Appeal of Scholastic Book Clubs, Inc.

• Decision Date: 12 July 1996
• Docket Number: No. 75199,75199
• Citation: 260 Kan. 528,920 P.2d 947
• Parties: In the Matter of the Appeal of SCHOLASTIC BOOK CLUBS, INC., from an Order of the Director of Taxation on Assessment of Compensating Use Tax.
• Court: Kansas Supreme Court

Page 947

920 P.2d 947

260 Kan. 528

In the Matter of the Appeal of SCHOLASTIC BOOK CLUBS, INC.,

from an Order of the Director of Taxation on

Assessment of Compensating Use Tax.

No. 75199.

Supreme Court of Kansas.

July 12, 1996.

Syllabus by the Court

1. Orders from the Board of Tax Appeals are subject to judicial review under the Act for Judicial Review and Civil Enforcement of Agency Actions.

2. The interpretation of a statute by an administrative agency charged with the responsibility of enforcing the statute is entitled to judicial deference.

3. Deference to an agency's interpretation is particularly appropriate when the agency is one of special competence and experience. Whether an agency has erroneously interpreted or applied the law in an unconstitutional manner is a question of law over which an appellate court's review is unlimited.

4. A state tax will withstand a challenge to the Commerce Clause of the United States Constitution if the tax is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the state.

5. Sufficient nexus to impose a use tax does not usually exist when a foreign retailer has no direct or personal contacts in the taxing state or does its business in that state only by mail. A foreign corporation's use of Kansas teachers to solicit book sales from their students constitutes a significant nexus for imposition of the Kansas compensating tax 6. Agency is a comprehensive term embracing an almost limitless number of relations between two or more persons or entities, by which one party, usually called the "agent" or "attorney," is authorized to do certain acts for, or in relation to rights or property of the other, who is denominated the "principal," "constituent," or "employer." Whether one is the agent of another for a specific purpose depends upon whether he orshe has power to act with reference to the subject matter. To establish an agency relationship, there need be no evidence of authority to act if the party performs duties or creates benefits of which the other person avails himself or herself.

7. While an express contract may create an agency relationship, conduct implying an agency relationship serves just as well. Express agency exists when the principal expressly authorizes the agent to do delegable acts. Implied agency may exist if it appears from the parties' words, conduct, or other circumstances that the principal intended to give the agent authority to act.

8. Under Kansas law, an agency relationship may exist notwithstanding either a denial of agency by the alleged principal or a lack of mutual understanding of agency between the parties.

9. Although an appellate court gives deference to the agency's interpretation of a statute, the Board of Tax Appeals' determination of a question of law is not binding on an appellate court. Under the facts of this case, whether an apparent agency exists and if that agency relationship is sufficient for the Kansas Department of Revenue to assess a use tax on the gross receipts of Scholastic Book Clubs, Inc.'s sales in Kansas under the Kansas Compensating Tax Act, K.S.A. 79-3701 et seq., are questions of law over which an appellate court's review is unlimited.

Martin I. Eisenstein, of Brann & Isaacson, Lewiston, Maine, argued the cause, and David W. Bertoni, of the same firm, and S. Lucky DeFries and Jeffrey A. Wietharn, of Coffman, DeFries & Nothern, Topeka, were with him on the briefs, for appellant Scholastic Book Clubs, Inc.

James A. Bartle, of Kansas Department of Revenue, argued the cause, and Cathleen M. Reeder, of the same agency, was on the brief, for appellee Kansas Department of Revenue.

LOCKETT, Justice.

Scholastic Book Clubs, Inc. (Scholastic), an out-of-state based business, sells books at discount prices to elementary school teachers and students throughout the United States. The Kansas Department of Revenue (KDR) assessed a use tax on the gross receipts of Scholastic's sales in Kansas under the Kansas Compensating Tax Act (KCTA), K.S.A. 79-3701 et seq. The tax was upheld by the Director of Taxation (Director). Scholastic appealed to the Board of Tax Appeals (BOTA), claiming it is not subject to the compensating tax because it is not a retailer doing business in this state and does not have a nexus with this state. BOTA affirmed the order of the Director, affirming the assessment. Scholastic appealed. The appeal was transferred to this court on the KDR's motion.

The parties stipulated to the relevant facts. Scholastic is a Missouri corporation with its principal offices and distribution center in Missouri. Scholastic sells books, videotapes, and audio tapes to primary and secondary school students throughout the United States, including Kansas. Scholastic maintains no offices, warehouses, or other facilities in Kansas. Scholastic has neither bank accounts in Kansas nor a contractual relationship with any banks or financial institutions in Kansas. No Scholastic employees conduct Scholastic's business in Kansas. Scholastic markets its books by mailing catalogs to schools and teachers in Kansas. The catalogs are sent through the United States mail from locations outside Kansas. Several hundred Kansas schools, and many Kansas teachers and other school representatives, participate yearly in the purchases of books and tapes by students from Scholastic. The written material given to the teachers specifically informs the teachers they are not Scholastic's expressed or implied agents. Scholastic included the language denying a delegation of authority only after a California court held it was responsible for collecting and remitting use tax in California. See Scholastic Book Clubs, Inc. v. State Bd. of Equalization, 207 Cal.App.3d 734, 255 Cal.Rptr. 77 (1989).

Scholastic's catalogs describe the various books and tapes which Scholastic offers for sale and lists the price for each item. The catalogs contain order forms, which teachers and other school personnel distribute to students. A message to parents is provided on each student order form directing the parent to "[c]heck the titles your child wants. Put this order form and payment in an envelope for your child's teacher." When teachers receive the student order forms, they consolidate the orders onto a classroom order form. Tables are provided with the classroom order form to assist the teachers in the computation of the total paid items and the total amount due. The books and tapes ordered by the teachers for their students are shipped by common carrier and other providers of interstate commerce from Scholastic's facilities in Missouri to the Kansas schools and teachers. Teachers or other school personnel receive the materials ordered and distribute the books and tapes to the proper students.

As part of its marketing plan, Scholastic offers "Free Classroom Bonuses" through a "Classroom Bonus Plan." Bonus points are provided based upon the amount of the classroom order and, as specified in the classroom order form, are redeemed for books in the catalog or bonus items set forth in the order material, or in Scholastic's "Bonus Catalog for the Classroom." The classroom order form advises the teacher or school personnel placing the student orders of the bonus points that are credited as a result of the order. The bonus catalog is sent to the teachers or other school personnel in conjunction with the books and tapes catalog. Although the bonus catalog states that the bonus points are awarded to the class, Scholastic makes no effort to insure compliance, but instead relies upon the good faith of the teachers or school personnel to use of the bonus points properly.

The KDR examined the books and records of Scholastic for the period June 1, 1987, through January 31, 1991. On June 21, 1991, the KDR issued a use tax assessment in the amount of $276,006, including interest and penalties, against Scholastic. Scholastic requested a hearing before the Director of Taxation. The Director appointed a "designee" to hear the matter. For simplicity, the designee is referred to as "Director."

Scholastic's argument to the Director was twofold. First, Scholastic contended that the teachers act on behalf of the students rather than on behalf of Scholastic. Scholastic argued no agency or representative relationship is created with the teachers because the elements of an expressed or implied contractual agreement, including a meeting of the minds and consideration, are not satisfied. Second, Scholastic argued that the teachers do not act under its authority because it specifically denied it was entering into an agency relationship with the teachers.

The KDR, on the other hand, argued that the teachers are part of Scholastic's Kansas sales force, acting as agents or representatives under the authority of Scholastic. The KDR pointed out that Scholastic gives the teachers authority to "hand out copies" of the materials, to "recommend" appropriate books, to "collect the students' orders and tally each order," to "mail your order and payment," and to "distribute books." It argued that Scholastic not only directs the teachers to act, it accepts the benefits of their sales and issues bonus points as consideration for their services.

The KDR asserted that having an agent or a representative in the state within the meaning of K.S.A.1995 Supp. 79-3702(h) does not require a formalistic contract establishing an agency relationship. In addition, the KDR argued that a factual analysis was unnecessary since Scholastic is estopped under Kansas law from denying the agency relationship. This argument was based upon the rationale that a principal cannot receive and retain the benefits of a transaction and, at the same time, deny the authority of the agent to enter into the transaction.

The Director first observed that in Kansas, taxation is the rule...