Understanding Three-Channel Retailer Affiliate Nexus
In today’s market, most ecommerce companies do not exist in isolation. They are typically part of a larger group of related corporations. Many major companies operate affiliated families composed of various corporations, with one corporation conducting traditional retail store operations in various states and a separate affiliated corporation operating the mail order and/or Internet-based business.
These conglomerates, or “three channel retailers”, complicate nexus questions. The current controversies involving three-channel retailers are rooted in the concept of “affiliate nexus”. This theory attempts to create nexus for an out-of-state/ecommerce seller based on the fact that a parent or other affiliated corporation is physically present and operating in the state. The idea that nexus can be acquired through the operations of a related corporation pre-dates Quill, the quintessential nexus case.
Unlike other areas of nexus law, the outcomes of cases involving “three channel retailers” are very consistent and therefore offer a set of fairly well defined affiliate nexus principles.
Previous cases involving the mail order branch of Bloomingdale’s and Saks Fifth Avenue have outlined some of the general principles assessed for affiliate nexus. These mail order companies shared a number of common officers and directors with their retail counterparts, they shared financial information, and also acquired overhead services from their common parent company. In addition, both mail order companies sold merchandise similar to that sold in the retail stores, and each was licensed to use similar tradenames and trademarks. For example, both Bloomingdale’s mail order affiliate and their retail stores used the Bloomingdale’s name, and Folio and its affiliate were each licensed to use the Saks Fifth Avenue name and trademark. Also, mail order customers sometimes attempted to return merchandise purchased from the catalog to local retail affiliates.
These types of store returns went directly against the mail order sellers’ written return policies, which instead directed customers to send all catalog returns to the seller at its out-of-state location. Although the companies did not direct customers to the stores, the stores would occasionally accept these returns.
The states seeking nexus claimed that because a common parent linked the corporations, their separate corporate existence should be disregarded and they should be treated as single entities. These states also claimed that by accepting returns, the local stores created nexus by acting as agents for the out-of-state retailers. In each case, however, the court refused to find that the affiliated retail stores created nexus for the mail order companies.
Since both mail order affiliates were separately formed and operated, adequately capitalized, and were not controlled to such a degree that they in fact were the “alter ego” of the other corporation, principles of corporate law prevented the state from disregarding the separate corporate status for tax purposes. The court also refused to find that the incidental store returns created an agency relationship or otherwise created nexus.
These cases established and later cases refined the controlling affiliate nexus rules, which hold that Quill (the controlling substantial presence case) protects an out-of-state seller with an in-state affiliate when the two entities are each organized as separate and distinct corporate entities, and neither corporation acts as the alter ego or agent of the other. Other cases have attempted to expand on the agency theory of affiliate nexus by focusing on return policies, gift cards, and loyalty programs, but courts have consistently followed the precedents set up by these two cases.
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