Connecticut Wants To Be Sure Elementary Students Learn To Pay Sales Tax On Books

Originally published on forbes.com.

I know states have a legitimate need for revenue, but squeezing pennies out of little kids buying their first books is really taking it too far.  That's what the Connecticut Department of Revenue will be doing thanks to this recent decision by the Supreme Court of Connecticut: SCHOLASTIC BOOK CLUBS, INC. v. COMMISSIONER OF REVENUE SERVICES

Do you remember the first book you bought with your own money ? I sure do - Thirty Seconds Over Tokyo by Captain Ted Lawson (Van Johnson played him in the movie

I even remember the problem I had writing the book report, because you had to say where the story was set.  Captain, then Lieutenant, Lawson went pretty much all around the world, leaving his B-25, The Ruptured Duck, and one of his legs in China.  By the way they really got the story of the Doolittle Raid totally wrong in the movie Pearl Harbor

I bought Thirty Seconds Over Tokyo at a fund raising auction, but I bet a lot of kids bought their first books from Scholastic Books Inc. I remember getting the book club brochures and I remember getting them for my own kids. I helped raise a couple of Barnes and Nobles junkies so Scholastic was not a big part of their book buying experience, on a percentage basis, but there must be many kids for which it is. I never realized how the whole thing worked and how much extra work it involves for the teachers. Hey, if you can read this, thank a teacher. The case gives a pretty detailed summary of the system.

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.

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. [Hey, don't forget paper routes and collecting deposit bottles.] 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.

It seems like Scholastic did a pretty good job of avoiding nexus, but the Achilles heel of the system was the teachers. Here is how Scholastic looked at it:

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.

That is not how Revenue Services and the Court saw it.

...we conclude that the Connecticut schoolteachers who participate in the plaintiff's program may be considered its representatives. The trial court found that the plaintiff is a “for profit” mail order business that distributes its books and related products “only through schools,” that approximately 14,000 teachers “participate in [the plaintiff's] programs” and that the plaintiff has no other personnel or means of selling its products in Connecticut. Accordingly, the teachers serve as the sole conduit through which the plaintiff advertises, markets, sells and delivers its products to Connecticut schoolchildren.

It seems like adding sales tax probably would not upset the whole Scholastic business model that much and of course Scholastic is stuck paying the 3 million or so it did not collect from the kids. I still don't like it, at all.  Sure the state is getting a big revenue hit from them on this case, but from here on in it will be the kids paying.  I'm really annoyed at Connecticut for chasing this one grabbing a few pennies from some kid who is buying his first book. It is even more aggravating than Chautauqua  County in Kansas saying that the Boy Scouts are not a humanitarian organization. At least the Court got that one right.

What's Next ?

I have to admit that the case has awakened my dark side. People are making big money ratting out tax cheats to the IRS, something I find very disturbing. Anyway if the State of New Jersey ever gets into that game I have something for them. Most little kids think all adults are old, but the first graders at Saint John's in Fairview in 1959 could tell that Sister Ellen Michael was young. That's because the rest of the Franciscans teaching and terrorizing the budding juvenile delinquents really were old. Like maybe a couple of them were recruited by Saint Francis. Anyway Sister Ellen Michael used to sell us pretzel rods for $.02 a piece and I'm sure she wasn't collecting sales tax. With all the interest and penalties I'll bet that would really add up. The mother house used to be in Peekskill, NY so it might not be that hard to hunt her down. Before you haul her off though, please thank her for teaching me how to read.

You can follow me on twitter @peterreillycpa.