Connecticut Gets Millions In Uncollected Tax

School Book Sales Could Soon Include Sales Tax

A U.S. Supreme Court non-decision this week will mean more than $10 million for Connecticut's coffers right away, and beyond that could embolden the state to go after a class of taxes that has been fuzzy but is growing clearer.

The issue is how and whether the state should collect sales taxes for goods ordered from out of state. It's worth tens of millions of dollars, perhaps hundreds of millions, and Connecticut is becoming one of the more aggressive states trying to capture sales taxes from the online and mail-order trade.

The case is Scholastic Book Clubs Inc. vs. the Connecticut Commissioner of Revenue Services, in which the Missouri-based company argued that the state's $3.3 million sales tax levy was improper.

All those books Scholastic sells to children through 14,000 Connecticut teachers amount to direct mail-order sales, the company argued. The teachers were, in effect, customers who earned points for buying books. That would mean the company was not obligated to collect the 6 percent sales tax, now 6.35 percent.

For its part, the state argued that the teachers acted as, and were "representatives" of, the company and therefore fell under a state law that requires any company with local agents or representatives to collect the tax.

To be clear, the issue here is not whether the books are subject to the state sales tax; they are. For Connecticut shoppers not paying those taxes now, a victory by the state may not be welcome news.

But fair is fair. Without aggressive state tax collection in mail-order and online shipping transactions, those customers get a discount, in effect receiving a subsidy. And that could mean that more local retailers — the same ones Gov. Dannel P. Malloy is showering with money so they can stay afloat — close up shop.

The legal question is whether the bookseller must collect the tax, or else the buyer of the book declares the purchase and pays the tax directly. Since no citizen other than Revenue Services Commissioner Kevin B. Sullivan himself ever makes such a voluntary declaration — OK, there are a few others — in reality, the case is about whether there's a tax at all on these goods.

In 2009, Judge Henry Cohn in Superior Court in New Britain decided in favor of Scholastic. The state Supreme Court this past March unanimously reversed that decision, saying the teachers were indeed representatives of the company.

Justice Peter T. Zarella wrote in the opinion, "Although the teachers may be customers when they purchase books from the plaintiff and participate in the bonus point system to obtain additional materials, this should not obscure the fact that their principal function is to serve as the exclusive vehicle for selling the plaintiff's products to their students."

Scholastic appealed to the U.S. Supreme Court, which on Tuesday declined to hear the case. That means Scholastic must now pay a total of $8.2 million — those interest and fee charges add up quickly — and Scholastic is now likely to be hit with a levy for all of its sales since May 2005, the end date of the $3.3 million charge.

"You can certainly make the leap that they would have sales tax liability for those periods as well," said Louis Bucari, general counsel for the state Department of Revenue Services.

The issue doesn't end in Connecticut and it doesn't end with Scholastic. The company has appealed similar decisions in at least six states, Bucari said, and has won in some places.

Why did Connecticut win? The question is whether each company is "engaged in business" and has a "substantial nexus" in the state. That means they have "agents" or "canvassers" in the state, and Connecticut lawmakers, getting it right, added the word "representatives," which nailed the case.

"It's certainly a good decision that will be helpful to the department, and to taxpayers," Bucari said. "Now that we know that the department's interpretation is correct, the department would look to see if there are other businesses that have a similar model."

How many are out there? No one knows yet. Call Sullivan if you have a tip.

It's already been established that if a company has a store in the state, such as L.L. Bean, it must collect taxes on all of its mail-order business here. What states need to do is find new ways to expand the definition of "engaged in business" locally so they can collect the tax.

To that end, Connecticut was among the states that added language in 2011 to include owners of websites that benefit from click-throughs for product sales. That provision, the so-called Amazon tax, is wending its way through New York State courts, where Amazon is appealing.

Meanwhile, Amazon has severed ties with local website owners, which is too bad. But it's the price that has to be paid in the long war to tax online and mail-order sales properly.

Even if you oppose higher taxes, you should favor aggressive moves like these. The overall state tax bite doesn't have to rise. If the online and mail-order levies added up, the state could lower the sales tax rate to, say, 5 percent from 6.35 percent — which would make sense since sales taxes aren't deductible on federal income tax returns, while state income taxes are.

Scholastic, for its part, acknowledged the advantage it receives over local bookstores.

'We're disappointed that those who may be hit hardest by the actions of the Connecticut Courts will be the children and families seeking access to books at the affordable prices that Scholastic Book Clubs have offered for more than 60 years," said company spokeswoman Kyle Good, in a written statement.

Going forward, it's likely Scholastic will collect the tax directly from buyers. As for its liability for past years, the company could now go after each of you who bought books for your kids over the years, to charge the tax that it now must pay. But, Bucari said, "I don't think they could find you."

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