The "bright line" test of the 1992 Quill decision is too often just a murky test. We have seen this often, but rulings in two states in the past year show the challenges taxpayers, practitioners and tax agencies face in determining if a business has sales tax nexus in a state. The cases involved Scholastic Book Clubs in Connecticut and Tennessee. The lower court rulings found that Scholastic did not have sales tax nexus, but on appeal, it was found that they did have nexus. In June 2012, Scholastic asked the U.S. Supreme Court to hear the Connecticut case.
The Tennessee Court of Appeals attempted to find and apply the Quill bright line test by noting that Scholastic's connection with in-state customers was beyond only via common carrier or the U.S. mail. The teachers helping students place orders and receive their books and use of the schools provided the physical presence for sales tax nexus under the Commerce Clause.
The lower court in Connecticut and a few other states have found the teachers to be equivalent to parents helping students place their orders. The teachers are not agents of Scholastic (although some judges have viewed the teachers' acts of returning order forms as entering a relationship - it does seem to obligate the teachers to then distribute the books to the students). The teachers are unlikely to describe themselves as sellers of Scholastic books (while, in contrast, the contractors in Scripto likely would describe themselves as sellers of Scripto products).
Is anything beyond use of a common carrier or U.S. mail (or phone or email or a website as some states also provide) mean a seller has a physical presence? Or to be a seller with sales tax obligations, must there be tangible property or a company or individual the seller has contracted with? Of course, the answer also depends on the specifics of a state's law as some states have specified certain activities or relationships that do or do not create nexus.
How can certainty be provided to sellers given the discrepancies among the Scholastic cases? For more on this topic, including a list of the Scholastic cases dating back to 1989 (pre-Quill) and their holdings, see a short article of mine - Back to School: Sales Tax Nexus Lessons in the AICPA Corporate Taxation Insider (8/23/12).
What do you think about the Scholastic fact pattern? Do the teachers and use of the schools create sales tax nexus for Scholastic?
Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:
- With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?
- Idaho Keeps Sales Tax On Groceries
- Sales Tax Policy Outlook for 2017
- Would Broader Sales Tax Base Deliver Simplification - and Savings?
- Trailing Nexus - When Does It End?