Fingerhut Products Co. v. Commissioner of Revenue

• Decision Date: 23 September 1977
• Docket Number: No. 46906,46906
• Citation: 258 N.W.2d 606
• Parties: FINGERHUT PRODUCTS COMPANY, et al., Relators, v. COMMISSIONER OF REVENUE, Respondent.
• Court: Minnesota Supreme Court

Page 606

258 N.W.2d 606

FINGERHUT PRODUCTS COMPANY, et al., Relators, v. COMMISSIONER OF REVENUE, Respondent.

No. 46906.

Supreme Court of Minnesota.

Sept. 23, 1977.

Syllabus by the Court

Typed mailing lists used by a direct-mail merchandiser are not subject to taxation under Minn.St. 297A.14, which imposes a use tax for the privilege of using tangible personal property. However, mailing lists in the form of Cheshire tapes, gummed labels, and heat transfers which are attached to envelopes and placed in the mail by the taxpayer do constitute tangible personal property subject to the use tax.

Faegre & Benson and Erwin N. Goldstein, Minneapolis, for relators.

Warren Spannaus, Atty. Gen., C. H. Luther, Deputy Atty. Gen., Dept. of Revenue, St. Paul, for respondent.

Heard before SHERAN, C. J., and MacLAUGHLIN and SCOTT, JJ., and reconsidered and decided by the court en banc.

SHERAN, Chief Justice.

The commissioner of revenue determined that the taxpayers were liable for additional use taxes assessed against the value of various mailing lists used by them in their mail order business. Taxpayers appealed this determination to the tax court, which affirmed. Upon certiorari to this court to review the decision of the tax court, we affirm in part and reverse in part.

On December 23, 1971, the commissioner of revenue filed four orders assessing additional sales and use taxes for the taxable period of August 1, 1967, to June 30, 1968. The four corporations which were affected by these orders were all part of the Fingerhut group of companies. ¹ Appeals were thereafter taken to the tax court, where all but one of the contested issues were resolved under two joint stipulations. The sole remaining issue concerns the taxability under Minn.St. 297A.14 of various mailing lists that during the taxable period were used by the Fingerhut Manufacturing Company and the Fingerhut Products Company. ² For simplicity, both of these taxpayers will hereafter be referred to as "Fingerhut."

Fingerhut is a Minneapolis-based direct mail merchandiser of a wide range of consumer products. Most of the items sold by Fingerhut are intended for use in the home, and include such articles as luggage, power tools, dishes, cookware, and automobile seat covers. During the taxable period, Fingerhut both solicited its customers and sold its products exclusively by mail. The typical mailing sent to a prospective customer contained an advertisement listing a single product for sale, an offer for extended payment terms, a product trial period, and merchandise premiums for placing an order and trying the advertised product. Approximately 98 percent of these mailings were sent to specific persons living outside Minnesota. All of this material was sent through the United States mail. It was estimated by one of Fingerhut's executives that close to 190 million separate mailings were made during the taxable period and that about 2.4 percent of these mailings resulted in sales of merchandise.

To enhance the success of its mailing operation, Fingerhut attempts to solicit business only from selected individuals. Thus, roughly one-half of the sales literature is sent to persons who have previously purchased items by mail from Fingerhut. The remainder of the names and addresses are obtained from mailing lists that are rented from mailing-list brokers. These lists reflect a broad spectrum of demographic data related to buying patterns, such as a person's average income, family size, geographical location, and previous history of buying products through the mail. The actual names and addresses supplied by the broker are intended for one-time use only and during the taxable period came in the form of Cheshire tapes, gummed labels, heat transfers, and typed mailing lists. For this service Fingerhut paid a rental fee of $17.50 to $25 per thousand names. The aggregate amount expended by Fingerhut for mailing lists during the taxable period was $1,396,702.10.

Fingerhut filed timely sales and use tax returns for the taxable period, but it did not report in those returns the amounts expended for the Cheshire tapes, gummed labels, heat transfers, or typed mailing lists. Subsequently, the commissioner levied a deficiency assessment of $41,901.06 plus interest, representing 3 percent of the amount expended by Fingerhut for these lists during the taxable period. ³

On appeal to the tax court, the assessment was affirmed, on the ground that the mailing lists obtained by Fingerhut were tangible personal property subject to taxation within the contemplation of the statute. Upon the petition of Fingerhut, we granted review by certiorari. Minn.St. 271.10, subd. 1.

The parties are in agreement that the tax, if any, applicable to the procurement of these mailing lists is that provided by Minn.St. 297A.14, which imposes a use tax "(f)or the privilege of using, storing or consuming in Minnesota tangible personal property." The sole issue here is whether the mailing lists are "tangible personal property" within the meaning of the statute so that their use may be taxed. ⁴

The focus of Fingerhut's argument to the tax court and on this appeal is that the mailing lists rented from its brokers were not tangible personalty subject to taxation under the statute. There is no dispute that during the taxable period the vast percentage of the names and addresses supplied came in the form of actual mailing labels. When Fingerhut contracted for Cheshire tapes, gummed labels, or heat transfers, it received names and addresses that had to be mechanically separated and placed on its mailings. Fingerhut advances the theory, however, that the essence of what it received from the brokers was not a physical list of names but rather a service which supplied highly sophisticated advertising information which was an intangible commodity.

To support this argument, Fingerhut principally relies on Dun & Bradstreet v. City of New York, 276 N.Y. 198, 11 N.E.2d 728 (1937), where the New York Court of Appeals considered the applicability of a local sales tax law in relationship to the rendition of professional services. The taxpayer was in the business of supplying to its subscribers highly confidential information dealing with the financial standing of persons engaged in various businesses. As an incident to this service, each subscriber received for his own personal use a reference book at no extra charge. In refusing to allow the city of New York to tax the value of this reference book, the court articulated two factors that have since been used by other courts to distinguish tangible personalty from intangibles. First, the subscriber was able to make only a limited use of the books. Under the subscription contracts, title to the books remained in the taxpayer and the subscriber was expressly forbidden to share the confidential information contained therein with the public. Second, and more important, the physical properties of the reference book were merely incidental to the services performed. As explained by the court (276 N.Y. 205, 11 N.E.2d 731):

" * * * The information...