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Connecticut Supreme Court: Scholastic Owes 3 Mil in Back Sales Taxes

UPDATE: 3/22/2012. Market Watch reports that Scholastic had to revise its previously disclosed third quarter results, following the Connecticut Supreme Court decision described below. "The revised consolidated loss for the third quarter was $10.3 million, or $0.33 per share, compared to a consolidated loss of $3.2 million, or $0.10 per share . . . ."

The Connecticut Supreme Court announced Monday that it upheld an assessment made by the Commissioner of Revenue Services: Scholastic Book Club owes over $3 million in "sales and use tax deficiency assessments." 

Connecticut's lower court originally overturned the Commissioner's assessment when Scholastic appealed the decision in 2008. However, the Supreme Court reversed that decision, stating that the well-known book club is in fact required to collect and remit sales tax in Connecticut. Tennessee state came to the same decision last month, charging Scholastic with over $5 million in sales tax penalties and fines.

For some companies, "nexus" might as well be a four-letter word. Scholastic used approximately 14,000 Connecticut teachers to promote and sell its books to students, during the assessed period. The company did not pay the teachers, but according to the Connecticut Department of Revenue,

. . . teachers received book catalogs from the company, distributed the catalogs to students, collected orders and payment from students, forwarded the orders and payment to the out-of-state company, received shipment and distributed the books to the students. New teachers are also asked to contact the company by telephone in order to learn this sales process.

In the eyes of the Supreme Court, the teacher participation described here makes them an agent to Scholastic, giving them nexus in Connecticut. If a company sells goods in Connecticut, and has nexus, they must collect and remit sales tax.

According to the Connecticut Commissioner of Revenue Services, the "...decision offers a more level playing field for commercial competition . . . ." Will more states come to the same conclusion?

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Avalara Author
Will Frei
Avalara Author Will Frei
Will Frei covers sales tax news including best practices, legislation and sales tax technology. He is the Social Media Manager at Avalara.