Scholastic Book Clubs, Inc. v. Comm'r of Revenue Servs., No. 18425.

• Citation: 38 A.3d 1183,304 Conn. 204
• Decision Date: 27 March 2012
• Docket Number: No. 18425.
• Court: Supreme Court of Connecticut
• Parties: SCHOLASTIC BOOK CLUBS, INC. v. COMMISSIONER OF REVENUE SERVICES.

304 Conn. 204

38 A.3d 1183

SCHOLASTIC BOOK CLUBS, INC.

v.COMMISSIONER OF REVENUE SERVICES.

No. 18425.

Supreme Court of Connecticut.

Argued Oct. 24, 2011.Decided March 27, 2012.

Gregory T. D'Auria, senior appellate counsel, with whom were Louis P. Buccari, first assistant commissioner and general counsel, and, on the brief, George Jepsen, attorney general, and Richard Blumenthal, former attorney general, for the appellant (defendant).

George S. Isaacson, pro hac vice, with whom were Dominic Fulco III and, on the brief, David W. Bertoni, pro hac vice, for the appellee (plaintiff).

ROGERS, C.J., and NORCOTT, PALMER, ZARELLA, McLACHLAN, EVELEIGH and HARPER, Js.

ZARELLA, J.

The principal issue in this tax appeal is whether the plaintiff, Scholastic Book Clubs, Inc.,¹ is liable under the Sales and Use Taxes Act (act), General Statutes § 12–406 et seq., for more than $3 million in sales and use tax deficiency assessments imposed by the defendant, the commissioner of revenue services (commissioner). The commissioner claims that the trial court incorrectly determined that the taxes could not be imposed because the schoolteachers are not the plaintiff's “representative[s]” within the meaning of General Statutes § 12–407(a)(15)(A)(iv) ² and the schoolteachers' administrative tasks do not supply the substantial nexus required between the plaintiff and the state to justify imposition of the taxes under the commerce clause of the United States constitution.³ The plaintiff responds that the trial court correctly determined that the taxes could not be imposed under either of the foregoing theories. We agree with the commissioner and, accordingly, reverse the judgments of the trial court.

The following relevant findings of fact are set forth in the trial court's memorandum of decision. The plaintiff is a Missouri corporation with its principal place of business in Jefferson City, Missouri. The plaintiff also is a wholly owned subsidiary of Scholastic, Inc. Both the plaintiff and Scholastic, Inc., are for profit companies. Scholastic, Inc. employees are allocated to the plaintiff for staffing purposes. Although Scholastic, Inc. products are available through direct purchase or in retail stores, the plaintiff distributes its books and related items only through schools.

The plaintiff has been in operation for sixty years and has “a known reputation” in the elementary and secondary school community. In Connecticut, approximately 14,000 teachers participate in the plaintiff's programs.

The plaintiff has identified four categories of students, and a catalog is designed for each. Early childhood students are in the “firefly” group. Kindergarten and first grade students are in the “seesaw” group. Students in grades two and three are in the “lucky” group, and students in grades four, five and six are in the “arrow” group.

The plaintiff does not own or lease any real estate or personal property in Connecticut. The plaintiff also has no principal place of business, temporary facility, office, telephone number, mailing address or bank accounts in Connecticut. In addition, the plaintiff has no employees, representatives, ⁴ independent contractors, salesmen, agents, canvassers, solicitors or other personnel in the state. It does not advertise in the local media or engage in direct advertising to Connecticut customers, and has not communicated with residents of Connecticut by means other than mail or Internet from locations outside the state. Moreover, it has never used state or local government services, such as the police or fire departments, and does not, and did not, use Connecticut vendors to design, prepare, print, store or mail catalogs describing its products. The plaintiff has not retained any security interests in any product sold to Connecticut customers and has no franchisees or licensees operating in Connecticut. The plaintiff does not conduct credit investigations or collection activities in Connecticut and does not solicit orders by telephone, computer, cable or other communication systems in Connecticut.

The plaintiff conducts its mail order business by mailing catalogs monthly during the school year to classrooms at nursery, primary and secondary schools throughout the United States, including Connecticut. Solely as a result of their academic interest in choosing books and other items for their students and themselves, Connecticut teachers play the following role in the plaintiff's sales and distribution process.

Initially, the classroom teacher receives a grade appropriate catalog from the plaintiff. The catalog contains flyers to be distributed to students. It also contains an order form and a memorandum, or “teacher memo,” describing the bonus point system that a completed order brings to the classroom. The “teacher memo” states that no agency relationship is created between the teacher and the plaintiff.

Whether a teacher decides to participate in the program or any other book club is entirely the teacher's decision. If a teacher decides to participate, the teacher distributes the flyers to the students, who are expected to bring the flyers home to their parents. If there are not enough flyers, the teacher contacts the plaintiff for more. Sometimes, the teacher sends a “student memo” to the parents, a draft of which is supplied to the teacher by the plaintiff. The teacher also may purchase books from the catalog for the classroom or for gifts to students.

The individual selections are returned to the teacher with cash or checks from the parent or parents. A student with allowance money also may pay for the order with cash. 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. If a book is unavailable, the plaintiff includes a coupon for the affected student, or sometimes a different book. The plaintiff attempts to fill the order eventually. If the order cannot be filled, the teacher receives a refund check for the student or parent. Students with torn or defective books also receive a refund check from the plaintiff, which is sent to the teacher.

A classroom may receive bonus points, which do not expire, based on the number of books ordered each month. Teachers, not parents or students, decide how the bonus points will be spent, and parents are not informed regarding the teachers' redemption choices. The bonus points may be redeemed for book catalog items or from a separate catalog for goods that require a greater number of bonus points. These items include, inter alia, telephones, fax machines, televisions, small refrigerators, and microwave and toaster ovens. The “items catalog” provides that the teacher may redeem bonus points for “classroom use” only. Because the plaintiff does not police this requirement, a teacher could obtain a television, for example, and use it at home. The plaintiff trusts the teachers, however, and does not know of any patent abuse of the bonus point system.

New teachers or teachers new to a grade receive an additional letter from the plaintiff in September of each school year explaining the program. They also receive a catalog known as a “slug,” which contains the same information as that sent to established teachers but omits the teacher's name. The plaintiff suggests that the new teacher call its offices in Missouri to “walk through” the process. The new teacher then learns about grade specific catalogs and special catalogs, such as those oriented to history or African–American studies. There is no restriction that would prohibit a teacher from giving a flyer to a teacher trainee, neighbor or friend.

There is no limit on the size or dollar amount of an order, but the plaintiff audits certain orders. For example, when an order contains a request for a large quantity of books or the same book, the plaintiff may conduct an audit to determine whether the teacher may be conducting a side business.

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.

On March 1, 2003, the commissioner imposed a sales and use tax deficiency assessment on the plaintiff in the amount of $2,048,339.69, plus interest and penalties, for the period of June 1, 1995, through May 31, 2002. On September 11, 2006, the commissioner imposed an additional sales and use tax deficiency assessment on the plaintiff in the amount of $1,250,403.11, plus interest and penalties, for the period of June 1, 2002, through May 31, 2005, for a total tax assessment of $3,298,742.80. The plaintiff protested the assessments pursuant to General Statutes § 12–418.⁵ On January 10, 2007, the commissioner issued a written decision in each case upholding the assessments because the plaintiff had sold its products by using “in-state representatives ... pursuant to ... § 12–407(a)(15)(A).”

Following the plaintiff's appeals from the commissioner's decisions, the case was tried to the court on October 14 and 15, 2008. On April 9, 2009, the court rendered judgments sustaining the plaintiff's appeals. The court determined that the term “representative,” as used in § 12–407(a)(15)(A)(iv), means “a...