The New York Tax Appeals Tribunal recently addressed whether the manner in which a taxpayer delivered advertising and promotional materials into the state enabled it to qualify for an exemption for promotional materials. Under New York law, “promotional materials” are exempt from sales and use tax when the purchaser of the promotional materials mails or ships the materials to customers or prospective customers for no charge and does so by means of a “common carrier, United States postal service or like delivery service.” There was no dispute that the taxpayer’s telephone directories qualified as “promotional materials.” However the taxpayer and the Division of Taxation disagreed as to whether two of the service companies used by the taxpayer to distribute a portion of its directories qualified as a “common carrier … or like delivery service.” The taxpayer used the US Postal Service and Federal Express, as well as two other companies to deliver the directories within New York. On audit, the Division determined that a portion of the taxpayer’s expenses incurred in printing the directories distributed in New York were subject to New York tax because the two other delivery companies were not common carriers and did not meet the test of being a “like delivery service.” After an ALJ agreed with the Division, the taxpayer appealed.
The Tribunal noted at the outset that there was no statutory definition of common carrier or “like delivery service,” and it was, therefore, necessary to look to definitions from prior case law. Based on earlier cases, the Tribunal (agreeing with the ALJ) determined that “common carriers” generally hold themselves out to the general public as providing shipping services according to a schedule of fixed rates without a negotiated contract. Further, their services generally consist of individual transactions rather than an ongoing course of business between the customer and carrier. In contrast, “contract carriers” generally provide services for a limited number of customers routinely, either dedicating equipment or providing customized service for the customer. The two delivery companies at issue specialized in delivering promotional materials and telephone directories, rather than all types of goods, and used independent contractors, rather than employees, to complete deliveries. Furthermore, these companies had entered into contracts with the taxpayer that detailed the specific services to be performed associated with the deliveries. Largely based on the existence of the negotiated contracts, the ALJ found, and the Tribunal agreed, that the services provided by the companies were not those of common carriers and were substantially similar to those provided by contract carriers. In addition, the Tribunal concurred with the ALJ that while the delivery services had certain characteristics of common carriers, they were most similar to contract carriers and should not be considered as a “like delivery service.” As such, the taxpayer did not qualify for the promotional materials exemption. Please contact Judy Cheng at 212-872-3530 with questions on Matter of Supermedia LLC.