Tax Officials Going After Scholastic Books

Classroom Teachers Considered to Be an Unpaid Sales Force  

Washington, D.C., May 15, 2012—Prominent educational publisher Scholastic Book Club, Inc.,  is facing large back tax bills from Connecticut and Tennessee despite the company not having property or employees in those states. Courts have ruled that the classroom teachers who collect book orders establish enough of a link in the state to subject the company to tax assessments, according to a new analysis from the Tax Foundation.

"States are becoming increasingly aggressive about expanding nexus standards beyond their borders as budgets get tighter and the desire to find new revenue increases," said Tax Foundation Vice President of Legal and State Projects Joseph Henchman. "The precedent thus far in these Scholastic cases suggests a bleak future for remote sellers seeking to do business across state lines."

Some 14,000 teachers in Connecticut use Scholastic Book Club programs, all of which the state now considers to be “representatives” of the company. Based on that definition, the company has been assessed more than $3 million in back sales taxes and penalties. This interpretation erodes the bright line distinction between who is and is not considered an employee of a business, and could easily be applied to not just to providers of educational services but to any out-of-state company.

Scholastic has also fun afoul of tax authorities in Tennessee, which have found that the company owes the state $5 million in back taxes. A court ruling on the dispute noted that Scholastic was benefitting from taxpayer services (public schools) to solicit and deliver its products, though such a standard could potentially be applied to any products ordered from or delivered to public buildings.

As Internet and other non-local sales continue to expand, the costs of state tax uncertainty will constitute an increasing burden on both consumers and businesses. While some court verdicts have ruled against Scholastic, other state courts have handed down opposing rulings in essentially identical circumstances. These cases illustrate the inconsistency of courts in deciding state tax authority and the necessity for Congress or the federal courts to definitively resolve the problem.

Tax Foundation Fiscal Fact No. 300, “Scholastic Books Faces State Tax Overreaching” by Joseph Henchman and Jordan King is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.