On October 9, 2012, the U.S. Supreme Court denied, without comment, Scholastic Book Club’s petition for certiorari, declining to hear an appeal regarding Connecticut’s taxation of classroom catalog sales of books to students.
Earlier this year, the Connecticut Supreme Court held that that Scholastic owes back sales and use taxes, despite the fact that the company has neither property nor employees in those Connecticut. The state Supreme Court found that Scholastic is “physically present” in the Connecticut for tax collection purposes despite having no property or employees there.
The Connecticut Court reasoned:
“[The] nature of the program necessarily places the teachers in a position in which they are functioning in much the same way as salesmen, in that they are bringing Scholastic’s products to the attention of students and are providing them with the means to order, pay for, and receive delivery of those products. Moreover, the teachers derive benefit from the program because they earn bonus points that enable them to purchase other items of value from Scholastic’s catalog.”
The Connecticut Court looked to U.S. Supreme Court precedential cases for guidance. The U.S. Supreme Court has previously ruled on the tax treatment of remote sellers in precedential cases that frame the debate. The Court ruled in Scripto, Inc. v. Carson, 362 U.S. 207 (1960) that a Georgia-based retailer (Scripto) had physical presence in Florida despite having no employees or property in that state. In Scripto, the Court found that independent contractors were effectively salesmen and that their activities conducted on Scripto’s behalf. The contractors acting on Scripto’s behalf was more important in reaching this determination than the fact that the contractors were not technically employees of Scripto.
Scripto is widely considered to be epitmoze the outer limits of a state’s taxing power. The Connecticut Court, however, did not limit its ruling to the confines of this rule, however, and actually suggested that their rule necessarily goes beyond Scripto: “[Scripto] was not necessarily intended to mean that a substantial nexus between the out-of-state retailer in the state could not be found in other, as of yet undefined circumstances.”
Subsequently, in National Bellas Hess, Inc. v. Ill. Dept. of Revenue, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the U.S. Supreme Court affirmed the physical presence nexus standard for determining sales tax collection obligations of out-of-state retailers. Bellas Hess was a mail order company, incorporated in Delaware that distributed catalogs to customers who would return order forms and then receive their items via common carrier. In Bellas Hess, Illinois argued that any company soliciting customers in the state must collect sales tax but the Court rejected that approach. Finding that Bellas Hess had no physical presence in Illinois, the Court ruled that they had no collection obligation existed. Quill reaffirmed this rule after North Dakota enacted a law similar to the one struck down in Bellas Hess.
The Connecticut ultimately looked to a California case, Scholastic Book Clubs v. Board of Equalization, 207 Cal. App. 3d 734 that described Scholastic’s case as “more analogous to Scripto than to Bellas [Hess].”
Quoting the California case, the Connecticut Court said that although the teachers did not have,
”written agency agreements with [Scholastic], they serve[d] the same function as did the Florida jobbers in Scripto-obtaining sales within California from local customers for a foreign corporation. In fact, they do more. Unlike the Florida jobbers, the California teachers collect payment from the purchasers, and receive and distribute the merchandise. [Scholastic] not only relies . . . but in fact depends on the teachers to act as its conduit to the students. Moreover, there is an implied contract between [Scholastic] and the teachers [because Scholastic] rewards them with the bonus points for merchandise if they obtain and process the orders. The bonus points are similar to the Florida jobbers’ commissions in Scripto; the more sales the teachers make, the more bonus points they earn.”
Because the U.S. Supreme Court declined to review the Connecticut Court’s decision, the state is free to continue taxing Scholastic’s book sales despite the lack of in-state employees or offices. To view the Supreme Court’s order list for Tuesday, October 9, 2012, click here. To read the Connecticut Supreme Court’s decision click here.