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Michigan Appeals Court exempts advertising materials mailed out-of-state from use tax

July 2021

In brief

A long-standing tax dispute has existed in Michigan regarding what constitutes a taxable ‘use’ of direct mail shipped from outside the state. The state has often asserted that the act of directing mailings into the state or the ability to recall an item from the US Postal Service (USPS) would constitute sufficient ‘control’ over the mailings to create a use tax consequence.

The Michigan Court of Appeals on July 8, in an unpublished opinion, affirmed that a corporation did not have ‘sufficient retention of control’ of advertising materials printed out-of-state and delivered by a third party vendor to Michigan customers to constitute ‘use’ of such materials in-state. Consequently, the directing or controlling of when materials were placed in the mail was not considered an exercise of control subjecting the distribution to use tax. Bed Bath & Beyond Inc. v. Dep't of Treasury, Michigan Court of Appeals, No. 352088; No. 352667; LC No. 18-000220-MT (7/8/21)

Action item: Businesses that produce advertising materials out-of-state that are mailed to Michigan customers may not be subject to use tax if control over the materials is not exercised in-state.

In detail


Bed, Bath & Beyond (‘the plaintiff’) promotes its business by producing advertising materials that are delivered to Michigan customers through the mail. The plaintiff designed the materials, purchased paper product, and sent the paper to a printer outside of Michigan. The printer sent the printed materials to a mail order vendor located out-of-state that subsequently processed and prepared the advertising materials, and entered them into the USPS mail stream outside of Michigan.

The Michigan Department of Treasury issued an audit assessment of use tax on the advertising materials, and the plaintiff filed a complaint. Subsequently, the Michigan Court of Claims (court) concluded that (1) plaintiff did not ‘use’ its advertising materials in Michigan for the tax period at issue because it “deferred all aspects of delivery” to a third-party direct mail vendor, and (2) there had not been “sufficient retention of control” of the advertising materials by plaintiff to constitute ‘use’ as defined in the Michigan Use Tax Act (UTA).

The Department of Treasury appealed the decision to the Michigan Court of Appeals.

Defining ‘use’ under the UTA

Under the UTA, “[t]here is levied upon and there shall be collected from every person in [Michigan] a specific tax ... for the privilege of using, storing, or consuming tangible personal property in [Michigan]...”. The UTA defines the term ‘use’ as “the exercise of a right or power over tangible personal property incident to the ownership of that property including transfer of the property in a transaction where possession is given.”

Precedent for ‘control’ over property

The court relied on two previous appellate court decisions in concluding the requisite control for ‘use’ of the advertising materials in Michigan under the UTA: (1) Sharper Image Corp v Dep’t of Treasury (1996), finding the distribution of mail-order catalogs mailed from a Nebraska USPS facility to Michigan residents was not a taxable use, and (2) Ameritech Publishing, Inc v Dep’t of Treasury (2008), finding that distribution could be a taxable use.

The court stated that similar to Sharper Image, plaintiff retained no control over the materials once they were delivered to the USPS, and there was no evidence suggesting plaintiff controlled any aspect of the delivery other than specifying that delivery should occur within a general timeframe.

Department argued ‘ownership’ was exercised in-state

On appeal, the Department contended that the plaintiff exercised its rights of ownership and control over the advertising materials within Michigan, and should be subject to use tax because (1) the record demonstrated that plaintiff controlled aspects of delivery, and required how and when the materials could be used after delivery to Michigan residents; (2) plaintiff used the advertising materials after they had been delivered to Michigan residents; (3) an incident of ownership included the right to manage the use of the advertising materials by customers; and (4) the advertising materials required customers to present materials at plaintiff's Michigan stores by a specific date selected by plaintiff.

In addition, the Department argued that the court erred by focusing solely on whether plaintiff controlled matters of delivery or distribution when it also should have considered whether plaintiff exercised control over the advertising materials after they had been delivered to Michigan residents.

Plaintiff contended it did not exercise required level of control

The plaintiff argued that it did not exercise the required level of control over the property in Michigan to implicate the UTA because (1) the distribution of advertising materials without indicia of control did not constitute a taxable use; (2) it ceded all physical control over the advertising materials once they were delivered to the mail order vendor, and its ability to exercise rights over the materials terminated upon deposit of the materials at USPS distribution centers; and (3) how Michiganders used the advertising materials after delivery was irrelevant to the issue of plaintiff's alleged control for purposes of the use tax.

Court determines no exercise of control to impose use tax

The Court of Appeals (Court) stated that the only markers of ‘power’ or ‘control’ of the property were that plaintiff (1) provided the mail order vendor a list of its Michigan customers and directed the dates of distribution and (2) required a report of the actual dates of distribution. The Court noted that none of these activities involved actual control over the process of delivery of the advertising materials, which was exclusively the responsibility of the mail order vendor.

The Court stated it was bound to apply the holding in Sharper Image given the very similar factual records of the two cases, finding that:

  • plaintiff no longer exercised a right of power over the advertising materials incident to ownership once in the hands of customers;
  • customers became the owners of the advertising materials and could do with them whatever they wished; and
  • the mere fact that a customer might not be able to redeem a coupon after a certain date did not translate to plaintiff’s ‘use’ of the advertising materials.

Therefore, the Court affirmed the lower court’s decision, concluding that “directing or controlling when materials might be placed in the mail, as any direct mail advertiser would, is not an exercise of control over the materials within [Michigan] that would subject the distribution to the imposition of use tax.”

The takeaway

The interpretation and standard discussed by the Michigan Court of Appeals in Sharper Image, Ameritech, and Bed Bath & Beyond communicate a unified interpretation of the indicia of control needed to ‘use’ direct mail advertising materials in Michigan and subject them to tax. Businesses with a fact pattern similar to Sharper Image and Bed Bath & Beyond should analyze whether they can qualify for relief from use tax on advertising materials sent to Michigan customers. Of interest will be if the Department of Treasury pursues further appeal of this decision, and/or if this can become a less contentious area of Michigan taxation.

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Peter Michalowski

Partner, State and Local Tax Consulting Leader, PwC US

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