Alabama Rules that a Voluntary Sales Force Creates Nexus

In a case involving Scholastic Book Clubs, Alabama determined that the actions of teachers, who distribute book catalogs and take orders, are crucial to Scholastic’s ability to maintain a market in Alabama and establish nexus.

By Tina Chunn, SALT senior manager

On March 25, 2016, the Alabama Tax Tribunal (the “Tribunal”) issued a decision in which it concluded that Scholastic Book Clubs, Inc. (“Scholastic” or the “taxpayer”) had sales and use tax nexus in Alabama based on the activities of Alabama teachers, as described below. [1]

The taxpayer has no retail stores or offices in Alabama, owns no property in Alabama, has no employees in Alabama, is not registered to do business in Alabama, does not have a mailing address or telephone number in Alabama and does not own or control another entity doing business in Alabama. It conducts business in all 50 states in the same manner, as follows: Scholastic sends catalogs or fliers to schools to hand out to its classroom teachers. The classroom teachers (at their discretion) further disseminate these materials to their students to give to the parents, who may choose to purchase items and provide the order back to the teacher. The teacher will submit these orders and monies received to Scholastic on a master order form. Scholastic then fills the order and ships the books to the teacher, who distributes them to the students. Any discrepancies or disputes regarding the orders are communicated by the teacher to Scholastic. The teacher is given bonus points based on the number of books ordered. These points can be redeemed for books for their classroom or to obtain $25 gift certificates from Target, Staples or Michaels. [2]

Alabama asserted that the activities of the teachers in the state created nexus for Scholastic under the Commerce Clause of the U.S. Constitution. The Tribunal noted that several states have ruled on this issue for Scholastic and other similar taxpayers in the past; three states – Arkansas, Ohio and Michigan – ruled that the activities of the teachers were not sufficient to create nexus, and four states – California, Kansas, Connecticut, and Tennessee – ruled that nexus existed. [3] The tribunal noted that, under the U.S. Supreme Court decision in Tyler Pipe, the “crucial factor governing nexus is whether the activities performed in (the) state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in (the) state for the sales.”

Based on the facts and the reasoning of the cases finding nexus, the Tribunal concluded that nexus existed. The Tribunal determined that the teachers were soliciting or at least promoting sales on behalf of Scholastic. In fact, the teachers actually went beyond distribution of marketing materials in that they completed a master order form to submit all orders and money received from the parents, as well as resolved any issues that arose. Further, it was irrelevant whether teachers actually benefited from these activities through the bonus points or any other type of remuneration, or whether the relationship was formally established through legal documentation. Thus, the Tribunal ruled that the teachers were a voluntary sales force necessary for Scholastic to make sales in Alabama, thereby establishing nexus under the Commerce Clause.

As evidenced by this disparity in treatment among the states, it is important to note that states often interpret taxpayer activities differently, which may create confusion regarding sales and use tax nexus requirements. Our SALT tax team is here to help you navigate the best course of action for your company in relation to these varying requirements. As the states continue to further define what activities may create sales and use tax nexus, we strive to keep our clients advised of these important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant state tax developments, and we will include any updates in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn, SALT senior manager, at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the May 2016 SALT Newsletter. To view the newsletter, click here.

[1] Scholastic Book Clubs, Inc. v. Alabama Department of Revenue, Alabama Tax Tribunal, No. S. 14-374, March 25, 2016.

[2] As the Tribunal notes, “The Taxpayer’s stated intent is that all items purchased using bonus points should be used for classroom purposes, but the Taxpayer has no way of monitoring, controlling, or otherwise knowing how the items may be used.”

[3] The following cases ruled that the teachers’ activities were not sufficient to create nexus: Pledger v. Troll Book Clubs, Inc., 871 S.W.2d 389 (Ark. 1989); Troll Book Clubs, Inc. v. Tracy, Ohio Bd. of Tax Appeals, No. 92-Z-590 (Aug. 19, 1994); Scholastic Book Clubs, Inc. v. Michigan Revenue Division, 567 N.W.2d 692 (Mich. 1997). These four cases established that nexus did exist: Scholastic Book Clubs, Inc. v. Board of Equalization, 207 Cal. App. 3d 734 (1989); In re Appeal of Scholastic Book Clubs, Inc., 920 P.2d 947 (Kan. 1996); Scholastic Book Clubs, Inc. v. Comm’r of Revenue Services, 38 A. 3d 1183 (Conn. 2012); Scholastic Book Clubs, Inc. v. Farr, 373 S.W.3d 558 (Tenn. Ct. App. 2012).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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