Sharp v. Direct Resources for Print, Inc.

• Decision Date: 16 August 1995
• Docket Number: No. 03-94-00599-CV,03-94-00599-CV
• Citation: 910 S.W.2d 535
• Parties: John SHARP, Comptroller of Public Accounts for the State of Texas; Dan Morales, Attorney General of the State of Texas; and Martha Whitehead, successor to Kay Bailey Hutchison, Treasurer of the State of Texas, Appellants, v. DIRECT RESOURCES FOR PRINT, INC. (formerly ATC Communications, Inc.), Appellee.
• Court: Texas Court of Appeals

Page 535

910 S.W.2d 535

John SHARP, Comptroller of Public Accounts for the State of Texas; Dan Morales, Attorney General of the State of Texas and Martha Whitehead, successor to Kay Bailey Hutchison Treasurer of the State of Texas, Appellants, v. DIRECT RESOURCES FOR PRINT, INC. (formerly ATC Communications, Inc.), Appellee.

No. 03-94-00599-CV.

Court of Appeals of Texas Austin.

Aug. 16, 1995.

Rehearing Overruled Sept. 20, 1995.

Released for Publication Oct. 18, 1995.

Jim B. Cloudt, Assistant Attorney General, Taxation Division, Austin, for Dan Morales, Attorney General.

Darold Maxwell, Maxwell & Walker, L.L.P., Houston, Stanley R. Kaminski, McDermott, Will & Emery, Chicago, IL, for appellee.

Before CARROLL, C.J., and ABOUSSIE and JONES, JJ.

ABOUSSIE, Justice.

This case presents the question whether a direct mail service must pay sales tax on the portion of its service relating to the ink-jet addressing of envelopes. Direct Resources for Print, Inc. ("Direct Resources") brought suit to recover Texas sales tax paid under protest and to obtain a declaration that its mailing services are not taxable under Texas law. Appellants John Sharp, as Comptroller of Public Accounts for the State of Texas; Dan Morales, as Attorney General of the State of Texas; and Martha Whitehead, Treasurer of the State of Texas (collectively, the "Comptroller") appeal from that portion of the trial court's judgment granting in part Direct Resources's motion for summary judgment and ordering them to refund the sales tax Direct Resources paid under protest. Direct Resources cross-appeals from that portion of the trial court's judgment granting in part the Comptroller's motion for summary judgment and denying Direct Resources's claim for attorney's fees. We will affirm the trial court's judgment.

BACKGROUND

Direct Resources is a Texas corporation engaged in the business of providing direct mail services. These services include the organizing, folding, collating, inserting in envelopes, and mailing of preprinted advertising circulars, brochures, pamphlets, and other materials. Direct Resources addresses the envelopes to those on the mailing list by means of a machine that attaches the address labels to the envelopes or by means of an ink-jet addressing machine that prints the information directly on the envelopes.

During the years at issue in this cause, a representative direct-mail job by Direct Resources involved the following steps:

(1) Clients furnished Direct Resources with the advertising material to be mailed, envelopes, an address list, and any special mailing instructions.

(2) Direct Resources then organized, folded, and inserted into envelopes the material to be mailed.

(3) Direct Resources sent the address list to a second entity, Houston Data Services, which either transferred the list onto address labels or into a machine-readable format for an ink-jet machine.

(4) Direct Resources then had either a labeling machine cut the address labels apart and glue them to envelopes or an ink-jet machine print the addresses on envelopes.

(5) After the envelopes were addressed, Direct Resources sealed, sorted, metered, bagged, and delivered the envelopes to the post office.

The Comptroller audited Direct Resources for sales tax compliance for the period of October 1, 1986, through October 31, 1990, and determined it owed $39,188.60 in additional sales tax, penalties, and interest. The Comptroller ruled that the addressing of envelopes by means of an ink-jet machine for consideration is a taxable printing service under section 151.005(4) of the Tax Code ¹ and assessed taxes relating to that portion of Direct Resources's services during the period in issue.

Direct Resources paid the assessed tax under protest pursuant to section 112.051 of the Tax Code. See Tex.Tax Code Ann. § 112.051 (West 1992). Direct Resources then filed this action, requesting a tax refund, a declaration under 42 U.S.C. § 1983 and section 112.051 of the Tax Code that its direct mail service was not subject to Texas sales tax, and attorney's fees as authorized under 42 U.S.C. § 1988. After a hearing on cross-motions for summary judgment, the trial court rendered judgment declaring that Direct Resources's business is not a taxable service or sale under the Tax Code's sales tax provisions and ordered the sales taxes refunded to Direct Resources. The trial court denied Direct Resources's request for attorney's fees. By two points of error, the Comptroller appeals the trial court's judgment granting Direct Resources a tax refund and denying its own motion for summary judgment. ² By two cross-points of error, Direct Resources appeals that portion of the trial court's judgment denying its recovery of attorney's fees.

DISCUSSION

The Comptroller maintains that Direct Resources is liable for sales tax because it engaged in printing or imprinting for consideration, see Tex.Tax Code Ann. § 151.005(4) (West 1992), and in word processing, see id. § 151.0101(a)(12) (West 1992), when it sprayed addresses in ink onto envelopes and charged its customers for the ink-jet addressing. Direct Resources responds that it should not be liable for the sales tax paid under protest because the essence of its transaction with its customers was a nontaxable direct-mail service rather than the printing of envelopes for consideration.

The parties agree that the term "printing" has no commonly understood or generally accepted definition. Because we base our opinion on the essence-of-the-transaction doctrine, even if the process used to address envelopes with an ink-jet machine can be characterized as a printing, imprinting, or word processing activity, that characterization does not control the outcome of this cause.

The established test for determining whether a transaction is subject to sales tax involves the determination of the ultimate object or the essence of the transaction. Bullock v. Statistical Tabulating Corp., 549 S.W.2d 166, 167 (Tex.1977); Williams & Lee Scouting Serv., Inc. v. Calvert, 452 S.W.2d 789, 792 (Tex.Civ.App.--Austin 1970, writ ref'd); Comptroller of Public Accounts v. Austin Multiple Listing Serv., Inc., 723 S.W.2d 163, 165 (Tex.App.--Austin 1986, no writ); First Nat'l Bank v. Bullock, 584 S.W.2d 548, 550 (Tex.Civ.App.--Austin 1979, writ ref'd n.r.e.). The inquiry concerns what is being sold. Williams & Lee, 452 S.W.2d at 792. In other words, the essence of the transaction is the customer's basic purpose in entering into the transaction. Statistical Tabulating, 549 S.W.2d at 169. In determining the object of the transaction, many factors are relevant, and the issue must be determined on a case-by-case basis. Id. If the essence of the sale is not tangible personal property but instead concerns intangible property such as a service, the transaction is not taxable under any definition of sale. Id. at 168. Any ambiguities in the application of the essence of the transaction test must be resolved in the taxpayer's favor; taxing statutes must be construed strictly against the taxing authority and liberally in favor of the entity sought to be taxed. Id. at 169; Williams & Lee, 452 S.W.2d at 793.

In the instant cause, we must determine whether the essence of the assessed transactions was a taxable transfer of printing for consideration or the nontaxable performance of a direct-mail service. ³ We conclude that the essence of Direct Resources's transactions with its customers during the years at issue was the performance of a direct-mail service; the true object sought by Direct Resources's customers was not a finished product in the form of envelopes addressed by an ink-jet machine but the receipt of a direct-mail service. Customers, in handing over an address list, advertising circulars, and mailing instructions to Direct Resources, desired something beyond the tangible printed envelopes; they sought the mailing of those envelopes and the enclosed advertising material to the targeted recipients.

The Comptroller contends, nevertheless, that the assessed transactions are taxable as printing for consideration, identifying several factors it believes establish that the essence of the assessed transactions in this cause was not a mailing service. We conclude however, that the factors the Comptroller identifies support our conclusion that the essence of the assessed transactions was a mailing service.

One factor identified by the Comptroller is the availability of other nontaxable forms in which to carry out the transaction. See Statistical Tabulating, 549 S.W.2d at 168. In Statistical Tabulating, the taxpayer processed raw data obtained from customers by translating it into a computer code that was punched onto key punch cards ultimately given to the customers. Id. at 167-68. The customers, in turn, used the punch cards to transfer the coded data into their own computers. Id. The court noted that the coded data was transferred by means of punch cards but could have been transferred to the customers' computers through several other forms, such as tapes and telephones. Id. at 168; see also Williams & Lee, 452 S.W.2d at 792 (recognizing printed reports could take other forms such as handwritten notes and telephone or telegraph communications); Austin Multiple Listing, 723 S.W.2d at 166 (noting information contained in printed books could have been transferred in variety of forms). This factor led to the court's decision that the essence of the customers' transactions was not the receipt of taxable tangible personal property in the form of coded punch cards, but the receipt of a data processing service. Statistical Tabulating, 549 S.W.2d at 168. Thus, the transaction was not one intended to be taxed under sales tax provisions. Id. at 169.

In the instant cause, the addressing component of Direct Resources's mailing service can be accomplished not only by ink-jet printing but also by the application of mailing labels or even handwriting or typing. ⁴ As in ...