AMERITECH PUBLISHING INC V DEPT OF TREASURYAnnotate this Case
STATE OF MICHIGAN
COURT OF APPEALS
AMERITECH PUBLISHING, INC.,
August 7, 2008
September 30, 2008
Court of Claims
LC No. 04-000235-MT
DEPARTMENT OF TREASURY,
Advance Sheets Version
Before: Gleicher, P.J., and Fitzgerald and Hoekstra, JJ.
Plaintiff Ameritech Publishing, Inc. (API), appeals as of right the Court of Claims order
affirming the denial of API’s request for a use tax refund for the years 1998 through 2000 (the
refund period) by defendant Department of Treasury (the Department). Because API “used” the
telephone directories in Michigan and the “price” of the directories is to be calculated without a
deduction for the costs of materials or services, and because the costs of the directories is not
subject to double taxation, we affirm.
I. Facts and Procedural Background
API1 and the Department submitted the case to the Court of Claims on the following
stipulated facts. API published and distributed telephone directories to business and residential
customers in Michigan. R.R. Donnelly & Sons Company (Donnelly) printed, bound, and cut the
directories at its printing facility in Dwight, Illinois.
The publishing of the directories involved three steps. First, API developed the content
to be published in the directories. After API completed creating the content, which consisted of
API is a subsidiary of Ameritech Corporation, and Ameritech Corporation is a subsidiary of A
T & T, Inc.
a page-by-page presentation of the directories, API provided the content to Donnelly in
electronic format. Second, API purchased the paper on which Donnelly was to print the
directories. API entered into contracts with non-Michigan paper mills for the paper. Although
the paper mills shipped the paper directly to Donnelly’s printing facility in Dwight, Illinois, API
took title of the paper before Donnelly used the paper to print any directories. Donnelly
maintained API’s paper separate from all other paper in its plant, and it was only allowed to use
API’s paper for the directories. Third, API procured printing services from Donnelly. After
Donnelly printed the content supplied by API on the paper, Donnelly cut and bound the paper
into finished directories.
API entered into an agreement with a contract carrier for transportation of the directories
(carrier contract) and with a product development corporation (PDC) for distribution of the
directories (distribution contract). The contract carrier transported the finished directories from
Donnelly’s printing facility in Dwight, Illinois, to the PDC’s distribution centers located
throughout Michigan. Then, over the course of several weeks, the PDC distributed the
directories to local businesses and residences. In general, the PDC’s distribution of the
directories consisted of two phrases: (1) the “initial distribution,” where the PDC completed
door-to-door distribution of the directories and mailed directories to remote and rural areas and
to controlled-access locations, such as condominium complexes and gated communities; and (2)
the “secondary distribution,” which consisted, in part, of the PDC’s delivering directories to new
telephone users and to customers requesting additional directories.
During the refund period, API remitted use tax to the Department based on the cost of the
paper it purchased from the paper mills and the cost of Donnelly’s printing services. In February
2002, API sought from the Department a refund in the amount of $3,519,409.13, which equaled
the amount of use taxes it alleged it had overpaid during the refund period. The Department
denied the refund request, and the Court of Claims upheld the denial.
On appeal, API makes three arguments. First, API argues that, because it exercised no
rights or powers over the directories while the directories were in the distribution channel, it did
not “use” the directories in Michigan. Second, API argues that, even if the distribution of the
directories is subject to the use tax, neither the cost of the paper nor the cost of Donnelly’s
printing services could be included in determining the “price” of the directories. Third, API
argues that, because the directories are a “tie-in” item to the telecommunication services
provided by its affiliated companies, the result of allowing defendant to tax its costs of producing
the directories would be double taxation.
II. Standard of Review
This Court reviews questions of law de novo. Gen Motors Corp v Dep’t of Treasury, 466
Mich 231, 236; 644 NW2d 734 (2002). This Court also reviews questions of statutory
interpretation de novo. Herald Wholesale, Inc v Dep’t of Treasury, 262 Mich App 688, 693; 687
NW2d 172 (2004).
Construction of the Use Tax Act (UTA), MCL 205.91 et seq., is subject to the general
rules of statutory interpretation. Brunswick Bowling & Billiards Corp v Dep’t of Treasury, 267
Mich App 682, 684; 706 NW2d 30 (2005). The primary goal of judicial construction of a statute
is to ascertain and give effect to the intent of the Legislature. Neal v Wilkes, 470 Mich 661, 665;
685 NW2d 648 (2004). If the language employed by the Legislature is unambiguous, the
Legislature is presumed to have intended the meaning clearly expressed, and this Court must
enforce the statute as written. Rowland v Washtenaw Co Rd Comm, 477 Mich 197, 219; 731
NW2d 41 (2007). However, when interpreting a tax statute, this Court must keep in mind that
the authority to tax must be expressly provided. See Molter v Dep’t of Treasury, 443 Mich 537,
543; 505 NW2d 244 (1993). Tax laws will not be extended in scope by implication or forced
construction. Sharper Image Corp v Dep’t of Treasury, 216 Mich App 698, 702; 550 NW2d 596
(1996). “When there is doubt, tax laws are to be construed in favor of the taxpayer.” Id.
III. The UTA
The use tax is complementary to the sales tax. WPGP1, Inc v Dep’t of Treasury, 240
Mich App 414, 416; 612 NW2d 432 (2000). The UTA is designed to cover those transactions
not covered by the General Sales Tax Act (GSTA), MCL 205.51 et seq. WPGP1, supra at 416.
The UTA provides:
There is levied upon and there shall be collected from every person in this
state a specific tax for the privilege of using, storing, or consuming tangible
personable property in this state at a rate equal to 6% of the price of the property .
. . .” [MCL 205.93(1).]
“It is the use [of the property] in Michigan that is taxed under the [UTA].” WMS Gaming, Inc v
Dep’t of Treasury, 274 Mich App 440, 443; 733 NW2d 97 (2007).
The UTA defines “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” to another. MCL 205.92(b). API claims that, because it
did not exercise any rights or powers over the directories while the directories were transported
by the contract carrier and distributed by the PDC, it did not “use” the directories in Michigan.
In addition, API argues that this Court’s decision in Sharper Image, supra, suggests that a
distribution of tangible personal property does not fall within the definition of “use” under MCL
In Sharper Image, the plaintiff conducted business in Michigan through mail-order
catalogs. The catalogs, produced by a printer in Nebraska, were shipped to Michigan residents
through the mail from the printer’s place of business. The plaintiff retained no control over the
catalogs after the catalogs were delivered to the postal service. The Court of Claims held that the
Throughout this opinion, we quote the UTA as it existed during the refund period. The UTA
has been revised since the refund period.
plaintiff’s distribution of the catalogs in Michigan was a “use” subject to the UTA because it
found that the definition of “distribution” was synonymous with the definitions of “give” and
“transfer,” two terms within the statutory definition of “use.”
This Court disagreed:
We conclude the trial court erred in two respects. First, under the plain
wording of the statute, in order to be taxed under the UTA, a taxpayer must
perform in Michigan one of the activities listed in the definition of “use.” MCL
205.93(1); MSA 7.555(3)(1). Here, plaintiff’s exercise of a right or power over
the catalogs ended when the catalogs were delivered to the postal service in
Second, we find no provision in the statutory definition of “use” to allow
defendants to tax the distribution of catalogs. Had the Legislature intended for
distributions to be taxed, it could have easily done so by expressly providing it in
the definition of use. Indeed, the legislatures of other jurisdictions have done this.
See, e.g., Collins v J C Penney Co, Inc, 218 Ga App 405; 461 SE2d 582 (1995),
and J C Penney Co, Inc v Olsen, 796 SW2d 943 (Tenn, 1990). Our Legislature,
however, did not include distribution in the definition of use, and we will not
extend the tax to that activity absent the statutory authority to do so. Michigan
Bell [Tel Co v Dep’t of Treasury, 445 Mich 470, 477; 518 NW2d 808 (1994)].
We find support for our conclusion from a review of case law from other
states. The cases from states in which a use tax has been applied in situations
similar to that presented here are dissimilar in two important ways. First, in many
of the other jurisdictions, the relevant statute specifically provides for the taxation
of distributions. See, e.g., Collins, supra, and Olsen, supra.
Also, the facts before the courts in the other jurisdictions indicated that the
taxpayer enjoyed indicia of control over the material not here present. Such
indicia of control included the power to determine in what publications the
advertisements were to be placed and at what time they would be distributed. See
Mervyn’s v Arizona Dep’t of Revenue, 173 Ariz 644; 845 P2d 1139 (1993), and K
Mart Corp v Idaho State Tax Comm, 111 Idaho 719; 727 P2d 1147 (1986).
The Georgia use tax enabling statute provides “that ‘[u]pon the first instance of use,
consumption, distribution, or storage within this state of tangible personal property . . . the owner
. . . shall be liable for a tax . . . .’” Collins, supra at 406-407, quoting Ga Code Ann 48-8-30(c)
(emphasis added). The Tennessee use tax statute applies to tangible personal property “‘when
the same is not sold but is used, consumed, distributed, or stored for use or consumption in this
state . . . .’” J C Penney Co, supra at 945, quoting Tenn Code Ann 67-6-203 (emphasis added).
In those jurisdictions having statutory language similar to that in
Michigan, and applying that language to facts similar to those presented here, the
use tax has been held inapplicable. See, e.g., Modern Merchandising, Inc v Dep’t
of Revenue, 397 NW2d 470 (SD, 1986), and Wisconsin Dep’t of Revenue v J C
Penney Co, Inc, 108 Wis App 2d 662; 323 NW2d 168 (1982). Indeed, many of
the courts addressing this issue rely on the distinction between those companies
exercising control over their mailings and those not exercising such control. See,
e.g., Modern Merchandising, supra, and Mervyn’s, supra. [Sharper Image, supra
We disagree with API’s assertion that the Court’s holding in Sharper Image suggests that
a distribution of tangible personal property can never be a taxable “use” of the property under the
UTA. In Sharper Image, the Court’s holding that the plaintiff’s distribution of the catalogs in
Michigan was not subject to a use tax was two-fold: (1) the plaintiff did not exercise “a right or
power” over the catalogs in Michigan, and (2) the Legislature did not include distributions within
the list of activities subject to the UTA. Id. at 702-703. On the bases of the first part of the
Court’s holding, we conclude that under MCL 205.92(b) a distribution of tangible personal
property is a “use” subject to the UTA if the owner of the property exercised “a right or power . .
. incident to the ownership of that property” while the property was in Michigan.4
An owner of tangible personal property no longer exercises “a right or power over
tangible personal property incident to the ownership of that property” when it has ceded total
control of the property to a third party. WPGP1, supra at 418-419. In WPGP1, the plaintiff
purchased two airplanes at a foreclosure sale. At the time of the purchase, the airplanes had been
leased to Southwest Airlines, Inc., and were used by Southwest as commercial passenger
airplanes. The plaintiff’s purchase of the airplanes did not terminate Southwest’s lease of the
airplanes, nor did the purchase interrupt Southwest’s continuous use of the airplanes in interstate
commerce. According to the Department of Treasury, by owning the airplanes, leasing the
airplanes to Southwest, and allowing Southwest to fly the airplanes into and out of a Detroit
airport, the plaintiff “used” the airplanes in Michigan within the meaning of the UTA.
On appeal, this Court disagreed, id. at 417-419, finding that if any entity “used” the
airplanes within Michigan, it was Southwest:
[I]t is undisputed that plaintiff bought the airplanes subject to preexisting
leases with Southwest. Under the leases, Southwest completely controlled the
flight schedules and the routine maintenance of the airplanes. In addition, the
leases held Southwest responsible for ensuring that the aircraft remained
registered with the FAA [Federal Aviation Administration] in the name of the
lessor. Under the UTA, the tax is imposed for “the privilege of using, storing, or
See K Mart Corp, supra at 721 (“In light of . . . the exercise by K Mart, through its contracts, of
rights and powers over the inserts incident to their ownership, K Mart uses the inserts within the
meaning of the use tax statute.”).
consuming tangible personal property in this state . . . .” MCL 205.93(1); MSA
7.555(3)(1). If any of these privileges were utilized, it was done by Southwest,
not plaintiff. “Use” means “the exercise of a right or power over tangible
personal property incident to the ownership of that property . . . ,” MCL
205.92(b); MSA 7.555(2)(b) (emphasis supplied), which plaintiff did not do.
Because of the leases, plaintiff at no time used, stored, or consumed the property
in Michigan. Despite plaintiff’s ownership interest in the airplanes, the leases
gave exclusive authority over the use, storage, and consumption of the airplanes
during the duration of the leases to Southwest, and thus plaintiff exercised no
right or power over the airplanes. In other words, by virtue of the leases, plaintiff
ceded control of the airplanes to Southwest, and therefore could not have “used”
the airplanes for purposes of use tax liability under the UTA.
. . . While the leases did not give Southwest permanent control of the
airplanes, we conclude that the leases gave Southwest total control of them,
because pursuant to the leases Southwest was responsible for the flight schedules
and general maintenance of the planes. Plaintiff did not direct Southwest’s routes
or otherwise exercise dominion over Southwest’s use of the planes. [Emphasis in
In this case, a review of the carrier contract and the distribution contract establishes that
API did not cede total control of the directories while the directories were transported in
Michigan by the contract carrier or when they were distributed to Michigan businesses and
residences by the PDC. Pursuant to the carrier contract, API’s responsibilities included the
“scheduling of directory printing, transportation and distribution from [Donnelly’s plant in
Dwight, Illinois] to the end user.” Pursuant to the distribution contract, the PDC was to complete
the initial delivery by the date specified by API.5 The distribution contract provided that in
completing the door-to-door distribution of the directories to residences, the PDC was to place
each directory in a bag6 and then place the directory on the hinged side of the door; the PDC was
not to place the directory in the residence’s mailbox. Delivery of directories to residences was to
take place between dusk and dawn. However, door-to-door distribution of directories to
businesses was only to take place between the hours of 8:00 a.m. and 6:00 p.m. The PDC was to
deliver the directories inside the place of business, and it was required to obtain customer
signatures from a certain percentage of the businesses.7
The distribution contract refers to SBCDO (SBC Distribution Office). We assume SBC is the
parent company of API.
The distribution contract also required the PDC to place in the bag any advertising inserts, such
as coupons, product samples, magnets, or CD-ROMS, submitted by Advertising Media
Solutions. The PDC was given instructions on where to place the advertising inserts in the bag
relative to the directory.
The PDC was responsible for obtaining adequate staffing for distribution of the directories.
However, the distribution contract provided the minimum requirements for adequate staffing,
In completing the initial mail distribution, the PDC was to shrink-wrap all directories to
be mailed and deliver the directories to the local post office five or eight days, depending on the
number of directories to be mailed, before the delivery start date.8 The PDC could not convert a
hand delivery route into a mail route without the approval of API. In addition, in completing the
secondary distribution, the PDC was required to hand deliver directories to a minimum of 65
percent of the new telephone customers.
The distribution contract required the PDC to implement a quality-assurance program
using an Interactive Voice Response (IVR) system. API reserved the right to approve any IVR
script used by the PDC. Requirements regarding how many IVR confirmations of receipt of the
directory the PDC must obtain for each delivery route were specified in the distribution contract,
as were instructions for when a delivery route must be pulled for manual investigation and
instructions on how to complete a manual investigation. And, it was API, rather than the PDC,
who held the ultimate authority to decide whether to redeliver directories on a given route.
Throughout the distribution cycle, the PDC was required to provide API with numerous
reports regarding its quality-assurance program and the number of directories delivered. The
reports included a daily report chronicling the progress of the door-to-door initial distribution,
weekly and monthly reports on the number of directories mailed during the initial distribution,
and monthly reports regarding the number of directories delivered and mailed during the
secondary distribution. Finally, pursuant to the distribution contract, all directories remaining at
the end of a distribution cycle remained the property of API and were to be disposed of by API’s
recycling supplier of choice.
Here, unlike the plaintiff in Sharper Image who lost all control over the catalogs once the
catalogs were delivered to the post office, API never lost all control over the directories after the
directories were transported from Donnelly’s printing facility to the PDC’s distribution centers.
In other words, although it was the PDC’s responsibility to distribute the directories to Michigan
residences and businesses, the PDC did not have exclusive authority over the distribution. API
informed the PDC of the date a distribution was to be completed. API instructed the PDC on
what hours it was to distribute the directories, where it was to place the directories at a residence,
and, when directories were to be mailed, when they were to be received by the local post office.
Through the reports the PDC was required to provide, API continually monitored the PDC’s
progress in distributing the directories. API also set the minimum requirements for the PDC’s
staffing, and instructed the PDC on the type of quality-assurance program it was to implement.
API retained possession of any unused directories, which were to be disposed of by the recycler
which included a management team, an administrative staff, a distribution staff, and data
The PDC was also responsible for securing leases for offices and warehouses necessary
for it to fulfill its responsibilities under the distribution contract. However, API reserved the
right to review and approve any lease executed by the PDC.
The distribution contract contained instructions on where the PDC was to place the mailing
label on mailed directories.
of API’s choice. Under these circumstances, API exercised “a right or power over [the
directories] incident to the ownership of [the directories],” MCL 205.92(b), while the directories
were in Michigan. Accordingly, API “used” the directories in Michigan.
A person using tangible personal property in Michigan shall pay use tax “at a rate equal
to 6% of the price of the property . . . .” MCL 205.93(1). The UTA defines the “price” of
property, in pertinent part, as
the aggregate value in money of anything paid or delivered, or promised to be
paid or delivered, by a consumer to a seller in the consummation and complete
performance of the transaction by which tangible personal property or services are
purchased or rented for storage, use, or other consumption in this state, without a
deduction for the cost of the property sold, cost of materials used, labor or service
cost, interest or discount paid, or any other expense. [MCL 205.92(f).]
The Department determined that the “price” of the directories included the cost of the paper and
the cost of Donnelly’s printing services. API argues that neither should be included in the
“price” of the directories.
1. Printing Services
API claims that the cost of the printing services provided by Donnelly cannot be included
in the “price” of the directories because, pursuant to Flexitype & Douglas Offset Co v Dep’t of
Treasury, 52 Mich App 153; 216 NW2d 609 (1974), printing services are not subject to the sales
tax. API argues that, because of the complementary nature of the UTA and the GSTA, the UTA
was not intended to tax services that are not taxable under the GSTA. In this regard, API points
out that, during the refund period, the UTA only provided for the taxation of telecommunication
services and hotel services. See MCL 205.93a. In addition, API claims any conclusion that the
cost of the printing services are to be included in the “price” of the directories would render
meaningless the Supreme Court’s adoption of the “incidental to service” test in Catalina
Marketing Sales Corp v Dep’t of Treasury, 470 Mich 13; 678 NW2d 619 (2004).
The GSTA provides for a tax on the gross proceeds of sales at retail of tangible personal
property. Univ of Michigan Bd of Regents v Dep’t of Treasury, 217 Mich App 665, 669; 553
NW2d 349 (1996); Flexitype, supra at 155; see also MCL 205.52(1). Generally, the GSTA does
not apply to sales of services. Catalina, supra at 19.
In Flexitype, Flexitype, a commercial printing company, agreed to print Detroit Edison’s
company magazine. Detroit Edison provided the paper and all matter to be printed on the paper.
Flexitype was only required to print the magazine, assemble it into a finished product, and
deliver it to Detroit Edison. In billing Detroit Edison, Flexitype did not charge a sales tax.
However, the defendant, the Department of Treasury, issued sales tax assessments against
Flexitype for the period it provided printing services to Detroit Edison. The disputed issue was
whether Flexitype had made a sale at retail to Detroit Edison. This Court found determinative of
the issue the then-existing definition of “sale at retail”: “‘any transaction by which is transferred
for consideration the ownership of tangible personal property * * *.’” Flexitype, supra at 156,
quoting MCL 205.51(b) (emphasis in original). According to the Court, Flexitype did not make
a sale at retail because it never owned either the tangible or intangible content of the magazines.
Flexitype, supra at 156. Rather, at all times, Detroit Edison controlled and owned the tangible
and intangible content of the magazines. Id.
In Catalina, supra, Catalina contested the assessment of sales tax by the defendant, the
Department of Treasury, on its Checkout CouponTM program. Under the program, Catalina
contracted with manufacturers of consumer products to deliver a coupon or advertising message
to shoppers as they checked out at a grocery store on the basis of what the shoppers had bought.
It was undisputed that Catalina’s transactions with the manufacturers involved both the provision
of services—advertising research and expertise—and the transfer of tangible personal property—
slips of paper with coupons or advertising messages. Because the GSTA only applies to sales of
tangible personal property, not the sales of services, it was necessary to categorize the
transactions as either a service or a tangible property transaction. Catalina, supra at 19. The
Supreme Court adopted the “incidental to service” test for categorizing a transaction involving
both the provision of services and the transfer of tangible personal property as either a sale of
services or a sale of tangible personal property. Id. at 24. Under this test, “‘sales tax will not
apply to transactions where the rendering of a service is the object of the transaction, even
though tangible personal property is exchanged incidentally.’” Id., quoting 85 CJS 2d, Taxation,
§ 2018, p 976.9
API contends that application of the “incidental to service” test to the facts of the present
case dictates a conclusion, consistent with Flexitype, that the object of its transaction with
Donnelly was the procurement of a service. We need not decide this issue.
The Court’s holding in Flexitype and our Supreme Court’s adoption of the “incidental to
service” test in Catalina are not relevant regarding whether the Department properly included the
cost of Donnelly’s printing services in the “price” of the directories. The issue in both Flexitype
and Catalina was whether there had been a taxable event, i.e., a sale at retail of tangible personal
property. However, in the present case, we have already concluded that there was a taxable
event, i.e., API’s “use” of the directories in Michigan. See part III (A) of this opinion. Having
determined there was a taxable event, the issue is whether, pursuant to MCL 205.92(f), the
Department properly included the cost of Donnelly’s printing services in the “price” of the
directories. The analysis of this issue must start with the language of MCL 205.92(f), see Hills
of Lone Pine Ass’n v Texel Land Co, Inc, 226 Mich App 120, 123; 572 NW2d 256 (1997) (“The
starting point in every case involving construction of a statute is the language itself.”), not
whether printing services are a taxable event under the GSTA. Moreover, by relying on
The Supreme Court remanded the case to the Tax Tribunal to apply the “incidental to service”
test. Catalina, supra at 26. In a subsequent order, the Supreme Court affirmed the decision of
the Tax Tribunal on remand that Catalina’s provision of services provided to the manufacturers
was the object of the transaction. Catalina Marketing Sales Corp v Dep’t of Treasury, 471 Mich
Flexitype and Catalina, along with the fact that during the refund period the UTA only taxed a
limited number of services, API’s argument fails to account for the distinction between the
imposition of a tax and the measure of the tax. In this case, the Department imposed a use tax on
API because API “used” the directories in Michigan. The Department did not directly impose
the use tax on the printing services provided by Donnelly. Rather, the Department used the cost
of Donnelly’s printing services, along with the cost of the paper, as part of the measure of the use
tax it imposed for API’s use of the directories in Michigan.
API argues that, because the paper was consumed in Illinois, rather than in Michigan,
when it was converted into the directories, the cost of the paper cannot be included in the “price”
of the directories. API’s argument is based on the Morton Buildings cases. See Morton Bldgs,
Inc v Indiana Dep’t of State Revenue, 819 NE2d 913 (Ind Tax Ct, 2004); Morton Bldgs, Inc v
Comm’r of Revenue, 43 Mass App Ct 441; 683 NE2d 720 (1997); Sharp v Morton Bldgs, Inc,
953 SW2d 300 (Tex App, 1997); Morton Bldgs, Inc v Bannon, 222 Conn 49; 607 A2d 424
(1992); Morton Bldgs, Inc v Chu, 126 AD2d 828; 510 NYS2d 320 (1987), aff’d 70 NY2d 725
The facts in each of the Morton Bldgs cases were the same and were undisputed. Morton
Buildings engaged in the production, selling, and on-site erection of prefabricated buildings for
agricultural and industrial use. Morton purchased raw materials, including steel and timber, and
stored the materials in warehouses as inventory. When Morton Buildings received an order for a
building from a customer, it removed the necessary materials to build the building from its
inventory. It then fabricated the materials into finished building components, such as trusses,
columns, purlins, panels, and overhang rafters, and transported the finished components to the
building site in the taxing state.10 At the building site, Morton Buildings erected the building.
The issue in each case was whether the taxing state could impose a use tax on Morton Buildings’
use of the building components it fabricated outside the taxing state. In each taxing state, the use
tax statute imposed a use tax on all tangible personal property used in the state that was
purchased from a “retailer” or a “vendor” (or acquired in a “retail transaction”). Morton
Buildings argued that, because it fabricated the materials into the finished building components
in factories outside the taxing state, the tangible personal property purchased from a retailer, i.e.,
the materials, had been used outside the taxing state, while the tangible personal property it used
inside the taxing state, i.e., the building components, had not been purchased from a “retailer.”
The courts in the above-cited Morton Bldgs cases agreed. For example, the Indiana Tax Court
Manufacturing, by its very nature, results in raw materials losing their
identity and becoming part of a new item of tangible personal property. . . .
Neither the warehouses in which Morton Buildings stored its inventory nor the factories where
Morton Buildings fabricated the finished building components were located in the taxing states.
The Stipulation of Facts reveals that the raw materials go through an
extensive production process in Morton’s out-of-state factories before they are
brought into Indiana as building components. The materials are processed
through Morton’s machinery, cut to size, and affixed to other materials. . . . The
result of this process is a building component that has an entirely different
appearance, character, and utility than the raw materials used to fabricate it. In
other words, the raw materials are consumed in the out-of-state production
process. What remains are the building components, which are not taxable when
used in Indiana because they were not acquired in a retail transaction. [Morton
Bldgs, supra, 819 NE2d at 916-917.]
We do not find the Morton Bldgs cases to be relevant regarding whether the Department
properly included the cost of the paper in the “price” of the directories. Like Flexitype, supra,
and Catalina, supra, the issue in the Morton Bldgs cases was whether there had been a taxable
event, i.e., whether Morton Buildings used tangible personal property purchased “at retail” in the
taxing state. However, as already stated, we have already concluded that API’s “use” of the
directories in Michigan was a taxable event. See part III (A) of this opinion. Thus, the issue is
whether, pursuant to MCL 205.92(f), the Department properly included the cost of the paper in
the “price” of the directories. Because the Morton Bldgs cases did not construe language similar
to that contained in the definition of “price” in MCL 205.92(f), we do not find the cases relevant
to the issue before us.
3. Aggregate Value
Under the UTA, the price of tangible personal property “used” in Michigan is “the
aggregate value in money of anything paid . . . by a consumer to a seller in the consummation
But see Morton Bldgs, Inc v Comm’r of Revenue, 488 NW2d 254, 258 (Minn, 1992), in which
the Minnesota Supreme Court rejected Morton Buildings’ argument:
In our opinion, Morton’s manufacturing process does not transform the
raw materials into something which is not used in Minnesota. Despite their
alteration at the factories, the raw materials are still tangible personal property
used in Minnesota as parts of Morton’s prefabricated buildings. The raw
materials, in their altered form as building components, are used in Minnesota
when they are erected into prefabricated buildings. Morton clearly exercises a
right or power over the raw materials when it constructs the prefabricated
building, and thus Morton “uses” the materials in Minnesota.
Neither party contests that API is a “consumer.” “Seller” is defined as “the person from whom
a purchase is made and includes every person selling tangible personal property or services for
storage, use, or other consumption in the state.” MCL 205.92(d). The UTA defines “purchase”
as “to acquire for a consideration . . . .” MCL 205.92(e). Here, API acquired for consideration
printing services from Donnelly and paper from the paper mills. Accordingly, because purchases
were made from them, Donnelly and the paper mills are “sellers.”
and complete performance of the transaction . . . .” MCL 205.92(f). Here, the complete
performance of the transaction includes the production of the directories. API’s purchase of the
paper from the paper mills and its purchase of printing services from Donnelly were necessary
and incidental to the transaction. See Kal-Aero, Inc v Dep’t of Treasury, 123 Mich App 46, 51;
333 NW2d 171 (1983). API could not have obtained the directories without purchasing the
paper or without purchasing Donnelly’s printing services. Paper and printing services are
necessary to the mass production of any telephone directory.
The aggregate value of the transaction is to be determined “without a deduction for the
cost of the property sold, cost of materials used, labor or service cost, interest or discount paid, or
any other expense.” MCL 205.92(f). By arguing that neither the cost of printing services nor the
cost of the paper can be included in the “price” of the directories, API is essentially asking for a
deduction equivalent to the cost of materials used and services provided. MCL 205.92(f)
unambiguously prohibits such deductions, and we must enforce an unambiguous statute as
written, Rowland, supra. Accordingly, because API paid the cost of the paper and the cost of
printing services in the complete performance of the transaction, the Department correctly
included the costs of the paper and the printing services in the “price” of the directories.
C. Double Taxation
Finally, API claims that, because the customers of the telecommunication services
provided by its affiliated companies are required to remit use tax on those services, see MCL
205.93a, if the Department is allowed to tax API’s costs of producing the directories, the costs of
the directories would be subject to double taxation.
In making its argument, API relies solely on the following two paragraphs from the
Department’s Revenue Technical Tax Training Manual:13
If a company sells 1,000 items of its product to a customer and gives the
customer an additional 10 items of the product free, the additional 10 items are
not considered taxable giveaway items. There is one gross selling price on the
1,010 items. The gross proceeds would be the amount charged for the 1,000
A “tie-in” sale requires someone to first buy tangible personal property in
order to receive a different item free. There is an advertisement that an item will
be received free at the time of purchase. The advertised item given away with the
“tie-in” sale is not subject to use tax. A portion of the gross proceeds received
from the sale is attributed to the free item. [Emphasis added.]
This manual was prepared as an “instructional text” to be used in classroom training on the
GSTA and the UTA. It expressly stated that it was “not intended as a statement of law” and was
“intended only for training purposes.”
Even assuming that the manual cited by API carries the force of law, API’s argument is
without merit. API claims that the directories were a “tie-in” to the telecommunication services
provided by its affiliated companies. However, telecommunication services are not tangible
personal property. API has presented no evidence that the customers of its affiliated companies
bought any tangible personal property before receiving the directories.
Double taxation occurs when a second tax is imposed on the same property, for the same
purpose, and by the same sovereign during the same taxing period. C F Smith Co v Fitzgerald,
270 Mich 659, 685; 259 NW 352 (1935). API has not proffered any evidence that the use tax
paid by the customers of the telecommunication services provided by its affiliated companies is
based, in part, on the costs paid by API in purchasing the paper used in the directories or in
purchasing Donnelly’s printing services. Accordingly, API’s costs in producing the directories
are not subject to double taxation.
/s/ Elizabeth L. Gleicher
/s/ E. Thomas Fitzgerald
/s/ Joel P. Hoekstra