United States: Tennessee Court Of Appeals Holds That Scholastic Book Clubs Has Nexus In Tennessee

Last Updated: February 10 2012
Article by Brett R. Carter and Patricia Head Moskal

The Tennessee Court of Appeals ruled on January 27, 2012 that Scholastic Book Clubs' ("Scholastic") use of schools and teachers to facilitate book sales and deliveries in Tennessee establishes a sufficient presence in Tennessee requiring Scholastic to collect sales and use tax on its sales. Scholastic Book Clubs, Inc. v. Farr, Dkt. No. M2011-01443-COA-R3-CV, slip op. at 9 (Jan. 27, 2012).

Scholastic markets and sells books and other publications and products to teachers and students at nursery, primary, and secondary schools across the United States. During the period under audit by the Tennessee Department of Revenue, over 8,000 Tennessee schools participated in Scholastic's program, generating sales in excess of $34 million. Scholastic did not collect or remit Tennessee sales and use tax on the book sales and, following audit, the Department of Revenue issued a $6 million sales tax assessment.

The activities of Scholastic in Tennessee were undisputed on the parties' cross-motions for summary judgment at the trial court. Specifically, the parties agreed that Scholastic maintained no property, employees, agents, bank accounts, data, or telephone listings in the state. The trial court concluded that Scholastic "lacked a 'substantial nexus' in the State of Tennessee" and was not required to collect Tennessee sales and use tax.

The issue on appeal was whether the activities of Tennessee schools performed by school employees on behalf of Scholastic created a sufficient presence in Tennessee under the Commerce Clause to support an assessment of Tennessee sales and use tax.

Scholastic argued that its only connection to customers in Tennessee is through mail order catalogs. The teachers distribute the catalogs to their students and, in some instances, assist students with the purchase of books. Book orders are submitted to the teachers, together with payment, and the teachers forward the orders and payment to Scholastic at its Missouri headquarters. The orders are filled and sent via common carrier to the teachers to be distributed to the students in Tennessee. Based on these facts, Scholastic maintained that it did not have a physical presence in Tennessee and that the teachers were not agents of Scholastic.

The Court of Appeals reasoned that the issue was not whether the teachers were "agents" of Scholastic but whether Scholastic's connections with Tennessee schools and teachers established a "substantial nexus" to sustain the assessment on Commerce Clause grounds. This issue has a long history of being litigated across the country, and the Court acknowledged a split in other jurisdictions such as California, Kansas, Michigan, and most recently in Connecticut.

The Tennessee Court of Appeals relied on its most recent nexus decision, Arco Building Systems, Inc. v. Chumley, 209 S.W.3d 63 (Tenn. Ct. App. 2006), to conclude that Scholastic had created "a de facto marketing and distribution mechanism within Tennessee's schools ... utilizing Tennessee teachers to sell books to school children and their parents." Accordingly, the Court held that Scholastic's connections with customers in Tennessee did not fall within the "safe harbor" of the Commerce Clause established by Quill Corp. v. North Dakota, 504 U.S. 298 (Tenn. Ct. App. 1992). Moreover, the Court rejected Scholastic's assertion that it used no public services in Tennessee, because "this State's school facilities and teachers are, in large part, funded by taxpayer dollars."

The Court of Appeals has remanded the case to the trial court for further proceedings consistent with the ruling. In addition to raising a Commerce Clause challenge, Scholastic also raised Due Process and Tennessee Constitutional challenges that were not decided on the parties' cross-motions for summary judgment. Scholastic has sixty (60) days within which to file an application with the Tennessee Supreme Court for discretionary review.

Practice Pointer: This decision continues a troubling trend in Tennessee for multistate businesses that have typically focused on compensated employees and contractors when determining what states in which they must collect and remit use tax. In Arco, the activity that satisfied the nexus standard was the use if an in-state manufacturer. Here, the Court of Appeals ignores the fact that the teachers were uncompensated for their participation in the Scholastic program, focusing instead on the fact that the teachers' activities are performed on behalf of Scholastic regardless of monetary compensation. The broader standard that has evolved will require out-of-state companies to reconsider current filing positions in Tennessee based on activities performed on their behalf by various third parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Brett R. Carter
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.