Tax Reform Friday: The Last Scholastic Case? Book Seller’s Nexus Issues May Have a Tidy Ending in the Post-Wayfair Era

On Sept. 7, 2018, the Alabama Court of Appeals held that Scholastic Book Clubs, Inc. (Scholastic or SBC) isn’t liable for sales and use taxes on its Alabama sales for the years 2007 through 2013. Scholastic has litigated whether it has nexus in various states such as California, Michigan, Kansas, and Tennessee since the 1980s. Now that the U.S. Supreme Court’s decision in Wayfair has overturned the physical presence standard, the question of whether Scholastic’s business model creates nexus may be effectively moot.

Scholastic has long argued that the activities of teachers and parents who purchase and distribute its books to children do not create nexus under the pre-Wayfair physical presence standard.

“If an Alabama schoolteacher or parent educator decides to hand out SBC catalogues and order forms in their classrooms to their students, then the Alabama teacher or parent educator is the responsible adult,” stated the joint stipulation of facts from the Alabama litigation. He or she “facilitates the ordering process by consolidating all student, teacher, and parent educator orders onto the single master order form, collecting money for student orders, and mailing the master form and money (including the teacher's/parent educator's money for his or her own orders) to SBC's offices …The responsible adult in receipt of the products takes responsibility for accepting and distributing them in his or her classroom.”

Additionally, in testimony, a Scholastic employee noted that “individual classrooms earn ‘bonus points’ for purchases made using the classroom teacher's unique identification code. Those bonus points can be redeemed by the teachers for products from SBC catalogues or for gift cards redeemable at various retailers.”

The Alabama Court of Appeals held “that SBC's activities did not subject it to an obligation to collect and remit use tax” under Alabama law for the years 2007 to 2013. The court found that Alabama teachers who facilitated sales were not employed by or under contract with Scholastic during the period at issue. The results of the other Scholastic cases have been relatively mixed, with at least two states finding that Scholastic did not have an obligation to collect and remit use taxes, and at least four states holding Scholastic liable for sales and use tax liability.

The Alabama court explicitly did not reach the question as to whether Scholastic would have nexus in Alabama under Wayfair or Alabama’s regulation imposing economic nexus provisions on out-of-state retailers. Now that the physical presence standard has been overruled by the Wayfair decision, it seems that the issue of whether teachers’ activities create nexus in a particular state may be now increasingly irrelevant to determining whether Scholastic has an obligation to collect and remit sales and use taxes in each state. Instead, as economic nexus provisions become more and more prevalent, the focus of nexus litigation may turn instead to the amount of sales out-of-state retailers make into states.

So, regardless of whether Scholastic’s litigation lives on, only the future will tell what types of business models and tax questions come next. Scholastic’s history of litigation and its possible future may serve as an insight into the ways in which the Wayfair decision will affect the state taxation of various types of businesses going forward.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: What types of nexus litigation should we expect to see in a post-Wayfair era?

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