Connecticut Court Rules that Non-Resident Scholastic Inc. is Subject to Sales Tax

 
 
March 30, 2012

On March 19, Connecticut's state supreme court ruled  that New York-based Scholastic Book Club Inc., familiar to most American schoolchildren, is "physically present" in the state for tax collection purposes despite having no property or employees there.

The Court found that teachers, who are the conduit for purchase and communication between Scholastic and children's parents, acted as representatives of Scholastic and therefore act more as an employee than a customer. Despite Scholastic's lack of ownership or lease of any property in Connecticut, it will owe more than $3 million in back sales taxes and penalties.

The trial judge had ruled in 2009 that the teachers were not acting as representatives because they are not "in-state order takers seeking to produce revenue for themselves or Scholastic Inc."  However, the supreme court's ruling didn't believe the terms customer and representative were mutually exclusive, pointing to teachers distributing flyers and catalogues of Scholastic products, collecting money for purchase, and mediating problems of sale between Scholastic and the parent.  The final decision rested on this conclusion:

A representative is a person who is not an employee or an agent and who does not necessarily act through delegated authority for remuneration, as does a salesman, canvasser or solicitor, but who otherwise stands in the place of, or acts on behalf of,  the out-of-state retailer "for the purpose of selling, delivering or taking orders" for the retailer's products.

We've covered efforts by states to expand their tax authority by redefining "presence of employees in the state" to things beyond that like contracts with website referrers.  While it is true that the sales tax is owed by the customer, here Connecticut is trying to force a collection obligation on the out-of-state company.  Presumably, Scholastic could now face this obligation anywhere in the country, subjecting them to over 9,600 different sales tax jurisdictions, rates, and rules.

Our recent testimony to Congress offered some possible solutions that would achieve the tax goals of states and protect businesses. There are federal bills that would achieve simplification while letting states collect this revenue. There's also the origin-based sales tax idea, where tax would be collected on where the seller is located (as is the case with brick-and-mortar businesses), not where the customer is located. A recent Cato Institute talk floating the concept reportedly packed the room.

No word on whether Scholastic will take its case to the Supreme Court.

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