The Georgia Tax Tribunal, in its first published decisions in more than a year, held that: (1) Scholastic Book Clubs has nexus in Georgia and must collect sales tax; and (2) a taxpayer’s election of one tax credit for creating jobs instead of an alternative credit cannot be changed in later tax years. Scholastic Book Clubs, Inc. v. Riley, No. 155237 (Ga. Tax Tribunal Feb. 14, 2017); Sewon America, Inc. v. Riley, No. 1627180 (Ga. Tax Tribunal Jan. 24, 2017).
Remote Seller Nexus Case
In the Scholastic Book Clubs case, the Tax Tribunal held that Scholastic, a remote seller with limited connections to Georgia, has nexus in Georgia and must collect sales tax.
Background. Scholastic sells books and educational materials by mail order and the Internet to Georgia purchasers. Scholastic mails catalogs and inventory into Georgia to teachers who place and receive orders on behalf of their students. No contractual relationship exists with the teachers, and Scholastic does not pay them. Although Scholastic has no property in Georgia, its parent company has a distribution center in the state.
Statutory “Dealer.” The Tax Tribunal determined that Scholastic is a statutory dealer that must collect sales tax on three independent grounds:
- Soliciting business through in-state representatives. Scholastic “solicits business” in Georgia through teacher “representatives” and is thus a dealer under O.C.G.A. § 48-8-2(8)(H). Although teachers and parents who solicit orders do not have a contractual relationship or receive remuneration from Scholastic, the Tribunal concluded the teachers were “representatives” since only the teachers could place orders, not the general public.
- Engaging in regular solicitation of the Georgia market beyond mail-order sales. Scholastic “engages in the regular or systematic solicitation of a consumer market” in Georgia and its activity is not limited to mail-order sales, making it a dealer under O.C.G.A. § 48-8-2(8)(I). By targeting specific Georgia schools and teachers, offering “bonus points” for sales, and paying for a Georgia teacher to attend a conference, the Tribunal concluded that Scholastic acted as more than just a mail-order company.
- Having affiliate nexus. Scholastic has two affiliates with a distribution center in Georgia and common intellectual property, making Scholastic a dealer under Georgia’s affiliate nexus statute, O.C.G.A. § 48-8-2(8)(K). The affiliates sell similar products and have similar trade names and trademarks.
Constitutional Nexus. Additionally, the Tribunal held that Scholastic has constitutional nexus “through its reliance on Georgia [teachers] to solicit and maintain a market in Georgia.” The Tribunal rejected Scholastic’s argument that it lacked a physical presence in the state under Quill v. North Dakota, 504 U.S. 298 (1992), finding that the teachers’ presence could be attributed to Scholastic for constitutional nexus purposes.
Eversheds Sutherland Observation
This is the first case to apply Georgia’s expanded definition of “dealer” after several legislative amendments broadened the definition over the past few years. In the decision, Judge O’Neal seemed heavily influenced by Scholastic’s prior adverse court decisions from other states (Alabama, California, Connecticut, Kansas and Tennessee). See Scholastic Book Clubs, Inc. v. Ala. Dep’t of Revenue, No. S. 14-374 (Ala. Tax Tribunal Mar. 25, 2016); Scholastic Book Clubs Inc. v. Connecticut, 38 A.3d 1183 (Conn. 2012); Scholastic Book Clubs, Inc. v. Farr, 373 S.W.3d 558 (Tenn. Ct. App. 2012); In re Scholastic Book Clubs, Inc., 920 P.2d 947 (Kan. 1996); Scholastic Book Clubs, Inc. v. State Bd. of Equalization, 255 Cal. Rptr. 734 (Cal. Ct. App. 1989). But see Scholastic Book Clubs, Inc. v. Michigan, 567 N.W. 2d 692 (Mich. App. 1997).
Georgia Jobs Tax Credit Election Case
In the Sewon America case, the Tax Tribunal held that a taxpayer is precluded from changing the type of jobs tax credit it claimed for particular jobs in later tax years.
Background. Georgia law provides two primary tax credits that can be claimed when new jobs are created in the state: the Jobs Tax Credit (JTC) under O.C.G.A. §§ 48-7-40 and 48-7-40.1 and the Quality Jobs Tax Credit (QJTC) under O.C.G.A. § 48-7-40.17. The two credits are mutually exclusive, so that only one credit or the other can be claimed for any particular new job.
Sewon America, a Georgia auto parts manufacturer that created more than 750 jobs in Georgia, originally claimed the JTC on its 2010, 2011, 2012 and 2013 income tax returns. Sewon had losses, and thus no Georgia income tax liability, preventing it from utilizing the JTC. As a result, Sewon filed an amended 2013 return changing its election from the JTC to the QJTC and filed an original 2014 return claiming the QJTC, so that it could utilize the credit against its withholding tax liabilities. After Sewon obtained an unfavorable private letter ruling, the Department of Revenue denied the 2013 and 2014 QJTCs and Sewon appealed.
Tax Tribunal’s Decision. The Tax Tribunal held that under the Department’s QJTC regulations, a taxpayer is bound by its election to claim either the JTC or the QJTC for a particular new job and cannot change to a different credit in a later tax year. The Tribunal rejected Sewon’s argument that the Department’s regulation was invalid, applying a deferential Chevron standard of review. See Chevron U.S.A., Inc. v. Nat. Res. Def. Council, 467 U.S. 837 (1984). Although the legislature used the phrase “irrevocable election” in several other tax credit statutes and chose not to do so in the QJTC statute, the Tribunal determined that the JTC/QJTC election was nevertheless binding.
Eversheds Sutherland Observation
The decision rests on significant deference to the Department’s interpretation of its regulation. The legislature intended to only allow one credit per job. The statute is silent, however, on whether the election should be irrevocable, and comparing the QJTC statute to other tax credit statutes suggests that the election was not intended to be irrevocable. Georgia courts have rarely afforded the Department’s regulations Chevron deference in the manner applied by the Tax Tribunal. Additionally, a recent Georgia Tax Tribunal decision cautioned against “unthinking reliance on the language of a regulation or undue deference to asserted administrative expertise,” in a case in which the Department had disavowed its own regulation. See Inglett & Stubbs Int’l, Ltd., v. Riley, No. Tax-IIT-1340253 (Ga. Tax Tribunal Feb. 11, 2015). Chevron deference is also under attack in Congress, as the U.S. House of Representatives recently passed the Regulatory Accountability Act of 2017 (H.R. 5), which would effectively overrule Chevron, if enacted .
The Tribunal leaves open the possibility that a taxpayer could be permitted to change its JTC/QJTC election if the initial credit year remains open under the three-year statute of limitations. The JTC is allowed each year for five years, and Sewon’s “Year 1” was closed.