Posted tagged ‘Scholastic Book Clubs’

Weekly Blog Update for Week of 3/23: Connecticut Supreme Court Reverses Scholastic Decision; Georgia and Marlyand Lawmakers Address Amazon Bills; Kansas Legislature Approves Single-Sales-Factor Apportionment Bill…and More

March 26, 2012

 by Jennifer Weidler



Connecticut Finds Scholastic Used Teachers to Sell Books Creating Nexus to Subject it to Sales Tax

The Connecticut Supreme Court reversed a lower court’s decision and held that Scholastic Book Clubs, Inc. was subject to state sales tax because in-state school teachers acted as its representatives, thereby creating the requisite nexus to justify imposing the tax.  For prior coverage of this issue, click here.



Georgia Lawmakers Approve “Amazon” Bill

The Georgia Senate approved legislation, HB 386, which would create click-through nexus and establish a phase-out of the sales tax on energy used in manufacturing.



Indiana Supreme Court Holds Out-of-State Service Provider’s Promotional Materials Subject to Tax

The Indiana Supreme Court held that an out-of-state online service provider, AOL, Inc., was subject to Indiana use tax on promotional materials that it distributed to in-state individuals.  The court found that the transactions through which AOL obtained the promotional materials it sent to in-state residents from its assembly houses and letter shops constituted retail transactions and were therefore subject to state tax once AOL used the property in-state.



Kansas Senate Approves Single-Sales-Factor Legislation

The Kansas Senate approved legislation, HB 2157, which would enact a single-sales-factor apportionment method for certain corporations relocating to the state.  The apportionment method would be available beginning in tax year 2013 for those businesses with no employees in the state and with no real or tangible personal property in the state prior to January 1, 2013.



Maryland Legislature Strips Bill of “Amazon” Language

The Maryland House amended legislation, SB 523, by pulling language pertaining to an “Amazon” law.  The amendment deleted language that would have required remote sellers to collect sales taxes on purchases by in-state buyers.  The House also revised the proposed individual income tax increase.



Minnesota Legislature Passes Bill to Phase-Out State’s Business Property Tax

The Minnesota House of Representatives passed legislation, HF 2337, which would phase-out the state’s business property tax.  The legislation would gradually reduce the tax, until an ultimate elimination of the tax during tax year 2025.  The legislation would also offer a tax credit in lieu of the current foreign operating corporation deduction.



South Carolina Publishes Revenue Ruling on Software

The South Carolina Department of Revenue issued a Revenue Ruling dealing with sellers who sell and deliver software via a laptop to the buyer’s location.  Where the seller downloads the software via the internet or other wireless connection and then terminates the connection, taking the laptop when the download is complete and leaving no tangible software behind, the transaction is not subject to South Carolina sales tax.


South Carolina Supreme Court Rules for Taxpayer in Bi-furcated Apportionment Case; Places Burden on DOR

In a victory for the taxpayer, the South Carolina Supreme Court held that where the South Carolina Department of Revenue (“DOR”) attempts to deviate from the standard method of apportionment, the DOR must bear the burden of proving both that the standard method should not be used and that the alternative method is reasonable and more appropriate than any of the opposing methods.



Tennessee Legislature Considers Phase-Out of Stat’s Inheritance Tax

The Tennessee General Assembly passed legislation, SB 3762/HB 3760, which would phase-out the state’s inheritance tax.  Pursuant to the legislation, the tax would be repealed by 2016.

Tennessee Court of Appeals Holds Out-of-State Book Distributor, Scholastic, Subject to Sales and Use Taxes Because of Substantial Nexus Through Local Schools and Teachers; Creates Split in Courts

February 3, 2012

  by Stewart Weintraub and Jennifer Weidler

The Tennessee Court of Appeals held that an out-of-state book distributor, Scholastic Book Clubs, Inc. (“Scholastic”), was obligated to collect Tennessee sales and use taxes because the distributor had substantial nexus with the state.

The court found the substantial nexus to be present through the local schools and teachers who participated in Scholastic’s program, holding that those teachers acted as agents for the company.  It found that Scholastic utilized teachers to effectuate its sales, creating a de facto marketing and distribution mechanism, and therefore Scholastic had nexus with the state.

Scholastic is a Missouri-based company that sells books and other materials to schoolchildren through the use of catalogs.   Scholastic mails catalogs to teachers, who are under no obligation to pass out the catalogs to students, to order any merchandise or to obtain orders from students.  If a teacher or student decides to order something, the teacher enters the order for the student or students on a form and submits it to Scholastic with payment.  The books are then delivered to the teacher, who distributes them to the students who ordered them.

The issue of whether school teachers create in-state nexus for Scholastic was litigated in the courts of five (5) other states.  The decision by the Tennessee Court of Appeals now establishes three (3) states holdingthat the school teachers created nexus for Scholastic and three (3) states findingthat the school teachers did not create nexus for Scholastic.  Courts in both Kansas and California joined with the Tennessee Court of Appeals’ holding and courts in Arkansas, Michigan and Connecticut refused to find nexus.

Those courts siding with the Tennessee Court of Appeals similarly reasoned that the teachers acted with respect to Scholastic’s products and were acting under Scholastic’s authority.  Moreover, they found that the teachers acted as a conduit for Scholastic to the students, thereby establishing substantial nexus. See, Scholastic Book Clubs, Inc. v. State Bd. Of Equalization, 255 Cal. Rptr. 77 (Cal. App. 1989); In re: Appeal of Scholastic Book Clubs, Inc., 920 P.2d 947 (Kan. 1996).

Conversely, the courts that found a lack of requisite nexus drastically differed.  For instance, one court found that, “[t]he teachers are not a sales force that works for plaintiff.  Rather, they are analogous to parents who order an item from a mail-order catalog for their children; no one would seriously argue that such parents are a ‘sales force’ for mail-order vendors.” Scholastic Book Clubs, Inc. v. Department of Treasury, 567 N.W.2d 692, 696 (Mich. App. 1997).  Additionally, a Connecticut court held that, “[t]here is no question that [Scholastic] and the participating teachers have a satisfying symbiotic relationship.  But to conclude that these relationships, drawn from school classrooms, amount to the teachers being ‘representatives,’ carries the matter constitutionally too far.” Scholastic Book Clubs, Inc. v. Commissioner of Revenue Services, 2009 WL 1175675 (Conn. Super. 2009); see also, Pledger v. Troll Book Clubs, Inc., 871 S.W.2d 389 (Ark. 1994).

Thus, for now the issue remains split between the states, with the latest case in Tennessee finding substantial nexus through what the court viewed as the use of teachers to effectuate Scholastic’s sales, thereby creating a de facto marketing and distribution mechanism.