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Alabama Department of Revenue v. Scholastic Book Clubs, Inc.

Alabama Court of Civil Appeals

September 7, 2018

Alabama Department of Revenue
v.
Scholastic Book Clubs, Inc.

          Appeal from Montgomery Circuit Court (CV-16-900562)

          DONALDSON, Judge.

         The Alabama Department of Revenue ("the department") appeals from a judgment of the Montgomery Circuit Court ("the trial court") reversing the decision of the Alabama Tax Tribunal ("the tribunal") upholding the final assessment of use tax pursuant to § 40-23-60, Ala. Code 1975, et seq., against Scholastic Book Clubs, Inc. ("SBC"). The question presented in this appeal is not whether the State of Alabama may impose an obligation to collect and remit use tax on SBC for the activities it conducts, but whether it did so pursuant to the statutes that were applicable during the period involved in this case as argued by the department. For the reasons set forth below, we hold that SBC's activities did not subject it to an obligation to collect and remit use tax based on the arguments presented, and we affirm the judgment of the trial court vacating the department's assessment of use tax against SBC.

         On March 25, 2016, the department entered a final assessment that SBC owed unpaid Alabama use tax of $815, 346.79, including interest for activities of SBC during the tax periods beginning April 1, 2007, and ending March 31, 2013. On March 27, 2014, SBC filed a notice of appeal of the assessment with the Administrative Law Division of the department pursuant to § 40-2A-7(c)(5), Ala. Code 1975, and, pursuant to § 40-2B-2, Ala. Code 1975, the tribunal upon its creation, assumed jurisdiction of the appeal of the final assessment. SBC contended that it did not have an obligation to collect and remit use tax under the applicable Alabama statutes. In the alternative, SBC contended that it did not have a constitutional nexus in Alabama sufficient for the state to impose an obligation to collect and remit use tax based on its activities and that the department cannot require SBC, as an affiliate of a in-state vendor, to register to collect and remit use tax for the in-state vendor under the facts of this case. In its answer, the department contended that the final assessment of use tax against SBC was correct based upon § 40-23-68, Ala. Code 1975, and Ala. Admin. Code (Dep't of Revenue), Rule 810-6-2-.90.01(4)(c).

         Before the tribunal, the parties filed a joint stipulation of facts that included the following:

"1. SBC is a corporation incorporated under the laws of the State of Missouri and headquartered in Jefferson City, Missouri.
"2. SBC sells books and other educational materials (excluding textbooks) by mail order and via the Internet to Alabama School teachers, Alabama parent educators, Alabama parents, and Alabama students from locations outside of Alabama.
"3. All of SBC's customers are mailed the same catalogs, order forms, and promotional materials by SBC from outside of Alabama.
"4. SBC has a national business and sells books and educational materials to customers located in all fifty states.
"5. SBC does not have a retail store located in Alabama.
"6. SBC does not have any offices located in Alabama.
"7. SBC is not registered to do business in Alabama.
"8. SBC does not maintain a mailing address or local telephone number in Alabama.
"9. SBC does not own or control any entities doing business in Alabama and has no franchises or licensees in the state.
"10. Alabama schoolteachers and parent educators do not have written contracts with SBC.
"11. SBC distributes catalogues, order forms, and promotional coupons each month to Alabama schools (in care of classroom teachers) and Alabama home schools (in care of parent educators) via the United States Postal Service only from locations outside of Alabama. SBC also provides an online marketplace through its website.
"12. Alabama schoolteachers and parent educators who receive SBC catalogues and order forms each month may disseminate the SBC catalogues and order forms to their students if they wish, but are under no obligation to do so. As described below, orders from schoolteachers, parent educators, and students are sent to SBC together on a single master order form.
"13. If an Alabama schoolteacher or parent educator decides to hand out SBC catalogues and order forms in their classrooms to their students, then the Alabama teacher or parent educator is the responsible adult who facilitates the ordering process by consolidating all student, teacher, and parent educator orders onto the single master order form, collecting money for student orders, and mailing the master form and money (including the teacher's/parent educator's money for his or her own orders) to SBC's offices in Missouri for fulfillment of the order.
"14. From its fulfillment center in Missouri, SBC mails the products requested on the master order forms to Alabama classrooms (at the school address) and home-schools to the attention of the responsible adult for each respective transaction (either a schoolteacher or a parent educator). The responsible adult in receipt of the products takes responsibility for accepting and distributing them in his or her classroom, a process in which SBC has no role. Products ordered by schoolteachers and parent educators are mailed by SBC in the same packages as products ordered by the students.
"15. Alabama teachers and parent educators, as the responsible adults, may communicate with SBC with complaints or concerns regarding their classroom orders. For example, they may communicate with SBC should the products received differ from the products requested on the master order form or should there be a discrepancy regarding the amount due for the order.
"16. Alabama classrooms whose teachers or parent educators serve as responsible adults for SBC transactions receive bonus points that may be redeemed for educational materials and books to be used solely in the classroom. Should a teacher leave a school for any reason, including for a new teaching position at a different school, bonus points remain with the classroom that earned them. [SBC] explains in its catalogues that bonus points cannot be used to obtain items for the personal use of teachers or parent educators.
"17. Alabama teachers and parent educators receive notifications from SBC regarding the points balance earned by their classrooms from placing paid orders with SBC.
"18. Bonus points may be redeemed online, by phone, or by mail or fax.
"19. Products distributed as a result of bonus point redemption are sometimes mailed to the classroom in the same box as paid purchases and are sometimes mailed to the classroom separately.
"20. Bonus point orders that are shipped separately are, like products paid for by teachers and students, mailed to Alabama classrooms to the attention of the Alabama teacher or parent educator assigned to that classroom.
"21. The number of Alabama schools, including public, private, Catholic, and home schools, that placed orders with SBC during the years included in the final assessment are as follows: 1, 933 in 2007; 1, 955 in 2009; 1, 942 in 2010; 1, 909 in 2011; 1900 in 2012; and 1, 832 in 2013.
"22. The number of Alabama classrooms, including public, private, Catholic, and home school classrooms, that placed orders with SBC during the years included in the final assessment are as follows: 13, 977 in 2007; 12, 936 in 2008; 11, 439 in 2009; 11, 527 in 2010; 10, 581 in 2011; 9, 917 in 2012; and 9, 518 in 2013.
"23. The number of bonus points awarded to Alabama classrooms, including public, private, Catholic, and home school classrooms, that placed orders with SBC during the years included in the final assessment are as follows: 23, 657, 826 in 2007; 20, 898, 209 in 2008; 15, 848168 in 2009; 20, 528, 393 in 2010; 15, 915, 048 in 2011; 16, 625, 173 in 2012; and 16, 167, 437 in 2013.
"24. The number of bonus points redeemed by Alabama classrooms, including public, private, Catholic, and home school classrooms, during the years included in the final assessment are as follows: 20, 889, 833 in 2007; 18, 156, 113 in 2008; 15, 770, 772 in 2009; 19, 288, 736 in 2010; 16, 065, 543 in 2011; 15, 114, 790 in 2012; and 16, 315, 310 in 2013.
"25. The value, both fair market and cost, of goods distributed as a result of the redemption of bonus points by Alabama classrooms, including public, private, Catholic, and home school classrooms, during the years included in the final assessment are as follows: $961, 330 (market value) and $163, 426 (cost) in 2007; $832, 987 (market value) and $141, 608 (cost)in 2008; $673, 114 (market value) and $114, 429 (cost) in 2009; $798, 314 (market value) and $135, 713 (cost) in 2010; $507, 923 (market value) and $86, 347 (cost) in 2011; $424, 069 (market value) and $72, 092 (cost) in 2012; and $488, 281 (market value) and $83, 008 (cost) in 2013.
"26. The value, both fair market and cost, of goods distributed as a result of the redemption of bonus points by Alabama home school classrooms during the years included in the final assessment are as follows: $5, 686 (market value) and $967 (cost) in 2007; $4, 649 (market value) and $790 (cost)in 2008; $3, 464 (market value) and $589 (cost) in 2009; $4, 008 (market value) and $681 (cost) in 2010; $2, 737 (market value) aid $465 (cost) in 2011; $1, 813 (market value) and $308 (cost) in 2012; and $2, 626 (market value) and $446 (cost) in 2013.
"27. Scholastic Inc. is SBC's parent corporation. SBC is wholly-owned by Scholastic Inc.
"28. Scholastic Inc. entered into a contract with the State of Alabama through its Board of Education to furnish certain math-related textbooks and programs from June 1, 2012, through May 31, 2018. None of the products sold in connection with this contract are offered for sale or sold by SBC. This contract did not indicate that subsidiaries or affiliates of Scholastic Inc. were registered for or collecting and remitting Alabama taxes.
"29. Scholastic Inc. is Scholastic Book Fairs, Inc.'s parent corporation. Scholastic Book Fairs, Inc. is wholly-owned by Scholastic Inc.
"30. Scholastic Book Fairs, Inc., which is located in Lake Mary, Florida, supplies books for book fairs held at schools throughout the United States, including in Alabama.
"31. On or about September 11, 2013, the Department entered a Preliminary Assessment against SBC for the periods from April 1, 2007, through March 31, 2013, for consumer's use tax.
"32. SBC timely filed a Petition for Review of the Preliminary Assessment with the Department challenging the grounds for the Preliminary Assessment on ...

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