State Tax Snapshot: A New Rationale for Volunteer Nexus

Tennessee may impose sales and use taxes on mail order and online sales made by Scholastic Book Clubs Inc., the state’s Court of Appeals ruled recently. The court found that the Missouri-based vendor that enlists in-state teachers to facilitate sales to school children had sufficient connections with Tennessee’s schools and teachers to establish substantial nexus under the U.S. Commerce Clause.

While other state appellate courts have ruled both for and against Scholastic on the nexus issue, all of them have focused on the question of whether an agency relationship existed between the out-of-state book vendor and the teachers.

But for the Tennessee Court Appeals, the crux of the case was not the teachers' agency status. Instead, the court analyzed the broader question of whether Scholastic’s connections with Tennessee's schools and teachers established a substantial nexus under the Commerce Clause.

In doing so, the court concluded that sending forms and marketing materials to teachers in Tennessee and then requesting them to submit orders on behalf of their students “created a de facto marketing and distribution mechanism in the state.” Protection under the Commerce Clause is limited to “vendors whose only connection with customers in Tennessee is by common carrier or mail,” the court held.

With the ruling, Tennessee joins California (Scholastic Book Clubs Inc. v. California State Bd. of Equal., 255 Cal. Rptr. 77 (Cal. 1989)) and Kansas (Appeal of Scholastic Book Clubs Inc., 920 P.2d 947 (Kan. 1996)) in finding that substantial nexus can result from a remote vendor’s use of volunteers or unpaid representatives in a state.

But several other state courts have refused to find nexus when addressing these book selling arrangements, notes state tax consultant Maryann Gall in her nexus index—a listing of every case, statute, regulation, and ruling since the U.S. Supreme Court decided Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

The rulings in favor of the book sellers cited in Gall’s index include:

  • Arkansas: Pledger v. Troll Book Clubs Inc., 871 S.W.2d 389 (Ark. 1994) (relationship between book club and teachers was not an agency relationship because there was no right of control, no compensation, of teachers);
  •  Connecticut:  Scholastic Book Clubs v. Connecticut Comr. of Rev., Nos. CV 07 4013027 S and CV 07 4013028 S (Conn. Super. Ct. April 9, 2009) (teachers were not representatives and, as a result, Scholastic lacked sufficient nexus to be required to register as a vendor and collect tax on its sales);
  •  Michigan:  Scholastic Book Clubs v. Michigan Dept. of Treas., 567 N.W.2d 692 (Mich. Ct. App. 1997) (the teachers were primarily the company’s customers and were under no control by and had no authority to act for the company); and
  • Ohio: Troll Book Clubs Inc. v. Tracy, No. 92-Z-590 (Ohio Bd. Tax App. Aug. 19, 1994) (teachers were not agents or representatives because they were not controlled by and did not receive compensation from the company and, as a result, the company lacked substantial nexus with Ohio).

The Tennessee Court of Appeals ignored the decisions from other states holding that no constitutional nexus was created when a school teacher volunteered to distribute book catalogs for the benefit of school children, Gall said.

“The Michigan decision in Scholastic Book Clubs and the Ohio Board of Tax Appeals decision in Troll Book Clubs were better reasoned and emphasized the important public educational polices that were ignored by the Tennessee appellate court,” she added.

By Steven Roll

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