REQUEST LETTER

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Response May 5/18/01

Dear Mr. TP REPRESENTATIVE

We are evaluating the sales and use tax responsibilities of one of our clients, a mail order retailer. As part of our analysis, we need to determine if your state imposes a sales or use tax on product catalogs. Although many states have taken a position on the matter in the context of COMPANYH v. COMPANY, 486 U.S. 24, not all of the following is entirely clear to us.

Please respond to the following and provide the appropriate technical authority for your decision:

1) Assuming that the retailer has agency nexus with your state, does your state impose a tax on catalogs sent into the state via common carrier or U.S. mail from outside the state?

2) Assuming the retailer does not have nexus with your state, but the third-party printer of the catalogs does have nexus in your state, does your state impose a tax on catalogs sent by the printer into the state from outside of the state to customers of the retailer which reside in your state?

3) Same as above except the printer sends the catalogs to customers in your state from within the state.

4) If the catalogs are subject to tax, explain what costs are included in the tax base.

For example, the printer has a variety of charges, including, ink, paper, typesetting, printing, and mailing. Would the tax only apply to the tangible personal property (ink and paper), or would it also apply to any of the other charges imposed by the printer?

5) In addition, there may be other costs incurred by the retailer such as photography, design, freight, and postage, some of which are paid to different third-parties, some of which are internal costs, but none of which are for purchases of tangible personal property. Which, if any, of these costs would be subject to tax?

Thank you for your assistance. Please call me at PHONE if you have any questions.

Sincerely,

NAME

RESPONSE LETTER

May 18, 2001

NAME

ADDRESS

RE: Advisory Opinion - Sales and Use Tax on Product Catalogs

Dear NAME:

We have received your request for an advisory opinion concerning an out-of-state mail order retailer and whether it is liable for sales and use tax in Utah on its catalogs delivered to Utah customers under several scenarios. Also, should the mail order retailer be liable for sales and use tax in Utah, you ask for information on how the tax liability is calculated.

QUESTION 1: Assuming the retailer has agency nexus with your state, does your state impose a tax on catalogs sent into the state via common carrier or U.S. mail from outside the state?

The United States Supreme Court addressed this issue in COMPANY. v. COMPANY, 486 U.S. 24 (1988), finding that a mail order retailer that hired an out-of-state printer to print and mail catalogs into STATE was responsible for use tax on those catalogs. In that case, the out-of-state retailer had stores in STATE, so there was no question concerning the retailer having nexus with the state seeking to impose the use tax. In COMPANY v. Utah State Tax Commission, Appeal No. ##### (USTC YEAR), the Utah State Tax Commission adopted the DH Holmes view and imposed a use tax on an out-of-state company having nexus with Utah for the catalogs it sent into Utah, even though the catalogs were completely produced, printed, and mailed from a location outside of Utah. Accordingly, a retailer that has nexus with Utah is liable for Utah’s sales and use tax on catalogs sent to customers in Utah.

QUESTION 2: Assuming the retailer does not have nexus with your state, but the third-party printer of the catalogs does have nexus in your state, does your state impose a tax on catalogs sent by the printer into the state from outside of the state to customers of the retailer which reside in your state?

If the mail order retailer does not otherwise have nexus with Utah, but has a contract with a printer that has nexus with Utah to print and deliver catalogs to Utah customers, then the mail order retailer does not acquire nexus with Utah because of this relationship. Under Utah Code Ann. §59-12-102(23)(e), a “retailer,” for sales and use tax purposes, does not include:

(i) a printer's facility with which a retailer has contracted for printing shall not be considered to be a salesman, representative, peddler, canvasser, or agent of the retailer; and

(ii) the ownership of property that is located at the premises of a printer's facility with which the retailer has contracted for printing and that consists of the final printed product, property that becomes a part of the final printed product, or copy from which the printed product is produced, shall not result in the retailer being deemed to have or maintain an office, distribution house, sales house, warehouse, service enterprise, or other place of business, or to maintain a stock of goods, within this state.

In addition, Section 59-12-102(33)(b) provides that a "vendor" does not mean a printer's facility described in Subsection (23)(e). It is the Commission’s opinion that these exceptions from the definitions of “retailer” and “vendor” were intended to preclude the imposition of sales and use tax nexus on a party, such as a mail order retailer, under the circumstances you describe when that party otherwise would not have nexus with Utah.

Nevertheless, a printer who has nexus with Utah is required to collect sales and use tax on its Utah sales, which includes those sales of tangible personal property that are delivered to a Utah location. See Utah Code Ann. §59-12-107; Utah Admin. Rule R865-21U-3. Accordingly, for those catalogs that the mail order retailer contracts with the printer to deliver within Utah, the printer should collect and remit sales and use tax from the retailer. For those catalogs that are delivered outside of Utah and, thus, considered items sold in interstate commerce, there is no Utah sales and use tax liability.

QUESTION 3: Same as Question 2, except the printer sends the catalogs to customers in your state from within the state.

For the same reasons explained in Question 2, the out-of-state mail order retailer would incur Utah sales or use tax liability on catalogs the printer sends within Utah, but not on catalogs the printer sends outside of Utah.

QUESTION 4: If the catalogs are subject to tax, explain what costs are included in the tax base. For example, the printer has a variety of charges, including, ink, paper, typesetting, printing, and mailing. Would the tax only apply to the tangible personal property (ink and paper), or would it also apply to any of the other charges imposed by the printer?

Almost all charges associated with the purchase of printed materials become part of the printed material’s purchase price, the amount on which the sales and use tax is imposed. As explained in the Utah State Tax Commission Tax Bulletin 16-00 (copy enclosed), charges for all the items and services you describe above become part of the catalogs’ purchase price for taxation purposes. Accordingly, sales and use tax is imposed on all these charges you describe when they are associated with catalogs that are subject to taxation.

QUESTION 5: In addition, there may be other costs incurred by the retailer such as photography, design, freight, and postage, some of which are paid to different third-parties, some of which are internal costs, but none of which are for purchases of tangible personal property. Which, if any, of these costs would be subject to tax?

Photography. Utah Admin. Rule 865-19S-75 provides that the sale of photography is the sale of tangible personal property and is, thus, taxable. Any photography charges related to the purchase of catalogs that are taxable in Utah becomes part of the taxable purchase price of those catalogs.

Graphic Design. Utah State Tax Commission Bulletin 15-00 (copy enclosed) explains that charges for graphic design services incorporated into tangible personal property are usually taxable because the tangible personal property, not the graphic design services, is the object of the transaction. However, there may be occasions where the graphic design services may be separated and not included in the taxable purchase price for the printed materials. Please refer to Tax Bulletin 15-00 for more information on how this distinction may apply to your specific circumstances.

Freight. If the item being shipped is exempt from taxation, the transportation charges associated with the sale are also exempt. On the other hand, if the item being shipped is taxable, the transportation charges are usually taxable, too, as part of the sales price of the item. However, there is an exemption from sales tax for transportation charges, if stated separately, when the freight is shipped by common carrier. However, the transportation charges must satisfy all of the following conditions, as set forth in Utah Admin. Code R865-19S-71 to qualify for the exemption:

1. Shipment must take place by means of common carrier.

2. Charges must be segregated and listed separately.

3. Charges must reflect the actual cost of shipping the particular tangible personal property by common carrier.

4. Shipment of the tangible personal property must take place after passage of title.

a) Shipment of the tangible personal property takes place after passage of title if the terms of the sale or lease are F.O.B. origin or F.O.B. shipping point.

b) If the invoice does not indicate an F.O.B. point, and a common carrier is used, it is assumed the terms are F.O.B. origin.

c) In all other cases, the shipment of tangible personal property takes place before passage of title.

We understand that you will retain title to the catalogs until their delivery to the ultimate recipient so you would not appear to qualify for the exemption.

Postage. Tax Bulletin 16-00 explains that postage charges are nontaxable.

Please contact us if your have any other questions.

For the Commission,

Pam Hendrickson

Commission Chair

PH/KC

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