I know states have a legitimate need for revenue, but squeezing pennies out of little kids buying their first books is really taking it too far. That’s what the Connecticut Department of Revenue will be doing thanks to this recent decision by the Supreme Court of Connecticut The teacher collects all of the orders and submits them to the plaintiff, and may add his or her own order to the total. Although a teacher may delegate the collection of an order to a “parent helper,” the order is submitted under the teacher’s name and account number. The teacher may order online from the plaintiff with a credit card and may have the option of using a discount coupon. All orders are processed and filled in Jefferson City, Missouri. If the order is calculated incorrectly, the plaintiff contacts the teacher.
The books are delivered to the teacher by common carrier with a packing slip addressed to the teacher. A list addressed to the teacher is enclosed with the order and shows the boxes contained in the delivery. The teacher distributes the order to the students.
It seems like Scholastic did a pretty good job of avoiding nexus, but the Achilles heel of the system was the teachers. Here is how Scholastic looked at it:
The plaintiff has been selling its products in this manner to Connecticut schoolchildren for many years. It is the plaintiff’s view that teachers are acting to assist students in their purchase of books “in loco parentis,” or in their role as surrogate parents.
That is not how Revenue Services and the Court saw it.
…we conclude that the Connecticut schoolteachers who participate in the plaintiff’s program may be considered its representatives. The trial court found that the plaintiff is a “for profit” mail order business that distributes its books and related products “only through schools,” that approximately 14,000 teachers “participate in programs” and that the plaintiff has no other personnel or means of selling its products in Connecticut. Accordingly, the teachers serve as the sole conduit through which the plaintiff advertises, markets, sells and delivers its products to Connecticut schoolchildren.
It seems like adding sales tax probably would not upset the whole Scholastic business model that much and of course Scholastic is stuck paying the 3 million or so it did not collect from the kids. I still don’t like it, at all. Sure the state is getting a big revenue hit from them on this case, but from here on in it will be the kids paying. I’m really annoyed at Connecticut for chasing this one grabbing a few pennies from some kid who is buying his first book. It is even more aggravating than Chautauqua County in Kansas saying that the Boy Scouts are not a humanitarian organization. At least the Court got that one right.
What’s Next ?
I have to admit that the case has awakened my dark side. People are making big money ratting out tax cheats to the IRS, something I find very disturbing. Anyway if the State of New Jersey ever gets into that game I have something for them. Most little kids think all adults are old, but the first graders at Saint John’s in Fairview in 1959 could tell that Sister Ellen Michael was young. That’s because the rest of the Franciscans teaching and terrorizing the budding juvenile delinquents really were old. Like maybe a couple of them were recruited by Saint Francis. Anyway Sister Ellen Michael used to sell us pretzel rods for $.02 a piece and I’m sure she wasn’t collecting sales tax. With all the interest and penalties I’ll bet that would really add up. The mother house used to be in Peekskill, NY so it might not be that hard to hunt her down. Before you haul her off though, please thank her for teaching me how to read.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on May 15th, 2012