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Tax Law

"Functional Equivalent" Nexus: When Goodwill Goes Bad in New Mexico

Sutherland Asbill & Brennan LLP

The New Mexico Court of Appeals held that for purposes of imposing the state's gross receipts tax, Barnes & Noble Booksellers, Inc.'s (Booksellers) in-state activities may be imputed to an out-of-state retailer (Taxpayer) based on the use of common Barnes & Noble trademarks. New Mexico Tax. & Revenue Dep't v. Barnesandnoble. com LLC, No. 31, 231 (N.M. Ct. App. Apr. 18, 2012). Notably, Booksellers undertook no physical activities on behalf of the Taxpayer that would independently satisfy the physical presence standard established in Quill. However, according to the court, the goodwill generated by Booksellers' use of the same Barnes & Noble trademarks helped the Taxpayer establish and maintain a market in the state, thereby creating substantial nexus that is the "functional equivalent" of physical presence under Quill.

The court did conclude that some of the connections between the in-state retailer and the out-of-state Internet retailer did not support a physical nexus finding. For example, the Taxpayer's website included a "store finder" feature listing Booksellers' in-state locations and upcoming events at those locations. The court, however, noted the website had no physical connection with New Mexico, and the information on the website was provided on behalf of the parent corporation, Barnes & Noble, Inc., not the Taxpayer. As another example, the court highlighted the absence in the record of any indication that Booksellers' sales of customer loyalty program memberships impacted the Taxpayer's revenues by means of sales made or orders taken in-state by Booksellers.

Despite the absence of physical activities taken by Booksellers on behalf of the Taxpayer, the court nevertheless imputed Booksellers' in-state activities to the Taxpayer based on the use of common Barnes & Noble trademarks. Relying upon its reasoning in Kmart Properties, Inc. v. Taxation and Revenue Department, 131 P.3d 27, 36 (N.M. Ct. App. 2001), the court concluded that the use of Barnes & Noble trademarks combined with the Taxpayer's relationship with Booksellers constitutes the "functional equivalent" of physical presence under Quill. In addition, the court found that "cross-marketing activities," such as the "store finder" feature on the Taxpayer's website and the customer loyalty program directly increased the goodwill for the Taxpayer's website. Accordingly, the court held that these activities in the aggregate created substantial nexus between the Taxpayer and New Mexico by helping the Taxpayer establish and maintain a market in the state.

New Mexico is the latest in a growing number of states to embrace and expand the concept of affiliate nexus. By imputing the goodwill of an in-state affiliate to an out-of-state corporation based on the use of common corporate trademarks rather than on direct, physical activities undertaken by the former on behalf of the latter to establish taxable nexus, the New Mexico Court of Appeals is not generating any goodwill of its own in the minds of multistate taxpayers. subscribers can access Lexis enhanced versions of the Protest of LLC v. LLC, 2012 N.M. App. LEXIS 32 (N.M. Ct. App. Apr. 18, 2012) and Kmart Props., Inc. v. Taxation & Revenue Dep't, 139 N.M. 177 (N.M. Ct. App. 2001) decisions with summaries, headnotes, and Shepard's.

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If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.

N. Jerold Cohen


Thomas A. Cullinan


Joseph M. DePew


Kendall C. Jones


Shane A. Lord


Mary E. Monahan


Daniel H. Schlueter


Jeffrey N. Starkey


© 2012 Sutherland Asbill & Brennan LLP. All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.


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