CATALINA MARKETING CORP V DEPT OF TREASURY
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STATE OF MICHIGAN
COURT OF APPEALS
CATALINA MARKETING SALES
CORPORATION,
UNPUBLISHED
March 5, 2002
Petitioner-Appellant,
v
No. 221811
Tax Tribunal
LC No. 00-231397
DEPARTMENT OF TREASURY,
Respondent-Appellee.
CATALINA MARKETING CORPORATION,
Petitioner-Appellant,
v
No. 221890
Tax Tribunal
LC No. 00-231398
DEPARTMENT OF TREASURY,
Respondent-Appellee.
Before: Fitzgerald, P.J., and Hoekstra and Markey, JJ.
PER CURIAM.
In these consolidated appeals, petitioners Catalina Marketing Sales Corporation (CMSC)
and Catalina Marketing Corporation (CMC) appeal as of right from the final order of the
Michigan Tax Tribunal (the Tax Tribunal) denying petitioners’ motion for summary disposition
and granting respondent Department of Treasury’s (the department) motion for summary
disposition.1
Petitioners challenge the tribunal’s conclusion that respondent properly
characterized petitioners’ business activities as subject to sales tax. We affirm.
I. Facts
1
Petitioners’ actions were also consolidated before the tribunal.
-1-
The parties presented this matter to the Tax Tribunal on stipulated facts, with multiple
exhibits, and petitioners also presented the affidavits of two individuals. The stipulated facts
reveal the following. CMSC is a wholly owned subsidiary of CMC, and both are Delaware
corporations. During the period at issue,2 these corporations performed business activities in
Michigan and in twenty-eight to forty-one other states. At that time, CMC and CMSC
(collectively, petitioners) contracted with product manufacturers interested in promoting
particular products. Petitioners entered into standard integrated performance agreements with
manufacturers to allow them to participate in petitioners’ Checkout CouponTM program. Those
agreements3
identified and categorized the product for which coupons would be prepared; the
markets in which the coupon would be issued; the periods during which the
program would be in effect; the base fee for participation in the program; and the
payment rate for each coupon issued. Typically, differential rates were charged
for issued coupons, depending upon the nature of the coupon. As an example, a
rate of $.06 may have been charged for each coupon issued upon the purchase by
a consumer or a competitor’s similar product; a rate of $.05 per coupon for a
coupon issued to promote a different product manufactured by the manufacturer
of a product purchased by a consumer (e.g., a coupon for Company X’s refried
beans may issue upon the purchase of Company X’s salsa); and a rate of $.035 per
coupon to promote the same product purchased by a consumer.
During the same period, CMC also entered into “Checkout CouponTM Distribution
Agreements” with retailers who wished to use the Checkout CouponTM system in their retail
outlets to distribute coupons designated for distribution by CMC and the manufacturer and other
coupons and promotional materials for other products for its own benefit “provided such
coupons do not conflict with category exclusivity of programs established by Catalina with its
manufacturer clients.” According to these agreements,4
CMC typically remunerated the retailer for its distribution of the coupons by
paying it a flat fee (such as $0.005) for each coupon or manufacturer incentive
printed, as well as an additional sum (e.g., $0.0025) for each coupon printed in
excess of 50% of the retailer’s customer counts. CMC also had the ability to
charge (although it may not actually have charged) the retailer a fee of $0.035 per
coupon for those coupons or promotions printed by the retailer for its private label
or in other noncompetitive situations.
Computer hubs in Florida and California furnished each PC at the customer’s individual
sites with current programming that instructed the printer in each supermarket checkout lane to
print a paper tape of either a money-off coupon or a message to the consumer. When someone
scanned products at the checkout lanes, the computer hubs provided information to the computer
in the store, causing the checkout lane printer to print on the paper tape specified information for
2
The combined period from January 1, 1991 through June 30, 1993.
3
Two exemplars of the standard agreements were attached to the stipulated facts as exhibits.
4
A standard distribution agreement was attached to the stipulated facts as an exhibit.
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the supermarket’s customers. For each supermarket participating in this program, CMSC
remitted to CMC a flat fee per calendar quarter and $0.015 for each coupon or message printed
during the quarter.
As remuneration for their activities, CMC and CMSC required the manufacturer,
pursuant to certain performance agreements, to remit the greater of the base program fee
identified in the agreement or a sum determined by reference to the coupon rate not to exceed ten
percent of the base amount chargeable in the cycle absent the written approval of the
manufacturer, or to remit a program fee equal to the higher of the base program fee or per
coupon rate identified in the agreement. During the audit period, either CMC or CMSC entered
into each performance agreement, but the activity of entering into contracts with manufacturers
shifted from CMC to CMSC during early 1992.
The parties further agreed that if the Tax Tribunal were to determine that petitioners are
liable for sales tax, only CMC or CMSC, not both, is obligated to pay the tax attributable to any
given portion of the audit period. The department recognized that it may not lawfully collect the
same tax from both petitioners with respect to the same transaction for the same period.
For the period from January 1, 1991 through June 30, 1993, the department conducted a
sales and use tax audit of CMC. Consistent with its position that its activities in Michigan during
that period exclusively consisted of the provision of nontaxable services, CMC remitted a check
for $38,002 (plus interest) to the department in full payment of its Michigan use tax liability for
the period of January 1, 1991 through March 31, 1992. The department admitted that CMC paid
the entirety of the use tax, penalty, and interest for that period and the department negotiated the
check.
Petitioners requested an informal conference before a department hearing referee, and
after the conference, the hearing referee recommended that Bills for Taxes Due (Intents to
Assess) G902765, issued to CMSC, and G902721, issued to CMC, be canceled because the
activities under consideration in this case constitute the provision of services, not the provision
of tangible personal property. However, the department’s revenue commissioner disagreed with
the recommendation and issued a “Statement of Rebuttal.”
In issuing the December 1, 1995 Bill for Taxes Due (Final Assessment) G902765, the
department asserted that CMSC is liable for payment of additional Michigan sales tax for the
period from January 1, 1992 through June 30, 1993, in the amount of $263,079.00,5 plus interest
computed to December 1, 1995, in the amount of $61,622.83, totaling alleged sales tax liability
of $324,701.83. In issuing the December 1, 1995 Bill for Taxes Due (Final Assessment)
G902721, the department asserted that CMC is liable for payment of additional Michigan sales
tax for the period from January 1, 1991 through March 31, 1992, in the amount of $44,092.00,
5
Although the stipulation of facts stated a slightly different number here, this correct number is
listed on the final bill for taxes due, and adding this amount to the interest amount results in the
total alleged sales tax liability.
-3-
plus interest computed to December 1, 1995, in the amount of $15,072.23, totaling alleged sales
tax liability of $59,164.23.6
On January 5, 1996, petitioners filed similar, individual petitions contesting their use and
sales tax assessment. The Tax Tribunal consolidated the cases. Both petitioners and respondent
moved for summary disposition pursuant to MCR 2.116(C)(10).7 On August 9, 1999, in a thirtysix page decision, the Tax Tribunal denied petitioners’ motion and granted the department’s
motion. Petitioners appeal this decision.
II. Standard of Review
Although generally we review a trial court’s grant of summary disposition de novo, Spiek
v Dep’t of Transportation, 456 Mich 331, 337; 572 NW2d 201 (1998), review of Tax Tribunal
decisions is limited:
This Court's authority to review a decision of the Tax Tribunal is very
limited. In the absence of an allegation of fraud, this Court's review of a Tax
Tribunal decision is limited to determining whether the tribunal committed an
error of law or adopted a wrong legal principle. The tribunal's factual findings
will not be disturbed as long as they are supported by competent, material, and
substantial evidence on the whole record. [Michigan Milk Producers Ass’n v
Dep’t of Treasury, 242 Mich App 486, 490-491; 618 NW2d 917 (2000) (citations
omitted); see also Const 1963, art 6, § 28; Michigan Bell Telephone Co v Dep’t of
Treasury, 445 Mich 470, 476; 518 NW2d 808 (1994).]
Further, “[f]ailure to base a decision on competent, material, and substantial evidence constitutes
an error of law requiring reversal.” Meijer, Inc v City of Midland, 240 Mich App 1, 5; 610
NW2d 242 (2000). Moreover, “[t]his Court will generally defer to the Tax Tribunal’s
interpretation of a statute that it is charged with administering and enforcing.” Michigan Milk
Producers Ass’n, supra at 491.
III. Central Arguments
Petitioners first argue that the Tax Tribunal erred in determining that their activities in
Michigan during the audited period constituted sales of tangible personal property at retail
subject to Michigan sales tax. According to petitioners, the Tax Tribunal “misapplied legal
principles governing the distinction between the taxable sale of tangible personal property and
the provision of nontaxable service to the facts before it, and its findings were unsupported by
competent, material and substantial evidence on the whole record.” In essence, petitioners argue
that their sale of coupons to manufacturers is merely incidental to their nontaxable marketing
services and therefore their activities should be not be assessed sales tax. Petitioners begin their
6
Although the stipulation of facts stated a slightly different number here, this correct number is
listed on the final bill for taxes due and results from adding together the two previous numbers.
7
Despite the department’s cite to MCR 2.116(A) and (B), the tax tribunal concluded that, for all
practical purposes, the department bases its motion for summary disposition on MCR
2.116(C)(10).
-4-
analysis by noting the formulations that the Tax Tribunal and courts have used prior to the
adoption of the “real object test” and finish their analysis by concluding that the Tax Tribunal’s
failure to apply these principles was legal error requiring reversal. According to petitioners, the
prior formulations stood for the principle “that an otherwise exempt service transaction that also
happens to involve an incidental transfer of tangible personal property is not subject to sales tax”
(emphasis omitted) and, applying this test, the creation of slips of paper in the form of coupons
and/or product messages are simply incidental by-products. Petitioners claim that they use their
marketing and product selection expertise to provide highly customized marketing services to
their clients and that the slips of paper produced are merely incidental to these services.
Petitioners explain that the manufactures pay for their sophisticated marketing services “to
enable them to efficiently and effectively target potential customers and motivate them to acquire
the manufacturers’ products upon a future store visit” and that the slip of paper “is merely the
medium through which the manufacturer obtains this desired outcome.”
Not only do petitioners argue that the Tax Tribunal committed legal error here by failing
to accord any consideration to the “pre ‘real object’” principles, they further argue that the Tax
Tribunal “misapplied the ‘real object’ analysis to the facts at issue and wrongfully ignored the
substantial, competent and material evidence it had before it.” Petitioners claim that an accurate
application of the “real object” test demonstrates that petitioners provide services. According to
petitioners, the manufacturers’ intent when contracting with them is to obtain services, as
discerned from the contractual language, the nature of what petitioners’ activities are meant to
accomplish for them, and the actual mechanics of petitioners’ relationship with the
manufacturers. At most, the coupon is an inconsequential medium with which to transmit
information to specifically-targeted customer groups. Petitioners state that the intrinsic value of
the arrangement lies in the services that petitioners and the manufacturers have strategically
designed using the enhanced marketing skills that petitioners have developed over time. In sum,
petitioners claim that they provide targeted marketing services, not retail sales.
Contrary to petitioners’ assertions, the department contends that the Tax Tribunal’s final
decision is consistent with the “real object” test. According to the department, the contracts are
for the creation and distribution of paper coupons for customers to use to buy the manufacturer’s
products at a discount and, without distribution of the coupons, the manufacturer’s purpose of
stimulating future purchases of its product by offering discounts is not accomplished. The
department states that from the manufacturer’s prospective, the real object of the transaction is to
get the coupons into the hands of shoppers at checkout. The department claims that the alleged
services could not be provided to consumers through some other medium, such as by verbal
delivery, without breach of contract. With regard to petitioners’ reliance on cases involving the
“pre ‘real object’” test formulations, the department responds that those cases are not on point
and are clearly distinguishable, especially where the contracts here demonstrate that petitioners
are engaged in the distribution of coupons. According to the department, “[t]he analysis, the
reports, and service enhanced the value of coupons in the eyes of the manufacturers, not the other
way around,” and thus the service aspect of petitioners’ activities is incorporated into, and
incidental to, the distribution of coupons. The department concludes that the Tax Tribunal’s
decision was proper.
IV. Analysis of Central Arguments
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While some activities clearly constitute sales and others clearly constitute services,
“mixed” transactions of both sales and services pose difficulty in determining how the activity is
to be taxed. Struggling with that issue, the Tax Tribunal, in Shelby Graphics, Inc v Michigan
Dep’t of Treasury, 5 MTTR 63 (Docket No. 83611, October 7, 1986), concluded that, “[i]n
attempting to affix the character of a transaction as a sale or service, the standard best aligned to
Michigan’s statutory sales tax framework appears to be the ‘real object’ test ….” Shelby, supra
at 70. Years later, the department issued Revenue Administrative Bulletin (RAB) 95-1,
establishing the “real object test” guidelines that the Department of Treasury adopted to
differentiate between the sale of a service and the sale of tangible personal property.
In the present case, petitioners do not challenge the department’s ability to issue a RAB8
or to adopt the “real object test” guidelines. Nor do they argue that the test is inconsistent with
the General Sales Tax Act (STA), MCL 205.51 et seq.9 Rather, they suggest that the Tax
Tribunal failed to take into consideration all of the formulations other than the real object test.
We see no need to focus on the “pre ‘real object’” test, as petitioners desire, because the real
object test is clearly more aligned with the circumstances in this case. Under the real object test,
the trier of fact must “discern whether, from the perspective of the purchaser, the purpose of the
transaction lies in the transfer of an end product or in the acquisition of services.” Shelby, supra
at 69; see also Speaker-Hines & Thomas, Inc v Michigan Dep’t of Treasury, 9 MTTR 129, 141
(Docket No. 88326, October 9, 1991), affirmed 207 Mich App 84; 523 NW2d 826 (1994). The
statement of the test in RAB 95-1 provides, “From the perspective of an impartial third party,
what is the purchaser seeking? A tangible end product produced by a service, or merely the
service itself?” Here, the Tax Tribunal indicated that “the linchpin issue requiring review and
resolution is whether, from the perspective of the manufacturer-clients, the ‘real object’ sought
by them from the business activities of CMC and CMSC during the audit period involved the
purchase, for distribution to retail consumer, of tangible coupons pursuant to contracts between
[p]etitioners and the manufacturers, or whether the real object sought by the manufacturers
consisted of the receipt of nontaxable computer and informational services from [p]etitioners.”
[Emphasis in original.] We find no error of law in the Tax Tribunal’s use of the real object test
or in its conclusion derived from its use of that test.
8
The administrative head of the revenue division of the state department of treasury, that being
the state commissioner of revenue, MCL 205.2, shall have “the power and authority incidental to
the performance of the following acts, duties, and services”:
(f) The department may periodically issue bulletins that index and explain
current department interpretations of current state tax laws. [MCL 205.3(f).]
9
The STA levies a tax on “all persons engaged in the business of making sales at retail . . . .”
MCL 205.52(1). The STA defines a “sale at retail” as
a transaction by which the ownership of tangible personal property is transferred
for consideration, if the transfer is made in the ordinary course of the transferor’s
business and is made to the transferee for consumption or use, or for any purpose
other than for resale, or for lease . . . . [MCL 205.51(b) (emphasis supplied).]
-6-
The circumstances in the present case are similar to those in Shelby, supra. There, the
petitioner was engaged in the business of advertising, including designing and furnishing for its
clients advertising products such as signs, banners, point of purchase displays, and trade show
items as well as planning and creating advertising and artistic services. Id. at 65-67. The
petitioner challenged the department’s final assessment of sales tax. Id. at 65. As the Shelby
decision indicates, “[t]he paramount question proposed by this case focuses upon the penumbral
dichotomy between sales and services: in providing [a supermarket] with signs, banners,
displays and other advertising related materials, did Shelby predominantly engage in the
provision of creative services in relation to which transfers of tangible personal property were
inconsequential, or did Shelby make taxable sales at retail which necessarily incorporated certain
services?” Id. at 67. After surveying the standard established in other jurisdictions in similar
cases, Shelby adopted the real object test, noting that that test, “in requiring that consideration be
given to the intent of the purchaser in acquiring an item (the salient question being whether the
purchaser is seeking to obtain the services of the seller or is contracting for a tangible end
product), appropriately focuses upon the point at which an ultimate consumer comes into play.”
Id. at 70. In applying the real object test, Shelby determined that the supermarket’s real object in
contracting with Shelby was to obtain a tangible end product for its use. Id. at 70-71.
Here, like in Shelby, both services and tangible personal property are components of
petitioners’ business. We admit that the situation here is complex and subject to different
interpretations.
Although petitioners persuasively argue their position that the
coupon/advertisement issued is merely an inconsequential medium with which to transmit
information to specifically-targeted customer groups and that it is incidental to the services that
they provide to their manufacturer clients, competent, material and substantial evidence supports
the Tax Tribunal’s determination that
in this “mixed” service/sales transaction, the objective evidence shows the
“customized” Checkout Coupons and advertising messages, which are printed at
supermarket checkout lanes for distribution to targeted retail consumers, to be the
“real object” of the manufacturers’ contracts with [p]etitioners. It is the end
product, the tangible personal property, which promotes a manufacturer’s
product(s) and which attempts, through discount offers and advertising messages,
to convince consumers to purchase its product(s) in the future. Without question,
highly skilled, detailed and creative services undoubtedly went, and continue to
go, into the final product—the targeted coupons and advertising messages
distributed to retail consumers. However, it is the tangible end product of those
efforts which manufacturers ultimately seek. [MTT Docket Nos. 231398 and
231397, August 9, 1999 decision, p 30-31 (emphasis in original).]
The contractual language, the focus on coupons, and the fact that the manufacturer only
obtains an increased redemption rate if the coupons are issued and used is competent, material
and substantial evidence sufficient to support the Tax Tribunal’s determination that the
manufacturer’s intent in contracting with petitioners is to use petitioners information and
expertise to target certain customers and provide them with a coupon or advertisement for the
manufacturer’s product(s), and thus the manufacturer’s intent is to obtain a tangible end product.
Although this Court may have reached a different conclusion, we cannot say that the Tax
-7-
Tribunal committed legal error in concluding that petitioners’ activities were subject to sales tax
or that the decision is not supported by competent, material and substantial evidence.
V. Secondary Arguments & Analysis
Petitioners also argue that the Tax Tribunal erred in failing to find that the department
exceeded its administrative authority under the Revenue Act, MCL 205.1 et seq., in issuing
multiple, inconsistent alternate sales and use tax assessments to petitioners. We find this
argument without merit.10 As the department argued to the Tax Tribunal and to this Court on
appeal, and with which we agree, “there has been no persuasive showing, statutory or otherwise,
of authority precluding the [d]epartment from auditing the taxpayer for both taxes” when the
taxpayer and the department have differing views on which theory applies. [Emphasis supplied.]
MCL 205.20 provides that “[u]nless otherwise provided by specific authority in a taxing statute
administered by the department, all taxes shall be subject to the procedures of administration,
audit, assessment, interest, penalty, and appeal….” When it is questionable whether taxation
under the STA, MCL 205.51 et seq. or the Use Tax Act, MCL 205.91 et seq., is appropriate, we
see no legislative limitation of, nor the legislative intent to limit, the department’s ability to audit
under only one theory of taxation. We note that there was no dispute that tax was owed under
only one of the two theories, and thus petitioners would not be exposed to double taxation.
Petitioners next argue that because they paid the use tax in full and the department
accepted the payment, their tax liability is satisfied. In other words, petitioners suggest that the
department’s acceptance of their use tax payment was an admission that the use tax amount
represented their sole tax liability. In effect, petitioners claim that a taxpayer may pay the
smaller amount due under two separate theories of tax liability to shield itself from further tax
liability. We disagree. The fact that sales tax and use tax are complementary in nature, Elias
Brothers Restaurants, Inc v Treasury Dep’t, 452 Mich 144, 153; 549 NW2d 837 (1996), in no
way precludes the department, in these circumstances where the record reveals that petitioners
knew that the department’s position was that petitioners’ activities were subject to sales tax, from
seeking to collect sales tax on activities that the taxpayers, petitioners, deem subject only to use
tax.11
10
We found no use tax assessment in the record before us, and apparently the tax tribunal was
aware of no final assessment for use tax.
11
See MCL 205.22(1) (“A taxpayer aggrieved by an assessment, decision, or order of the
department may appeal the contested portion of the assessment, decision, or order to the tax
tribunal within 35 days, or to the court of claims within 90 days after the assessment, decision, or
order. The uncontested portion of an assessment, order, or decision shall be paid as a
prerequisite to appeal.”) We note that the department credited the amount that petitioners paid
toward their sales tax liability. We further note that the tax tribunal ordered that “an industrial
processing exemption, which the [d]epartment has agreed is proper to be allowed to
[p]etitioner(s), shall forthwith be calculated” and that the department shall issue a revised Bill of
Taxes Due. [Emphasis omitted.]
-8-
Affirmed.
/s/ E. Thomas Fitzgerald
/s/ Joel P. Hoekstra
/s/ Jane E. Markey
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