How Gift Cards and Loyalty Programs Affect Affiliate Nexus
While there have been many successful cases for the state seeking nexus, there have also been attempts to base physical presence on theories that are more far-fetched. Two cases involving another online bookseller, BarnesAndNoble.com, are good illustrations of these attempts.
In the BarnesAndNoble.com cases, it was held that the company lacked nexus for the obvious reasons that the company sold merchandise via its Internet website, had no employees, property or physical presence of its own in the states. The states’ hoped that because their parent company owned and operated B&N retail stores in the states that affiliate nexus could be established. Although the same parent owned both these branches, neither company shared management, employees, offices or other important elements of their business. This is consistent with the Bloomingdale’s and Saks Fifth Avenue cases.
Five aspects of the business relationship between the two divisions were cited in support of the states’ attempt to establish nexus: (1) both of the companies offered a membership program, and derived revenue from customers who paid an annual fee and received discounts on merchandise purchased from either company; (2) the retail stores sold gift cards that included the web address and could be redeemed for purchases from the website; (3) the website received commissions on merchandise ordered at the retail stores but shipped directly to the customer from the website’s distribution center; (4) the two companies engaged in advertising on behalf of each other; and (5) the retail stores gave preferential treatment to returns of merchandise purchased from the website.
The court found that the character and extent of retailers’ activities performed on behalf of website were insufficient to create nexus. One reason being that the in-state retailers had never taken or solicited orders on behalf of the website. The state also failed to demonstrate that participation in the gift card and membership programs created nexus, which is not too surprising.
The court also rejected the states’ argument that returns created nexus. While the stores’ return policy was preferential because they accepted the website’s merchandise as if it was it’s own and only provided in-store credit for returns from unaffiliated retailers, the court found that the retailers had chosen the approach to generate goodwill with their customers and not as a duty to the website.
Attempts to base nexus on close corporate relationships between affiliated companies, common gift card programs, loyalty programs and marketing plans, and other close corporate connections were deemed insufficient to create nexus is becoming a trend in the world of nexus debates. Despite the clear nature of these decisions, states continue to reach farther with every attempt at nexus due to affiliation. The attempts are weak, but continue on with trademarks, trade names, and substantial ownership.
Have some more questions? Let us know! We’re happy to help, and we love talking taxes.