SALT Blawg – State and Local Tax
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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.