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NO. 12-374 In the Supreme Court of the United States SCHOLASTIC BOOK CLUBS, INC., Petitioner, v. RICHARD H. ROBERTS, COMMISSIONER OF TENNESSEE DEPARTMENT OF REVENUE, Respondent. On Petition for a Writ of Certiorari to the Court of Appeals of Tennessee BRIEF IN OPPOSITION ROBERT E. COOPER, JR. Attorney General and Reporter State of Tennessee WILLIAM E. YOUNG Solicitor General CHARLES LARRY LEWIS* Deputy Attorney General BRIAN J. RAMMING Assistant Attorney General OFFICE OF THE ATTORNEY GENERAL Tax Division P. O. Box 20207 Nashville, TN 37202-0207 (615) 741-2968 Larry.Lewis@ag.tn.gov Counsel for Respondent * Counsel of Record Becker Gallagher Cincinnati, OH Washington, D.C. 800.890.5001

i QUESTION PRESENTED Whether the Tennessee Court of Appeals correctly determined that out-of-state seller Scholastic Book Clubs, Inc. s use of thousands of Tennessee teachers and schools as its exclusive means of soliciting, communicating, delivering, and administering sales of its products to its customers in Tennessee, thus enabling it to establish and maintain a market for its products in the State, creates sufficient nexus under the Commerce Clause to support an assessment of Tennessee sales and use taxes against Scholastic Book Clubs, Inc.

ii TABLE OF CONTENTS QUESTION PRESENTED... i TABLE OF CONTENTS... ii TABLE OF AUTHORITIES... iii STATEMENT OF THE CASE... 1 REASONS FOR DENYING THE WRIT... 4 I. THE TENNESSEE COURT OF APPEALS APPLIED THE PROPER NEXUS ANALYSIS UNDER EXISTING UNITED STATES SUPREME COURT PRECEDENTS AND PROPERLY DETERMINED THAT SCHOLASTIC HAS SUFFICIENT NEXUS WITH TENNESSEE.... 6 II. STATE APPELLATE COURTS HAVE CONSISTENTLY HELD THAT SCHOLASTIC HAS SUFFICIENT NEXUS WITH THE RESPECTIVE TAXING STATES.... 11 III. SCHOLASTIC FAILS TO IDENTIFY ANY REAL ISSUE OF NATIONAL SIGNIFICANCE.... 14 CONCLUSION... 18

iii TABLE OF AUTHORITIES CASES Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)... 8, 12, 16 Hubbard v. The Shores Group, Inc., 855 S.W.2d 924 (Ark. 1993)... 13 In re Appeal of Scholastic Book Clubs, Inc., 920 P.2d 947 (Kan. 1996)... 11 Pledger v. Troll Book Clubs, 871 S.W.2d 389 (Ark. 1994)... 13 Quill Corp. v. North Dakota, 504 U.S. 298 (1992)... passim Scholastic Book Clubs, Inc. v. Connecticut Comm r of Revenue Servs., 38 A.3d 1183 (Conn. 2012), cert. denied, No. 11-1532, 2012 WL 2396881 (U.S. Oct. 9, 2012). 4, 11 Scholastic Book Clubs, Inc. v. Michigan, 567 N.W.2d 692 (Mich. App. 1997), appeal denied, 586 N.W.2d 923 (Mich. 1998)... 12 Scholastic Book Clubs, Inc. v. State Bd. of Equalization, 207 Cal. App. 3d 734 (1989)... 11 Scripto, Inc. v. Carson, 362 U.S. 207 (1960)... 8, 9, 12, 16

iv Troll Book Clubs, Inc. v. Tracy, No. 92-Z-590, 1994 WL 456090 (Ohio Bd. Tax. App. 1994)... 12 Tyler Pipe Industries, Inc. v. Washington Dep t of Revenue, 483 U.S. 232 (1987)... passim STATUTES Tenn. Code Ann. 67-6-103(a)(2) (2011)... 17 Tenn. Code Ann. 67-6-101 to -907 (2006 & 2010 Supp.)... 6 Tenn. Code Ann. 67-6-102 (25), 67-6-201, 67-6- 202, 67-6-501 to -608 (2006 & 2010 Supp.)... 6 OTHER Brief in Opposition to Petition for Writ of Certiorari, Scholastic Book Clubs, Inc. v. Connecticut Comm r of Revenue Services, No. 11-1532, 2012 WL 2396881 (U.S. Oct. 9, 2012)... 4 H.R. 2071, 112 th Cong., 1 st Sess. (2012)... 17 H.R. 3179, 112 th Cong., 1 st Sess. (2012)... 17 S. 1452, 112 th Cong., 1 st Sess. (2012)... 17 S. 1832, 112 th Cong., 1 st Sess. (2012)... 17

1 STATEMENT OF THE CASE The petitioner, Scholastic Book Clubs, Inc. (hereinafter Scholastic ), is a Missouri corporation with its principal place of business in Jefferson City, Missouri. Scholastic Book Clubs, Inc. v. Farr, 373 S.W.3d 558 (Tenn. Ct. App. 2012) (Pet. App., b2). Scholastic is engaged in the marketing and sale of books and other publications and products to students in primary and secondary schools across the United States, including customers residing in Tennessee. (Id.). Scholastic mails its catalogs and other promotional materials to primary and secondary schools on a monthly basis. (Pet. App., b9). Approximately 8,000 schools in Tennessee participated in Scholastic s program during the period in question here: January 1, 2002 through May 31, 2008 (the audit period ). (Id., b2.). Scholastic has no offices or regular employees who solicit sales in Tennessee. Instead, Scholastic s business model relies exclusively on the activities of school administrators and teachers to carry out virtually all essential business operations. Scholastic relies on the school administration to distribute its catalogs and promotional materials to the teachers and, in turn, Scholastic then depends upon the teachers to distribute its catalogs to students. (Id., b9-10, 13-14). Scholastic expects that the teachers will recommend the books listed in Scholastic s monthly catalogs to their students. The students and their parents then remit their orders and payments to the teachers, who compile the orders on a master form and then forward

2 the master form and payment to Scholastic. (Id., b13-14). All orders are processed at Scholastic s fulfillment facility in Missouri. Scholastic delivers the ordered books to the schools by common carrier. (Id., b10, 14). Scholastic again relies upon the teachers to sort and distribute ordered books to the students when they are received by the schools. (Id., b14). Scholastic expects teachers to handle all product returns and exchanges, report damaged items, and issue refunds to students. (Id.). Virtually all of Scholastic s operations, outside those few activities that are undertaken by Scholastic in Missouri, are conducted by these teachers and school employees. Students and parents are not allowed to submit orders directly to Scholastic but must use a participating teacher as a conduit for ordering, paying, receiving, and handling any resulting problems or issues. Teachers and schools work to promote Scholastic s sales not only to enhance the educational advancement of their students but also because they receive bonus points based on sales volume; these bonus points can be redeemed by the teacher in exchange for additional books for classroom use, as well as for computers and other educational items for the students use. (Pet. App., c3-4). The Tennessee Commissioner of Revenue (hereinafter Commissioner ) performed a sales and use tax audit of Scholastic for the period from January 1, 2002, through May 31, 2008 (the audit period ). (Pet. App., b2.). As a result of this audit, the Commissioner assessed Scholastic $3,647,908.45 in tax,

3 $905,239.76 in penalty, plus interest, based on taxable sales in Tennessee in the amount of $34,623,151 during the audit period. (Id.). On March 27, 2009, Scholastic filed suit challenging the Commissioner s assessment, alleging that Tennessee lacks constitutional nexus under the Commerce Clause of the United States Constitution. 1 The case was heard on cross-motions for summary judgment. The trial court granted Scholastic s motion for summary judgment and abated the assessment of tax in its entirety. The Commissioner then appealed the trial court s decision to the Tennessee Court of Appeals. The Tennessee Court of Appeals issued its decision on January 27, 2012, reversing the judgment of the trial court and holding that Scholastic s connections with Tennessee schools and teachers establish sufficient nexus to support the Commissioner s assessment of tax. (Pet. App., b1-14.). The court found that Scholastic has created a de facto marketing and distribution mechanism within Tennessee s schools that utilizes Tennessee teachers to sell books to school children and their parents. (Pet. App., b14). The Court further determined that whether the teachers should be considered agents under Tennessee law 1 Scholastic also initially raised the issues that the Commissioner s assessment violated the Due Process Clause of the United States Constitution, as well as Article I, Section 8, of the Tennessee Constitution. However, as recognized by the trial court, the sole issue in dispute is whether Scholastic has sufficient nexus with Tennessee to be subject to Tennessee s sales and use tax laws under the federal Commerce Clause. (Pet. App., c2-4).

4 was irrelevant to the question of whether Scholastic s significant activities in Tennessee established a substantial nexus for Commerce Clause purposes. (Id., b12). The Supreme Court of Tennessee denied Scholastic s application for discretionary review on June 22, 2012. (Pet. App., a1). Scholastic now seeks this Court s review. REASONS FOR DENYING THE WRIT This case is virtually identical to a case from the State of Connecticut that Scholastic sought to have this Court review earlier this year, and which this Court has now declined to review. See Scholastic Book Clubs, Inc. v. Connecticut Comm r of Revenue Services, 38 A.3d 1183, 1197-98 (Conn. 2012), cert. denied, No. 11-1532, 2012 WL 2396881 (U.S. Oct. 9, 2012). Scholastic used the same marketing strategy and techniques in Tennessee as it did Connecticut. The Connecticut Supreme Court, as did the Tennessee Court of Appeals, found that Scholastic s marketing activities created sufficient connections or nexus to support the imposition of a sales-and-use-tax collection responsibility under the Commerce Clause. Scholastic Book Clubs, Inc. v. Farr, 373 S.W.3d at 561-65 (Pet. App., b1-14). The reasons cited by Connecticut in support of its opposition to Scholastic s petition for certiorari are equally compelling and determinative in this case. Brief in Opposition to Petition for Writ of Certiorari, Scholastic Book Clubs, Inc. v. Connecticut Comm r of Revenue Services, No. 11-1532, 2012 WL 2396881 (U.S. Oct. 9, 2012). For decades, Scholastic has been taking advantage of the in-state activities of Tennessee schools and

5 teachers, which in large part are funded by taxpayer dollars, to market and sell its products to its targeted customers, Tennessee students and their parents, while ignoring its responsibility to collect and remit Tennessee sales and use tax on those sales. (Id., b2, 13-14). These schools and teachers are the sole means by which Scholastic communicates with its customers, and Scholastic solicits and utilizes the services of these teachers for virtually every sale Scholastic makes to Tennessee students. Without the active support of these Tennessee teachers and schools, no market would exist for Scholastic s products in Tennessee. Scholastic has created a unique sales model under which teachers have a peculiar incentive to represent it and promote sales of its products to a captive audience, their students. Scholastic, however, asserts that it is merely a mail order company lacking a sufficient nexus with Tennessee for purposes of the Commerce Clause, despite its use of thousands of Tennessee schools and teachers to create a de facto marketing and distribution force within Tennessee. (Pet. App., b14). Scholastic s argument is an unconvincing attempt to bootstrap its operations in Tennessee into the relatively narrow safe harbor protections afforded by the Commerce Clause to retailers whose sole contact with the taxing state is by mail or common carrier, as pronounced by this Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The record demonstrates, as the Tennessee Court of Appeals found, that Scholastic is not strictly a mail order company. Rather, its business model relies exclusively on the marketing, solicitation, and distribution activities carried on within Tennessee by Tennessee schools and teachers. Because these activities go far beyond simple mail order sales, the safe harbor protections described in

6 Quill simply do not apply and Scholastic cannot escape its responsibility to collect and remit Tennessee sales and use tax. The decision of the Tennessee Court of Appeals was correct, and Scholastic s petition should be denied. I. THE TENNESSEE COURT OF APPEALS APPLIED THE PROPER NEXUS ANALYSIS UNDER EXISTING UNITED STATES SUPREME COURT PRECEDENTS AND PROPERLY DETERMINED THAT SCHOLASTIC HAS SUFFICIENT NEXUS WITH TENNESSEE. Tennessee imposes a tax on the sale at retail and use of all tangible personal property in Tennessee. Tenn. Code Ann. 67-6-101 to -907 (2006 & 2010 Supp.). Persons selling tangible personal property in Tennessee are exercising a taxable privilege and are, unless exempted, required to collect and remit sales and use tax on tangible personal property sold at retail. See Tenn. Code Ann. 67-6-102 (25), 67-6-201, 67-6- 202, 67-6-501 to -608 (2006 & 2010 Supp.). The Tennessee Court of Appeals correctly concluded that Scholastic cannot escape its responsibility to collect and remit Tennessee sales and use tax through the narrow safe harbor existing under the Commerce Clause. (Pet. App., b14.). Under the Commerce Clause, interstate commerce may be required to bear its fair share of state taxes. The limits that do exist on a state s taxing power are narrowly construed. These include the requirement that the person or entity subjected to the tax have substantial contacts or nexus so as to create a physical presence within

7 the taxing state and that there exist a relationship between the tax and state-provided services. Quill Corp. v. North Dakota, 504 U.S. 298, 313 (1992). This limitation is intended to ensure that state taxation does not unduly burden interstate commerce. Id. Scholastic argues that the Commissioner must establish the existence of a legal relationship of some kind between the teachers and Scholastic in order to establish substantial nexus. (Pet., 11). To the contrary, in order to establish nexus it is entirely unnecessary to pigeonhole the teachers and schools as agents of Scholastic, or to dwell on the formalities of what legal relationship may exist between them. It is the actions of the Tennessee teachers and schools on Scholastic s behalf not the semantics defining their legal relationship that determines nexus. Scholastic s arguments here are reminiscent of the formalism and legal phraseology that was explicitly disavowed nearly twenty years ago by this Court. See Quill, 504 U.S. at 310-11. Scholastic asserts that this Court should take this opportunity to reaffirm the bright-line drawn in Quill. (Pet., 23). This Court s decision in Quill established a limited safe harbor for retailers whose only contact with a state is by mail or common carrier. As the Tennessee Court of Appeals correctly acknowledged, when such safe harbor protections do not apply to a retailer s business practices, nexus analysis must focus on the nature and extent of the retailer's activities and the extent to which the in-state individuals activities are associated with the retailer s ability to establish and maintain a market in the state. (Pet. App., B8, B12-13) (citing Tyler Pipe Industries Inc. v. Department

8 of Revenue, 483 U.S. 232, 249 (1987)); see also Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977); Scripto, Inc. v. Carson, 362 U.S. 207, 211-12 (1960). The critical factor in establishing nexus through the physical presence of a taxpayer in the taxing state is whether the activities performed in-state on behalf of the taxpayer are significantly associated with the taxpayer s ability to establish and maintain a market in this state for the sales. Tyler Pipe, 483 U.S. at 250. Thus, contrary to Scholastic s assertions, the bright line of Quill is not drawn so sharply as to disregard all activities undertaken by third parties on behalf of Scholastic. Scholastic s argument fails to recognize that, in the present case, the Tennessee Court of Appeals applied the proper test for establishing nexus because Scholastic s operations fall beyond the narrow safe harbor of Quill. This Court has held time and again that the test for nexus may be satisfied through the actions of third parties taken on the taxpayer s behalf in the taxing jurisdiction, regardless of how those third parties may be legally characterized. In Scripto, Inc. v. Carson, 362 U.S. 207 (1960), the Court determined that a use-tax-collection duty was properly imposed upon an out-of-state seller that had no offices, employees, or property in the taxing state but conducted its in-state solicitation through independent contractors. The Court noted that the focus for determining whether sufficient nexus exists is the nature and extent of the [taxpayer s] activities in the taxing state, and it rejected the taxpayer s claim premised on the fact that the salesmen were not regular employees.

9 [S]uch a fine distinction is without constitutional significance. The formal shift in the contractual tagging of the salesman as independent neither results in changing his local function of solicitation nor bears upon its effectiveness in securing a substantial flow of goods into Florida.... The test is simply the nature and extent of the activities of the appellant [taxpayer] in Florida. Id., at 211-12. The independent contractors in Scripto did not accept orders or payments in Florida but forwarded orders received in Florida to the taxpayer s out-of-state headquarters for acceptance. Thus, this Court found that those representatives acting on the taxpayer s behalf in the taxing state enabled the taxpayer to establish a market for its products within the state and to obtain a substantial flow of revenue by virtue of those contacts. Such contacts were found to be sufficient to support Florida s imposition of a use-taxcollection duty. The significance of the relationship between the taxpayer and its in-state representatives was revisited by the Court in Tyler Pipe Industries, Inc. v. Washington Dep t of Revenue, 483 U.S. 232 (1987). There the Court again stressed that even though the taxpayer s in-state representatives were independent contractors and not agents, this fine distinction is without constitutional significance. Id. at 250. The Court agreed with the Washington Supreme Court s conclusion that the crucial factor governing nexus is whether the activities performed in-state on behalf of

10 the taxpayer are significantly associated with the taxpayer s ability to establish and maintain a market in this state for the sales. Id. The decision of the Tennessee Court of Appeals in this case is consistent with this Court s precedents. The Tennessee schools, administrators, and teachers utilized by Scholastic were critical and indeed absolutely necessary for Scholastic to maintain and protect its extremely lucrative Tennessee market. Scholastic used the teachers and schools in Tennessee to create a de facto marketing and distribution mechanism for Scholastic, thus creating the substantial contacts and physical presence in Tennessee necessary to allow state taxation under the Commerce Clause. (Pet. App., b14). Indeed, Scholastic s entire business model was dependant on over 8,000 Tennessee teachers and schools to produce over $34,000,000 in sales to students at Tennessee schools during the five-and-a-half-year audit period. (Id., b2, 14). Contrary to Scholastic s assertions, the teachers and schools were more than mere customers of Scholastic; they served as the only conduit between Scholastic and students and their parents and thus enabled and facilitated Scholastic in its multi-million-dollar sales effort in Tennessee. Under Scholastic s sales model, the teachers and schools distribute Scholastic s catalogs to students, collect students orders and payments, handle problems encountered by students with their orders with Scholastic, distribute the items ordered to the students, and receive valuable bonus points redeemable for educational merchandise for doing so. (Pet. App., c3-4). Indeed, neither Scholastic nor its

11 employees have any direct contact with the students and parents who ultimately purchase the bulk of Scholastic s products, instead relying exclusively on Tennessee teachers and schools to develop and handle these pivotal relationships for Scholastic. (Pet. App., b13-14). II. STATE APPELLATE COURTS HAVE CONSISTENTLY HELD THAT SCHOLASTIC HAS SUFFICIENT NEXUS WITH THE RESPECTIVE TAXING STATES. The issue before this Court has been considered by several state appellate courts. Most have found sufficient nexus when reviewing Scholastic s activities within the taxing state. See Scholastic Book Clubs, Inc. v. Connecticut Comm r of Revenue Services, 38 A.3d 1183, 1197-98 (Conn. 2012), cert. denied, No. 11-1532, 2012 WL 2396881 (U.S. Oct. 9, 2012); Scholastic Book Clubs, Inc. v. State Bd. of Equalization, 207 Cal. App. 3d 734, 739-40 (1989); In re Appeal of Scholastic Book Clubs, Inc., 920 P.2d 947, 955-58 (Kan. 1996). Indeed, this is so because Scholastic s business model is the same in every state. In each of these decisions, the appellate courts determined that the extent of the teachers marketing, communication, solicitation, and distribution activities in the taxing state played key roles in Scholastic s ability to establish and maintain a market within the state. In each instance, the facts, which are the same as those presented here, established sufficient nexus and took Scholastic outside the limited safe harbor protections set forth in Quill. Of particular note is Scholastic s recent litigation in Connecticut. Scholastic Book Clubs, Inc. v. Connecticut

12 Comm r of Revenue Services, 38 A.3d 1183 (Conn. 2012), cert. denied, No. 11-1532, 2012 WL 2396881 (U.S. Oct. 9, 2012), involved the identical facts and analysis as the present case. Like the Tennessee Court of Appeals, the Connecticut Supreme Court determined that nexus was satisfied under this Court s nexus analysis in Scripto, Tyler Pipe, and Complete Auto, and concluded that Quill's safe harbor did not apply because the teachers... serve as the only means through which the plaintiff communicates with its customers in the state. Id. at 1199-1200. As noted above, this Court denied certiorari, and, for the same reasons, it should do so here. Only one state appellate court has determined that nexus was lacking. See Scholastic Book Clubs, Inc. v. Michigan, 567 N.W.2d 692 (Mich. App. 1997), appeal denied, 586 N.W.2d 923 (Mich. 1998). 2 The Michigan court however, incorrectly focused its analysis on the legal characterization of the relationship between the out-of-state taxpayer and the teachers and schools in its determination of the existence of nexus, while ignoring the extent of the teacher s activities on behalf of Scholastic. The Michigan court simply held that physical presence requires the existence of an agency relationship under Michigan law and failed to undertake any further nexus analysis. See id. at 695-96. 2 Scholastic also relies on the case of Troll Book Clubs, Inc. v. Tracy, No. 92-Z-590, 1994 WL 456090 (Ohio Bd. Tax. App. 1994) in support of its petition. Troll Book Clubs is an administrative decision from Ohio that was not subject to any form of judicial review and is therefore of little value to the present discussion.

13 Scholastic attempts to put Arkansas in the same camp as Michigan, but that characterization is incorrect. In Pledger v. Troll Book Clubs; 871 S.W.2d 389 (Ark. 1994), the Arkansas Supreme Court never reached the issue of sufficient nexus because the argument had been waived; both the taxpayer and the State of Arkansas had previously argued that the existence of an agency relationship was a prerequisite to a finding of nexus. Id. at 391-92. In declining to address the issue of whether substantial nexus may be found in the absence of an agency relationship, the Arkansas Supreme Court stated: In oral argument before this court, there was considerable discussion about whether a substantial nexus might be found with proof of something less than agency. However, that is an issue we do not reach because it was not raised below, and we have often written that we will not address an issue on appeal which was not raised below. Id. at 392 (citing Hubbard v. The Shores Group, Inc., 855 S.W.2d 924 (Ark. 1993)). Thus, although the parties attempted to address the issue when the case reached the Arkansas Supreme Court, the court declined to consider it. Because the Michigan and Arkansas courts never applied the proper nexus analysis, neither case is particularly helpful when considering whether Scholastic s business model creates the substantial contacts and physical presence in Tennessee necessary to allow state taxation under the Commerce Clause.

14 In short, Scholastic s argument that it faces inconsistent Commerce Clause decisions in the various states is misleading. There is no crazy quilt of decisions as alleged by Scholastic, even as to this particular and unusual sales model. Only those state appellate courts that have refused fully to address the nexus issue have failed to reach the correct conclusion that, under Scholastic s peculiar business model, sufficient nexus exists in the taxing state. Every state appellate court that has undertaken a complete review of Scholastic s operations and applied the appropriate nexus analysis has come to the same conclusion as the Tennessee Court of Appeals and determined that sufficient nexus exists. III. SCHOLASTIC FAILS TO IDENTIFY ANY REAL ISSUE OF NATIONAL SIGNIFICANCE. In part, Scholastic would have this Court grant its petition based on Scholastic s assertion that under the current state of Commerce Clause analysis, all retailers now find themselves in a quagmire of Commerce Clause rights that vary from state to state. (Pet., 9). Indeed, Scholastic contends it is a seller caught in a war between state courts over its Commerce Clause rights. (Id., at 19). Nothing could be further from the truth, and this Court should reject this argument. Like any other business that operates on a nationwide level, Scholastic already must contend with a wide variety of taxing jurisdictions on a daily basis. Most other retailers manage to navigate their way through this quagmire ; the simple fact that Scholastic

15 must do so as well does not raise a matter of national significance. Regardless, as discussed above, most state appellate courts that have considered the issue have been in agreement on how to apply nexus analysis to Scholastic s business model. The nexus analysis in cases that involve taxpayers whose activities fall outside the limited safe harbor of Quill necessarily relies heavily on the specific facts of those cases. Nexus analysis by its very nature is dependent on the nature and extent of the activities conducted in a taxing state. And Scholastic s facts are unique to its own business operations. Simply put, any retailer other than Scholastic that is directly affected by the Scholastic line of cases would have to be operating in a manner virtually identical to that of Scholastic. It is therefore very unlikely that this line of cases implicates any other retailers nationwide. Indeed, Scholastic has enticed thousands of teachers in Tennessee to represent its interests through exploiting the teachers natural desire to promote reading, through piggybacking on the teachers unusual credibility with their students and the students desire to please them, and through the bonus points program that provides valuable merchandise for classroom use. This unique sales model is not typical of other mail order sellers and offers a poor context in which to establish or elaborate on a broad constitutional standard for nexus. Finally, Scholastic argues that this Court should grant its petition to reaffirm the bright line rule in Quill. (Pet., 23). In doing so, Scholastic is asking this Court to create a new uniform rule that would resolve any conflict among the state courts regarding how

16 third party activities should be factored into nexus analysis. Scholastic does not explain how the new uniform rule would operate and, more importantly, Scholastic again refuses to recognize that the safe harbor protections of Quill simply do not apply to Scholastic s operations. Scholastic is far different from the typical mail order company. Scholastic uses thousands of schools and teachers to conduct its very profitable business operations within Tennessee. Without the efforts of these teachers, Scholastic s sales would disappear. Scholastic s argument also fails to recognize that this Court has, through its prior jurisprudence, already completed the task of providing Scholastic with a uniform rule for nexus analysis. This Court has held, time and again and in a clear and concise fashion, that when looking to establish nexus through the physical presence of the taxpayer in a taxing state through a third party, courts must focus on whether the activities performed in-state on behalf of the taxpayer are significantly associated with the taxpayer s ability to establish and maintain a market in this state for the sales. Tyler Pipe, 483 U.S. at 250. See also Scripto, 362 U.S. at 211; Complete Auto, 430 U.S. at 281. This test applies regardless of how the in-state and out-ofstate taxpayer choose to characterize their relationship. Indeed, this Court has expressly disavowed utilizing semantics or legal phraseology to establish the validity of state taxing statutes under the Commerce Clause. Quill, 504 U.S. at 310-11. A more clear and uniform rule of nexus analysis for companies whose activities fall outside Quill could not reasonably exist. Simply because Scholastic does not

17 favor the present state of Commerce Clause nexus analysis does not mean this case rises to the level of national import that would require this Court to revisit its previous Commerce Clause decisions. Likewise, the Court has already established a clear line of decisions and it need not engage in the creation of a new uniform rule for Commerce Clause analysis that, even as Scholastic points out, is a task best left to Congress. Congress should be allowed to continue its study and possible refinement of state taxing powers in this area without the imposition of additional strictures by this Court. 3 It is indeed ironic that Scholastic seeks to avoid collection of Tennessee s sales and use tax which, under Tennessee law, is the primary source of funding for the very Tennessee schools that constitute the crux of Scholastic s successful marketing efforts. See Tenn. Code Ann. 67-6-103(a)(2) (2011) (allocating over 65% of sales and use tax collections exclusively for educational purposes). Here, sufficient nexus exists to require Scholastic to collect and pay its fair share of Tennessee s sales and use tax in return for the services the State provides in support of Scholastic s business activities in Tennessee. 3 A number of bills presently are pending before Congress that address state taxation of out-of-state sellers. See, e.g., H.R. 2071, 112 th Cong., 1 st Sess. (2012); S. 1452, 112 th Cong., 1 st Sess. (2012); H.R. 3179, 112 th Cong., 1 st Sess. (2012); S. 1832, 112 th Cong., 1 st Sess. (2012).

18 CONCLUSION For all of the reasons set forth herein, the petition for a writ of certiorari should be denied. Respectfully submitted, ROBERT E. COOPER, JR. Attorney General and Reporter State of Tennessee WILLIAM E. YOUNG Solicitor General CHARLES LARRY LEWIS* Deputy Attorney General BRIAN J. RAMMING Assistant Attorney General OFFICE OF THE ATTORNEY GENERAL Tax Division P. O. Box 20207 Nashville, TN 37202-0207 (615) 741-2968 Larry.Lewis@ag.tn.gov Counsel for Defendant-Respondent RICHARD H. ROBERTS Commissioner of Revenue State of Tennessee * Counsel of Record Dated: October 25, 2012