96-0661

Sales and Use Tax

Signed 7/14/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

COMPANY A, :

Petitioner, : FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

v. : AND FINAL DECISION

AUDITING DIVISION OF THE : Appeal No. 96-0661

UTAH STATE TAX COMMISSION, :

: Account No. #####

Respondent. : Tax Type: Sales & Use Tax

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on January 7, 1997. Val Oveson, Chairman, Utah State Tax Commission, heard the matter for and on behalf of the Commission. Present and representing Petitioner COMPANY A were XXXXX, Esq. and XXXXX, Esq., of XXXXX, along with XXXXX of COMPANY A. Present and representing Respondent Auditing Division was Clark L. Snelson, Assistant Attorney General, along with Gail Naisbitt and Bert Ashcroft of the Auditing Division.

Based upon the evidence in the file and the testimony presented at the hearing, the undersigned makes the following:

FINDINGS OF FACT

1. The tax in question is use tax.

2. The period in question is April 1, 1993 through April 30, 1995.

3. The parties stipulated to the material facts in this matter.

4. The catalogs in question in this case are direct mail catalogs furnished by Petitioner free of charge to its customers.

5. Petitioner has nine retail stores, a catalog order center, and a regional accounting center in the state of Utah. Petitioner employs over 2,100 employees in the state of Utah.

6. Petitioner's objective in sending catalogs to Utah was and is to sell its catalog merchandise. The catalogs advertise to potential customers a broader selection of merchandise than would be available in most of Petitioner's stores. For instance, in addition to general merchandise, Petitioner's catalogs also promote sales of specialty items, such as uniforms or big men's clothing, not available at all of Petitioner's stores.

7. The catalogs are produced in CITY and then printed by an independent printer in CITY, STATE. None of the catalogs at issue were printed in Utah. The Catalogs are then shipped directly from the printer, via common carrier, to U.S. post offices in Utah.

8. Petitioner prepares the address information which is used by Petitioner's printers and the Postal Service to ship the catalogs to the Utah addresses.

9. In 1992, Petitioner was assessed a use tax for catalogs it mailed to Utah customers during the audit period of October 1, 1988 through March 31, 1992. At that time, Petitioner filed a Petition for Redetermination for that assessment with the Utah State Tax Commission.

10. In response to Petitioner's Petition for Redetermination, the Auditing Division sent Petitioner a Memorandum of Understanding, dated June 24, 1993. The Memorandum stated, in part:

Respondent has determined that the catalogs shipped from outside Utah direct to Utah consumers are exempt from Utah tax. Future tax exemption would be based on whether the facts remain the same or whether some control is exercised in Utah prior to shipment of the catalogs to the final consumer.

11. On February 27, 1997, the Auditing Division issued a statutory notice against Petitioner assessing use taxes for its catalogs for the audit period of April 1, 1993 to April 30, 1995 in the amount of $$$$$ and interest thereon of $$$$$. Petitioner timely filed an appeal of this assessment.

APPLICABLE LAW

Utah Code Ann. §59-12-103(1) provides in pertinent part:

There is levied a tax on the purchaser for the amount paid or charged for the following:. . . (1) tangible personal property stored, used or consumed in this state.

"Use" is defined in Utah Code Ann. §59-12-102(24) as follows:

(a) "Use" means the exercise of any right or power over tangible personal property under Subsection 59-12-103(1), incident to the ownership or the leasing of that property, item or service.

ANALYSIS

This case brings two issues before the Commission. The first issue is whether mail order catalogs produced and printed outside the state of Utah and shipped by common carrier to residents of the state of Utah are subject to Utah use tax. The second issue is whether Petitioner is liable for the use tax assessment despite the stipulation agreement ("Memorandum of Understanding") entered into with the Auditing Division in 1993. Both parties concede that nexus exists between the Petitioner and the state of Utah, such that the requirements under the Commerce Clause are met. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)(holding that a tax does not violate the Commerce Clause if it is applied to an interstate activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State).

The Commission first considers the issue of whether mail order catalogs mailed to Utah residents from out of state are subject to Utah use tax. Utah Code Ann. §59-12-103(1) levies a tax on "personal property stored, used or consumed in this state." The word "use" is defined in §59-12-102(24) as "the exercise of any right or power over tangible personal property...incident to the ownership or the leasing of that property, item or service." Petitioner argues that it does not have sufficient control over its catalogs shipped to Utah to constitute "use" under Utah Code Ann. §59-12-102(24). The Commission finds this argument unconvincing. Petitioner is responsible for the conception, design, planning, and layout of its catalogs; it contracts with the printer for the printing of the catalogs and prepares its own address labels for the shipment of the catalogs. Petitioner then causes the catalogs to be shipped via common carrier to its customers in Utah, in order to promote and sell its merchandise. In D.H. Holmes Co., v. McNamara, 486 U.S. 24 (1988), a case almost factually identical to the instant case, the Supreme Court addressed the issue of what constituted "control" over mail order catalogs mailed from out of state vendors. In Holmes, the Supreme Court held that a taxpayer who ordered and paid for its catalogs, supplied the list of residents to whom the catalogs were to be delivered, and had the catalogs turned over to the United States postal service for distribution had sufficient control over the catalogs such that the use tax was applicable.

Petitioner further argues that the Holmes holding is not controlling in the instant case because the Louisiana statute on which Holmes relied included the word "distribution" in its definition of "use,[i]¹" whereas the Utah statute does not. The Commission does not believe that the word "distribution" must be included in the statute in order for the distribution of catalogs to be taxable. Petitioner "uses" the catalogs in the state of Utah under the ordinary meaning of the word "use." Petitioner uses the catalogs in Utah to sell its merchandise. The Commission believes that the Utah legislature's definition of "use" in Utah Code Ann. §59-12-102(24), which includes "the exercise of any right or power over tangible personal property," is broad enough to encompass the distribution of catalogs.

This interpretation is in keeping with other states' interpretations of statutory language similar to Utah's. See, for example, Service Merchandise Co., Inc. v. Arizona Dept of Revenue, 1996 WL 566178 (Ariz. App. Div. 1)(holding that Arizona's definition of "use," which included 'the exercise of any right or power over tangible personal property incidental to owning the property' was broad enough to encompass distribution); American Express Travel Related Services Co., Inc. v. Tax Commission of the State of Idaho, 920 P.2d 921 (1996)(holding that an Idaho statute defining "use" as "the exercise of any right or power over tangible personal property incident to the ownership or leasing of that property" was intended to be as broad as possible and included the direct mailing of promotional and advertising material from out of state); Sharper Image Corp. v. Miller, 1997 WL 195413 (Conn.)(holding that a statute taxing storage, acceptance, consumption, or "other use" is broad enough to include the distribution of catalogs). The Commission holds that the distribution of catalogs within the state of Utah, even if those catalogs are designed and printed outside of Utah and are shipped by common carrier from an address outside of Utah, constitutes "use" for the purposes of the Utah Code Ann. §59-12-103(1) use tax.[ii]²

The Commission must next consider whether the petitioner can be required to pay use tax on its catalogs for the auditing period in question, given the fact that Respondent Auditing Division had earlier determined that catalogs shipped by Petitioner from outside of Utah direct to Utah consumers were exempt from tax. (See Memorandum of Understanding, Petitioner's Exhibit #1). The Memorandum of Understanding, signed by representatives for both the Petitioner and the Respondent, states that "future tax exemption would be based on whether the facts remain the same or whether some control is exercised in Utah prior to shipment of the catalogs to the final consumer." Respondent has conceded that there have been no significant changes in the way Petitioner does business. Petitioner's catalog distribution system remains essentially the same as it was when the Memorandum of Understanding was signed. Additionally, there have been no changes in Utah law regarding use tax of catalogs since the signing of the Memorandum.

Respondent contends that the facts have not remained the same because since the Memorandum was signed Respondent has become aware of the 1988 Supreme Court case, D.H. Holmes v. McNamara, 486 U.S. 24 (1988). In Holmes, the Supreme Court interpreted Louisiana's definition of "use" to include the distribution of mail order catalogs from out-of-state. The Commission does not consider Respondent's new awareness of the Holmes case to be a change in the facts such that Respondent is relieved of its duty to abide by its agreement with Petitioner. Nor do we believe that mere shifts in the "trend" of tax law around the country allow Respondent to claim a change in facts that would allow Respondent to renege on its agreement.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that the Utah Code Ann. §59-12-102(24) definition of "use" encompasses the distribution of catalogs from out of state vendors via common carriers. Hence, prospectively, from the date of this order, mail- order catalogs sent from outside the state of Utah to Utah addresses by companies who have nexus with the state of Utah will be subject to Utah use tax pursuant to Utah Code Ann. §59-12-103(1).

Because Respondent signed a Memorandum of Understanding with Petitioner stating that Petitioner was not liable for a tax on its catalogs, it would be inequitable to now assess a use tax on Petitioner's catalogs for the audit period in question. The Commission therefore vacates the assessment for Petitioner for the audit years in question, but will from the date of this order allow the assessment of a use tax on mail order catalogs sent to Utah addresses by companies that are located outside the state of Utah but have sufficient nexus with Utah. It is so ordered.

DATED this 14 day of JULY, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

_____________________________

W. Val Oveson

CHAIRMAN, UTAH STATE TAX COMMISSION

The agency has reviewed this case and the undersigned concur in this decision.

DATED this 14 day of JULY, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

Joe B. Pacheco Pam Hendrickson Richard B. McKeown

Commissioner Commissioner Commissioner