A Big Win For State Taxpayers In The Mail-Order War

by Categorized: Commerce, Consumer, Public finance, Retail Date:

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
Revenue Services.

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.”

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25 thoughts on “A Big Win For State Taxpayers In The Mail-Order War

  1. Noteworthy

    And how exactly is this good for our families? We will now pay more for the books the teachers buy for their children; and families will pay more for the books we buy through Scholastic. It’s an assault on common sense to anybody other than Kevin “Tax You More” Sullivan and Dan “The Tax Man” Malloy. But hey, Connecticut is Still Revolutionary and we’re still open for business! Whatever.

    1. Ant

      Now we will all pay 6.35% for our online shopping taking more money out of our pockets and then the democrats can say ‘we are in favor of cutting middle class taxes!’ When all there doing is creating another tax for everything we buy. Yay CT get that money! The well ain’t dry yet I still have quarters in my pocket!

  2. Bob Duguay

    Right on I say. I’m a small Connecticut retailer who must collect tax on products but see savvy consumers go to the web, buy out of state, to avoid paying our sales tax. I, and my employees, want a level playing field. It is only fair.

  3. Susan Hays

    When will people realize that this is not a new tax? Just collection of a tax already owed by the purchaser. As Dan Haar rightly points out, if the sales tax is not collected by the seller, then the purshaser owes a use tax. And yes, I am one of the few who actually declares that on my tax return. CT loses somewhere between 40 and 60 million dollars a year from these unpaid taxes

  4. Homer

    Oh no. I think there is a typo in the headline. You need to remove the word taxpayers. State gets the money and taxpayers get incresed price tags.

  5. pete

    Dan Haar is soooooo clueless. CT won this case because the teachers were deemed to be “agents” of scholastic. If I buy over the “net” Mr. Haar and the company has no “nexus” that’s a fancy tax word for presence in CT either with an employee or a location they DO NOT have to collect CT sales tax. You can keep dreaming. You’re nothing but a tax and spend liberal like DANNY BOY and is DEMOCRATIC PARTY who raises taxes on the MIDDLE CLASS and gives 50% pay raises to lazy state cops and his cronies at the Community College Board.

  6. Curt Hawkes

    I think this is an excellent decision. All those children in poor families whose parents are lazy and don’t work hard enough don’t deserve books. Or an education.

  7. Jimbo

    Can you see that Dan, like other liberals, are giddy at the prospect of additional taxes that to urinate our money away on crony projects, bloated state workers, and the urban entitlement zones?

    Work harder people- the liberals need more of our money for their insatiable spending appetite.

      1. Jimbo

        To deny our out-of-control state and federal spending is to deny reality. Please seek help Dena.

  8. Dan Haar Post author

    Guys, you’re off-base on this one. I am very well aware that companies with no agents or other nexus (nexi?) in Connecticut do not have to collect the tax. That’s the whole point of the column, to applaud the state for expanding the definition of nexus.
    As for the tax itself, this column favors broadening the sources of tax revenue so the rest of us who are already here can pay lower taxes, all things being equal.
    If your neighbor lies about where he keeps his car to get a lower tax rate and I praise the tax department for going after him, am I pro-tax? I don’t think so.

    1. old capitalist

      keep on broadening…companies keep on leaving. Say goodbye to Carter’s in Shelton.
      Another $10 million plus annual payroll leaving for Dixie.
      Make all the excuses you like, Atlas will keep on shrugging.

    2. michael

      Hey Dan, I make about 50K, between state income tax, sales tax, all those pesky hidden gross receipt taxes, fees, property tax and car tax, I pay about 17% of my income in state & local taxes, way over the U.S.A. average of 10%, according to the conservative leaning Tax Foundation. In Connecticut, the rich, the 1 percenters, if you please, pay more like 7% of their income in state & local taxes. The rich can lower there state income tax liability with passive income, which is far more valuable to them than not getting that puny property tax credit. With sales taxes being regressive, you used your influence to have a more regressive tax system on most of the Connecticut population. Considering that I have to make a greater tax effort to pay my taxes, versus the rich, should I feel guilty about getting out of paying a tax?

  9. Guy

    Speaking of which, shortly after college and living with a friend in his house in Manchester, town cops knocked on the door to inquire about my Delaware (cars are property tax free there) plates. I couldn’t believe it. (The car was a piece of junk and would have gotten the town maybe 200 bucks a year).

    But I respected it I guess. Turned out that I was heading south the next day and it didn’t matter, but at least when I moved back I registered in CT.

  10. old capitalist

    “the rest of us who are already here can pay lower taxes”

    ? ? ?

    Will this sales tax be paid by residents from the Republic of Chad?

  11. Dave

    I own retail stores in Connecticut, employ local people, pay Connecticut taxes and collect State Sales Tax. My mail-order competitors don’t.

    1. Try It

      Why don’t you try getting your “retail” stores online; then you will be able to compete with your mail-order competitors…

  12. Try It

    The location of customers is rapidly becoming irrelevant and armed with powerful computers/communicators in their hands, those customers want to use them to interact with product and service vendors. This creates huge opportunities for companies to develop new and more efficient ways to service their customers. At the end of last year, there were an estimated 6 billion mobile subscribers in the world. That’s 87% of the world’s population. According to researchers, smart phone shipments grew 58%, making up nearly a third of all mobile phones shipped last year. Additionally, mobile tablet sales are projected to double this year.

  13. patrick

    welcome to tax me any way i can that happens to be the constitution state of connecticut. on one side you have the dot union bleeding the state for 20 years on every employee and then we carry them til they die. welcome to one side sex act ~! this state is ruined by unions. no amount of tax will save it . oh wait~!! i know~!! include a BS tax to any one who is associated with DC . then you will get rid of the federal deficit problem solved (eye roll)

  14. Fred

    O come on people….get over it. If u don’t know already that we’re all slaves than u better get your heads out of the sand. Before u know it….when u leave your home to go to the movies,or dinner or a pop and paper and r stopped at a checkpoint and asked to show your papers and they find out u didn’t pay your taxes on something. Shame on u slave. Be ready to be arrested and moved to a FEMA camp out in Montana so the powers to be can keep a better eye on u ……………SLAVE. Tax on free speech will be next. O wait a minute…..we don’t live in a free country and more. This slave is forget full at times. Where’s that pile of sand?

  15. Ray

    So we are left to believe that state sales tax will go down because the state is now collecting this money? Sure, right after the earth smashes into the sun. Dan haar is an idiot if that was the “angle” in his title, and he believes it.

  16. Dr. Aki Bola, Esq.

    Oh good, extra costs and tax increases for the citizens. Now if I go to Best Buy down the road, there are mall cops and fire and ambulance and other services which have to be paid for. If I order an oil filter from Wisconsin, why am I paying local taxes here? UPS pays enough to the state already for registering trucks and buying fuel and worker income taxes.

    Just say No to these greedy politicians, who have not displayed any ability to wisely spend our money.

  17. Dena Davis

    I am a small bookseller providing book fairs to local schools. I charge my customers sales tax and ALSO pay use tax on all books donated to the schools and organizations I work with. Is Scholastic required to pay this use tax to states? Are they paying income tax to each state not only on their book order forms sent to families every month but also for sales at their book fairs, which are most often run by PTA groups?

  18. senior citizen of CT

    Ct has been :one sided: with its politicians and BS campaign promises, union strangle hold to such a point that to debate it is boarding on futile.
    Until we get a more equitable division of state Gov, “doing” for the people and not running amuck with the funds collected for self indulgence and shoving their bills down the throats of the minority, there will not be a ‘balanced’ gov for the citizens;

Comments are closed.