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Wednesday, April 22, 2009

Associates vs Teachers - What Creates Sales Tax Nexus?

On April 9, 2009, the Superior Court of Connecticut issued an opinion in Scholastic Book Clubs v. Commissioner (Docket CV 07 4013027S). This issue has been litigated in other states and this opinion is similar to a 1997 Michigan case (567 N.W.2d 692). The Connecticut Court found that the roughly 13,000 to 14,000 grade school teachers in the state who helped Scholastic generate sales did not cause Scholastic Book Clubs (SBC) to have nexus in the state.

You may have personal experience with SBC. The system is that SBC mails catalogs to teachers who distribute them to their students. Students place orders and give the order form and a check to the teacher. The teacher sends it to SBC, who then ships the books to the teacher. The teacher distributes the books to the students. If there are any problems, the teacher contacts SBC. Teachers earn points for their classroom (technically not for them) which can be used to buy books and equipment from SBC.

Some highlights from the decision:
  • SBC does not have any property, employees, representatives, independent contractors or sales personnel in the state.
  • SBC doesn't advertise using local media.
  • SBC uses no state or local government services.
  • Teachers are not obligated to participate in the program.
  • SBC encourages new teachers to contact the parent company in Missouri to learn about the ordering process.
  • The court did not agree with the Commissioner that SBC was engaged in business in the state by having representatives sell, deliver or take orders. The court interpreted representative in this context to mean an employee or contractor. Instead they serve an "important administrative role." The teachers are not a "sales force."
  • The teachers really operate like parents in helping kids to order books and we wouldn't say a company has nexus because parents help kids order from their catalogs.
  • The situation is different from the independent contractor sales force in Tyler Pipe (483 US 232 (1987)). The Tyler Pipe workers "maintained Tyler Pipe's name recognition, market share, good will and customer relations."

So, it really comes down to perhaps that the teachers' main business isn't selling books for SBC - they aren't sales staff. But is that the right approach? It doesn't take much to sell SBC books because unlike Tyler Pipe contractors who had to travel to get to existing and new customers and probably give a good sales pitch, the teachers have a ready supply of customers. The job is very easy. SBC sends the order forms and teachers hand them out to their students. If you get 13,000 to 14.000 teachers to do this, you've got quite a market. Without the teachers, it would be a lot more work for SBC to get order forms to hundreds of thousands of students.

Should it matter that the teachers don't earn bonus points but that the classroom earns them? That is, if the teacher leaves the school, the points remain for the next teacher to use. Many teachers make long careers in the same classroom. Also, teachers tend to need books and supplies - how many keep their points banked for more than 1 year?

And to illustrate oddities of state sales tax law - let's contrast this result to the rebuttable presumption in New York that can cause a remote vendor to have to collect sales tax if they compensate NY residents for directly or indirectly referring potential customers and over $10,000 of sales to NY customers occurr as measured in the prior four quarters.

The presumption can be administratively difficult and time-consuming to rebut. In New York, Amazon didn't try to rebut, but started collecting sales tax. But let's contrast what the Amazon Associates do for Amazon to what teachers do for SBC (note - I'm not implying that all of the factors below are relevant to nexus determinations, but just that they are interesting contrasts between the two situations and the propects for sales):

How they "solicit" sales:

  • Associates - have an Amazon link on their website and may have a note encouraging people to order from Amazon by first clicking on the Associate's link. Some Associates might be encouraging people to buy a particular product. The Associates can't make someone click on the link or place an order.
  • Teachers - they get order forms from SBC and hand them out to their students and tell them when to return the completed orders and payment. They probably can't force a student to take an order form, but students are trained to take what their teacher gives them to take home. The teachers don't have to guess if a potential customer will walk into their classroom and pick up an order form because the customers are in their room 40 hours a week - a captive customer base.

Role played in processing orders:

  • Associates - none. Orders are placed on the Amazon website and shipped by Amazon to the customer. If there is any problem with the orders, customers contact Amazon directly.
  • Teachers - they hand out the order forms, collect the completed forms and payment, sent that to SBC, receive the books from SBC, distribute the books to SBC and work with SBC to resolve any problems.


  • Associates - no
  • Teachers - no


  • Associates - earn a commission based on sales placed by people who reached Amazon from the Associate's website.
  • Teachers - their classroom earns bonus points, but it takes a human being to use them. I'd guess that in the majority of situations, it is the teacher who earned the point from their students who ends up using them.

Obligated to sell?:

  • Associates - no; they could end up not putting the link on their website.
  • Teachers - no; they don't have to hand out the forms.

Likelihood of a sale:

  • Associates - probably low. The website owner must first hope that someone visits the website and then that they click on the Amazon link and that they place an order.
  • Teachers - probably high because they are working with a captive seller base and are offering something very appealing to families - low cost books, a large selection and extreme convenience.


  • Associates - none.
  • Teachers - are encouraged to contact Scholastic to "walk through" the process.

Necessary for a sale?

  • Associates - Amazon will still have sales without the Associates. People likely to buy from Amazon have probably already done so before. Amazon advertises and is a well known name - people can find on the web without the Associates link.
  • Teachers - yes - SBC would need a whole different strategy if the teachers didn't hand out order forms. It would be expensive to find families and mail them forms and process them each individually. (It seems odd for the court to conclude that the teachers are not a sales force when the reality is that SBC would have no sales in Connecticut if it were not for the teachers - or they would need a completely different business plan.)

Relationship to customers:

  • Associates - varies; links on PTA sites are only going to be visited by families that belong to that PTA. The PTA is using the Amazon link to encourage parents to make purchase from Amazon through the link rather than elsewhere or not via the link. On other sites, the Associates may not have any relationship with website visitors.
  • Teachers - per the court - they were like parents helping kids to decide what books to buy

I think the teachers look far more like sales helpers than Associates. But, it comes down to how the state law is written. States could change their laws to add a rebuttable presumption that sellers are presumed to be soliciting sales if they have residents distribute order forms and receive some type of compensation. The presumption could be rebutted if the seller can show that the teachers did not solicit sales in the state.

Another angle on this is whether schools and teacher organizations should be finding a way for SBC to collect sales tax to help generate more tax revenues for schools. I'd guess that very little use tax gets collected in Connecticut from the SBC orders. Seems odd that schools are eager to get more funds, yet so many participate in activities that actually diminish tax collections.

What do you think?

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