Michigan: Advertising Materials Not Used in State, Although Distributed to In-State Customers

In an unpublished opinion, the Michigan Court of Appeals recently held that the distribution of a retailer’s advertising materials, which included circulars, coupons, and newspaper inserts, were not subject to Michigan use tax. The retailer, a seller of household products and furnishings, designed advertising materials to be delivered to its potential customers throughout the U.S. The retailer purchased the necessary paper for the materials and sent it to a printer.  After the advertising materials were printed outside of Michigan, they were sent to a mail vendor outside of Michigan to be processed and prepared for mailing. The mail vendor printed addresses onto the advertising materials from an “audience file” owned and built by the mail vendor using the retailer’s proprietary mailing list. Subsequently, the mail vendor sorted and delivered the mailings to the appropriate U.S. postal service centers and facilities. The materials destined for Michigan were prepared at the mail vendor’s Pennsylvania facility and then delivered to postal centers in Michigan for mailing to in-state customers. The timing of the mailings was dictated by the retailer, largely because the mailings included coupons that had an expiration date. After the retailer was audited and assessed use tax on the advertising materials sent to Michigan customers, the retailer appealed. The Court of Claims ruled in the retailer’s favor on the basis that the retailer did not use the materials in the state. The Department of Treasury subsequently appealed.

Under Michigan law, use tax is imposed on the privilege to use, store, or consume tangible personal property in the state. “Use” is statutorily defined to mean “the exercise of a right or power over tangible person property….”  The appeals court observed that the retailer lacked control over the advertising materials within Michigan even though it provided the mail vendor with the list of its Michigan customers and directed the dates on which mailings should be distributed. These activities, in the court’s view, did not involve “actual control over the process of delivery of the advertising materials.” Rather, the mail vendor had exclusive control over the packaging of the mailing materials and had sole discretion over whether materials were handed off to the postal service. The court further held that the mere fact that a customer could redeem a coupon or take advantage of a sale at the retailer’s Michigan locations did not constitute “use” by the retailer for purposes of Michigan’s use tax. For more information, please contact Dave Perry or Sara Crooks.