Service Merchandise Co., Inc. v. Arizona Dept. of Revenue

• Court: Arizona Court of Appeals
• Writing for the Court: LANKFORD
• Citation: Service Merchandise Co., Inc. v. Arizona Dept. of Revenue, 937 P.2d 336, 188 Ariz. 414 (Ariz. App. 1996)
• Decision Date: 03 October 1996
• Docket Number: CA-TX,No. 1,1
• Parties: SERVICE MERCHANDISE COMPANY, INC., Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee. 95-0002.

Page 336

937 P.2d 336

188 Ariz. 414

SERVICE MERCHANDISE COMPANY, INC., Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee.

No. 1 CA-TX 95-0002.

Court of Appeals of Arizona Division 1, Department C.

Oct. 3, 1996.

Review Denied May 20, 1997.

[188 Ariz. 415] Lewis and Roca LLP by John P. Frank, Patrick Derdenger, Michael Galloway, Phoenix, for Plaintiff-Appellant.

Grant Woods, Attorney General by Michelle M. White, Assistant Attorney General, Joseph A. Kanefield, Assistant Attorney General, Michael Worley, Assistant Attorney General, Phoenix, for Defendant-Appellee.

OPINION

LANKFORD, Judge.

The Arizona Department of Revenue ("DOR") assessed Arizona use taxes against Service Merchandise Company ("Service Merchandise") on the price it paid to out-of-state printers to produce catalogs and sales fliers delivered to Arizona households. After exhausting its administrative remedies, Service Merchandise brought this tax court action against DOR challenging the assessment.

On cross-motions for summary judgment, the tax court ruled for DOR. Service Merchandise timely appealed. We have jurisdiction pursuant to Ariz.Rev.Stat. Ann. ("A.R.S.") section 12-2101(B) (1994). We review the summary judgment de novo. United Bank of Ariz. v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (App.1990). Our review leads us to affirm.

The material facts are undisputed. Service Merchandise, a Tennessee corporation, does business in 37 states. It operates 390 retail stores, two of which are in Arizona. Customers may either purchase merchandise in a store or order merchandise by telephone or mail and have the merchandise delivered to their homes.

Service Merchandise distributes catalogs and fliers to its customers throughout the year. A large fall catalog advertises all of its products. A smaller spring catalog emphasizes items appropriate for the summer, and fliers are periodically distributed to promote special sales.

Service Merchandise designs its catalogs and fliers at its Tennessee headquarters. It decides how many catalogs and fliers will be produced, the products and prices to be advertised, when the catalogs and fliers will be printed and distributed, and to whom these materials will be delivered.

Two non-Arizona companies printed the catalogs and fliers. The printers prepared a draft catalog or flier according to specifications set by Service Merchandise, which then approved the drafts. After the catalogs and fliers were printed, the printers affixed addresses to them from a mailing list provided by Service Merchandise.

The printers turned the fall catalogs over to common carriers, who shipped the catalogs to the main United States Postal Service office in Phoenix for mailing to Arizona homes. Service Merchandise obtained bids from the common carriers, but the printers chose the carriers from a list of successful bidders provided by Service Merchandise.

The common carriers paid postage charges with blank checks that Service Merchandise had provided through its printers. Service Merchandise paid the common carriers directly. No Service Merchandise employees directly oversaw the common carriers or had any direct contact with the fall catalogs in Arizona.

The procedure differed for the spring catalogs and fliers. The printers mailed these directly to addressees in Arizona from postal facilities at the printers' locations. For each mailing, the printer calculated the required postage and informed Service Merchandise, which returned a check in that amount.

I.

Service Merchandise first contends that the use tax is inapplicable because it did not use the catalogs and fliers in Arizona. We hold that Service Merchandise "used" the catalogs in Arizona by distributing them to its customers in Arizona and therefore hold that the use tax was properly applied.

Arizona imposes a tax on the "use or consumption in this state of tangible personal property purchased from a retailer...." A.R.S. § 42-1408(A) (Supp.1995). "Every person ... using or consuming in this state tangible personal property purchased from a retailer is liable for the tax." A.R.S. § 42-1408(D) (Supp.1995).

"Use" and "consumption" are defined by statute as "the exercise of any right or power over tangible personal property incidental to owning the property...." A.R.S. § 42-1401(8) (Supp.1995). We must therefore determine whether Service Merchandise exercised any power in this State incidental to ownership of the fliers or catalogs.

Service Merchandise concedes that it exercised rights incidental to ownership while the catalogs were outside Arizona. Its officers and employees in Tennessee entered into contracts with the printers, determined the content of the catalogs and fliers, compiled address lists, contracted with common carriers, and paid for the printing and shipment of the materials.

However, Service Merchandise denies that it exercised any such rights in Arizona. It contends that every act incidental to its ownership occurred in Tennessee. It further argues that while its acts in Tennessee caused the materials to be distributed in Arizona, it exercised no control over the materials after the printers shipped or mailed them from their out-of-Arizona locations.

We hold that distribution of the catalogs and fliers in Arizona was a use by Service Merchandise incidental to its ownership. Service Merchandise contracted for the right to have the catalogs distributed to specified Arizona customers at particular times during the year. Although the distribution contracts were consummated outside Arizona, the rights to control when, where, how, to whom and whether the catalogs would be delivered were exercised in Arizona through Service Merchandise's agents. We see no reason to treat Service Merchandise differently for tax purposes merely because it employed agents to do in Arizona what it could have done itself.

Courts from other jurisdictions have held that distribution of catalogs and fliers is an act incidental to ownership. These jurisdictions imposed use taxes under statutes which specifically taxed "distribution" in addition to "use." See, e.g., Collins v. J.C. Penney Co., 218 Ga.App. 405, 461 S.E.2d 582, 584 (1995), review granted, No. 595G2002 (Ga. Jan. 5, 1996); McNamara v. D.H. Holmes Co., 505 So.2d 102, 105 (La.App.1987), aff'd, 486 U.S. 24, 108 S.Ct. 1619, 100 L.Ed.2d 21 (1988). Service Merchandise asserts that these cases are distinguishable because Arizona does not specifically include "distribution" in its definition of acts incidental to ownership. See Sharper Image Corp. v. Michigan Dep't of Treasury, 216 Mich.App. 698, 550 N.W.2d 596, 598 (1996) ("Had the Legislature intended for distributions to be taxed, it could have easily done so by expressly providing it in the definition of use.").

It is true that our statute does not specifically mention distribution. However, it would be redundant to do so in light of Arizona's broad definition of "use." Arizona law defines use as "the exercise of any right or power over tangible personal property incidental to owning the property...." A.R.S. § 42-1401(8) (emphasis added). Because distribution is a right incidental to ownership, it was unnecessary for the Legislature to specifically include it in the definition of "use."

For example, the power to decide which customers will receive a catalog or flier is a power exercised "incidental to owning the property." Service Merchandise provided the list of addresses to the printers, and the printers followed the directions as to which specific customers would receive the catalogs. A non-owner could not decide to send the materials to particular customers. Nor could a non-owner decide to relinquish title to the materials by giving them to the potential customers. By directing the catalogs and fliers to be mailed to customers from the post office, Service Merchandise "used" the catalogs in Arizona.

We also find support for our decision in the so-called "newspaper cases." In these cases, out-of-state taxpayers contracted with out-of-state printers to print and distribute newspaper advertisement inserts. The advertisements were shipped by the out-of-state printers to in-state newspapers. The taxpayers contracted with in-state newspapers to insert advertisements.

The courts uniformly held that the out-of-state taxpayer must pay a use tax. The courts concluded that the out-of-state taxpayer "used" the inserts by virtue of their "power to determine the date of distribution and the number of copies to be distributed." K Mart Corp. v. South Dakota Dep't of Rev., 345 N.W.2d 55, 58 (S.D.1984); see also Wisconsin Dep't of Rev. v. J.C. Penney Co., 108 Wis.2d 662, 323 N.W.2d 168, 172 (App.1982).

We disagree with Service Merchandise's attempts to distinguish the newspaper cases. ¹ While Service Merchandise notes that in the newspaper cases the out-of-state taxpayer contracted with in-state agents (the newspapers) to distribute the materials, this is not a legally important distinction. The question is whether the catalogs were "used" by Service Merchandise in this state through the actions of an agent. Whether the agent is based in Arizona or not is immaterial. In either instance, the taxpayer performs acts incidental to ownership of the materials by proxy.

Service Merchandise also argues that in the newspaper cases, the advertisers determined when the inserts would be distributed. But Service Merchandise had as much power over distribution schedules as did the advertisers in the newspaper cases. For example, in Drackett Products Co. v. Limbach, 38 Ohio St.3d 204, 527 N.E.2d 860 (1988), the out-of-state taxpayer contracted with Ohio newspapers to run inserts printed out-of-state and shipped to the Ohio newspapers. Under the contract, an advertisement could not be canceled unless the newspaper found replacements but in no case could an advertisement be canceled after the printing deadline had passed. Id. at 861. Applying a statute...