A U.S. Supreme Court non-decision this week will mean more than $10 million for
Connecticut’s coffers right away, and beyond that it will embolden the state to go after a class of taxes that has been fuzzy but is growing clearer.
The issue is how and whether the state should collect sales taxes for goods ordered from out of state. It’s worth tens of millions of dollars, perhaps hundreds of millions, and Connecticut is rightly becoming one of the more aggressive states in cracking down on this widespread abuse of commerce.
The case is Scholastic Book Clubs Inc. vs. the Connecticut Commissioner of Revenue Services, in which the Missouri-based company argued that the state’s $3.3 million sales tax levy was improper.
All those books Scholastic sells to children through 14,000 Connecticut teachers amount to direct mail-order sales, the company argued. The teachers were, in effect, customers who earned points for buying books. That would mean the company is not obligated to collect the 6 percent sales tax, now 6.35 percent.
The state argued that the teachers were “representatives” of the company under a state law that requires any company with local agents or representatives to collect the tax.
To be clear, the issue here is not whether the books are subject to the state sales tax; they are. The question is whether the bookseller must collect the tax, or else the buyer of the book declares the purchase and pays the tax directly. Since no citizen other than Revenue Services Commissioner Kevin B. Sullivan himself ever makes such a voluntary declaration — okay, there are a few others — in effect, the argument is about whether there is a tax at all on these goods.
Judge Henry Cohn in Superior Court in New Britain, the same judge who last week ruled against the wind farm opponents in Colebrook, decided in favor of Scholastic. The state Supreme Court this past March reversed that decision, saying the teachers were indeed representatives of the company.
Justice Peter T. Zarella, writing the opinion: “Although
the teachers may be customers when they purchase
books from the plaintiff and participate in the bonus
point system to obtain additional materials, this should
not obscure the fact that their principal function is to
serve as the exclusive vehicle for selling the plaintiff’s
products to their students.”
Scholastic appealed to the U.S. Supreme Court, which on Tuesday declined to hear the case. That means Scholastic must now pay a total of $8.2 million — those interest and fee charges add up quickly — and Scholastic is now likely to be hit with a levy for all of its sales since May, 2005, the end date of the $3.3 million charge.
“You can certainly make the leap that they would have sales tax liability for those periods as well,” said Louis Bucari, general counsel for the Department of
The issue doesn’t end in Connecticut and it doesn’t end with Scholastic. The company has appealed similar decisions in at least six states, Bucari said, and has won in some places.
Why did Connecticut win? The question is whether each company is “engaged in business” and has a “substantial nexus” in the state. That means they have “agents” or “canvassers” in the state, and Connecticut lawmakers, getting it right, added the word “representatives,” which nailed the case.
“It’s certainly a good decision that will be helpful to the department, and to taxpayers,” Bucari said. “Now that we know that the department’s interpretation is correct, the department would look to see if there are other businesses that have a similar model.”
How many are out there? No one knows yet. Call Sullivan if you have a tip.
It’s already been established that if a company has a store in the state, such as LL Bean, it must collect taxes on all of its mail-order business here. What states need to do is find new ways to expand the definition of “engaged in business” locally.
To that end, Connecticut was among the states that added language in 2011 to include owners of web sites that benefit from click-thoughs for product sales. That provision, the so-called Amazon tax, is wending its way through New York State courts, where Amazon is appealing.
Meanwhile, Amazon has severed ties with local web site owners, which is too bad. But it’s the price that has to be paid in the long war to get online and mail-order sales properly taxed.
Even if you oppose higher taxes, you should favor aggressive moves like these. Low taxes are one thing, and an unfair system that penalizes local retailers is another.
Scholastic, for its part, could now go after each of you who bought books for your kids over the years, to charge the tax that it now must pay. But, Bucari said, “I don’t think they could find you.”