U.S. Supreme Court Asked to Review Connecticut Nexus Ruling
The U.S. Supreme Court has been asked to review a Connecticut Supreme Court decision handed down in March 2012, which held that an out-of-state mail order company selling books to teachers and students was liable for sales and use tax. The Connecticut Court found that the teachers acted as the corporation’s representatives for purposes of establishing nexus.
Specifically, Scholastic Book Clubs, Inc. v. Commissioner of Revenue Services, Conn. S. Ct., Dkt. No. SC 18425, 03/27/2012, 304 Conn 204, 38 A3d 1183 (2012), petition for cert. filed, U.S. S.Ct., 06/26/2012, held that the teachers were in-state representatives of Scholastic due to the fact that they served as the sole conduit through which the corporation advertises, markets, sells, and delivers its products to Connecticut schoolchildren. Participating teachers (note that teachers were NOT required to participate), distributed the corporation’s catalogs, flyers, order forms, and other materials in class. Scholastic is able to sell its products in Connecticut only through the teachers who participate in its program, and otherwise had no further contact or presence within the State.
The case stands for the principle that a company may well trigger sales tax nexus in a state due to the presence of an "agent" acting on its behalf, even in the situation where the agent is not even paid by the vendor and is rendering solely an indirect benefit to the company. For example, a computer software vendor may contract with independent contractors who are paid by their customers to perform patches and fixes on installed software in a remote jurisdiction; or an advertising agency may contract with a firm who is paid by the advertiser to conduct focus groups in various states and to furnish data to the agency. Such contacts may or may not trigger sales tax nexus. Companies should be sensitized to the general climate in the states where the slightest physical presence, even that of an indirect agent, can trigger nexus and cause a sales tax collection obligation.
At the time of the decision, Connecticut Department of Revenue Services Commissioner Kevin Sullivan stated that “the decision is also a masterful review of the state of constitutional law under the federal Commerce Clause and the practical circumstances in this case establish sufficient contacts or nexus within Connecticut to uphold taxability.” The Supreme Court may soon have a chance to disagree/agree.