State Court of Appeals reverses lower court in large tax case

Department of Revenue wins right to pursue $6M liability

The State Court of Appeals has reversed a lower court’s decision to not tax a nationally recognized education company for conducting online and mail order business with its customers in Tennessee.

At issue was nearly $6 million in sales and use taxes — including other penalties and fees — the state’s Department of Revenue had determined that Missouri-based Scholastic Book Clubs Inc. owed on amounts earned over a six-year period.

The Jan. 27 state Court of Appeals opinion written by Judge David R. Farmer details that court’s reasoning for reversing the trial court’s decision to relieve Scholastic of its mammoth $5.7 million sales and use tax bill. The company booked approximately $34 million in revenue from its Tennessee customers from Jan. 1, 2002 through May, 31, 2008.

Scholastic was represented by David W. Bertoni, partner in the Lewiston, Maine law firm of Brann & Isaacson, and Charles A. Trost, G. Michael Yopp and Christopher Wilson from the Nashville office of Waller Lansden Dortch & Davis. The attorneys were not able to comment on this case given that proceedings may not be complete if the state’s Supreme Court gets involved. It’s unclear whether the decision to approach the state’s highest court has been made.

In Jan. 2009, the Tennessee Department of Revenue conducted an audit of Scholastic's Tennessee sales, which resulted in the large assessment rendered by the department. Scholastic officials met with Revenue representatives the same month and were told they had 90 days to challenge the assessment.

In March 2009, Scholastic did just that in Davidson County Chancery Court, asserting that the business conducted in the state was “exclusively by mail order and via the Internet and that it was not liable for sales and use taxes in Tennessee.” Scholastic further asserted that no agency relationship existed between it and the teachers, students and the schools it served. The Chancery Court ruled in favor of the Department of Revenue, but upon appeal to the trial court, Scholastic gained the upper hand and won by summary judgment.

The dispute over requiring out-of-state companies to pay sales and use taxes just like a state-based company would isn’t new.

Last October, Gov. Bill Haslam granted mammoth retailer Amazon a two-year tax reprieve on collecting sales taxes here. Later the same month the state’s Attorney General issued an opinion advising counsel to step carefully when litigating tax court issues given the high cost of litigation and the resulting penalties levied against non-prevailing parties in the form of costs and attorneys fees ordered by the court.