.
Barnes & Noble is No. 41 in the Internet Retailer Top 500 Guide.
William Lynch Jr., CEO of Barnes & Noble, will deliver the keynote address at the Internet Retailer Conference & Exhibition in Chicago this June.