CATALINA MARKETING SALES CORP V DEPT OF TREASURY
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Michigan Supreme Court
Lansing, Michigan 48909
Opinion
Chief Justice
Maura D. Corrigan
Justices
Michael F. Cavanagh
Elizabeth A. Weaver
Marilyn Kelly
Clifford W. Taylor
Robert P. Young, Jr.
Stephen J. Markman
FILED MAY 5, 2004
CATALINA MARKETING SALES CORPORATION,
Petitioner-Appellant,
v
No. 121673
DEPARTMENT OF TREASURY,
Respondent-Appellee.
_______________________________
CATALINA MARKETING CORPORATION,
Petitioner-Appellant,
v
No. 121674
DEPARTMENT OF TREASURY,
Respondent-Appellee.
_______________________________
BEFORE THE ENTIRE BENCH
WEAVER, J.
The issue in this case is whether the Michigan Tax
Tribunal and the Court of Appeals erred in holding that
petitioners’ Checkout Coupon™ program, which involves both
the
transfer
of
tangible
personal
property
and
the
provision of services, constitutes a sale at retail that is
subject to sales tax under MCL 205.52.
Department
of
coupons
its
sales
to
at
Treasury,
alleges
that
manufacturer-clients
retail
on
which
Respondent, the
petitioners
and
sold
that
were
owe
petitioners
these
sales
tax.
Petitioners contend that they were selling services, not
goods, and that the delivery of the manufacturer-clients’
coupons and advertising messages was only one part of the
sophisticated targeted marketing distribution services they
provide to their manufacturer-clients.
We
adopt
the
“incidental
to
service”
test
for
categorizing a business relationship that involves both the
provision of services and the transfer of tangible personal
property
as
either
a
service
or
a
tangible
property
transaction and we remand the case to the Michigan Tax
Tribunal
(MTT)
for
application
of
the
“incidental
to
service” test, consistent with this opinion.
I
This
case
petitioners,
concerns
Catalina
a
taxation
Marketing
dispute
Corporation
and
between
Catalina
Marketing Sales Corporation (Catalina), and the Michigan
Department
of
Treasury.
Since
2
its
inception
in
1983,
Catalina
has
provided
its
clients,
consumer
products
manufacturers, with alternative mass marketing strategies.
Catalina developed the Checkout Coupon™ program, under
which Catalina contracts with its manufacturer-clients to
deliver
a
coupon
or
advertising
message
to
certain
specified shoppers as they check out at a grocery store on
the basis of what they buy at that time.
For example, if
Catalina’s manufacturer-client is Campbell’s Soup, Campbell
can contract to have a coupon reading “$1 off your next
purchase of Campbell’s Soup” printed out at the supermarket
checkout counter whenever someone purchases a can of its
soup to encourage repeat business.
specify
that
printed
out
the
$1-off
whenever
a
coupon
Or Campbell’s Soup can
for
competitor’s
Campbell’s
brand
be
soup
of
Soup
is
purchased or whenever someone buys a box of crackers.
If
the shopper does not buy any of the triggering items, no
coupon
or
coupons
advertising
and
message
advertising
is
messages
printed.
are
printed
Catalina’s
on
thermal
paper; they do not use sharp graphics or bold colors.
The Checkout Coupon™ program takes advantage of the
Universal Product Codes, or bar codes, that appear on the
packaging of most consumer goods.
code
at
generate
the
a
checkout
receipt,
register
and
monitor
Retailers scan the bar
to
tabulate
their
own
the
sale,
inventories.
Catalina has developed hardware and software that collect
3
data
on
the
products
as
they
are
being
scanned
at
the
checkout register.
The collected data are transferred to
one
centralized
of
Catalina’s
California.
near
the
databases
in
Florida
Catalina has also installed thermal printers
checkout
scanners,
which
printers
it
produce either coupons or advertising messages.
owns,
or
installs,
and
maintains
all
its
uses
to
Catalina
hardware
and
software, and maintains the stocks of paper utilized by the
printers.
Catalina
exclusive
soup,
provides
access
diapers,
Catalina
and
to
pasta
the
its
a
manufacturer-clients
certain
sauce,
product
etc.—in
with
category—such
four-week
manufacturer-clients
work
as
cycles.
together
to
identify the desired product category.
A software program installed in Catalina’s centralized
databases analyzes the product information it receives from
the supermarket checkout scanners and determines whether an
item fits into any desired product categories.
If the item
is not part of a desired product category, no response is
generated.
category,
If the item falls within a desired product
the
centralized
three responses.
database
will
generate
one
of
The manufacturer-client chooses what the
response will be.
The
first
possible
response
manufacturer’s redeemable coupon.
4
is
the
creation
of
a
The centralized database
will send data by way of the Catalina network, instructing
a
printer
near
manufacturer’s
the
checkout
redeemable
scanner
coupon.
to
produce
Catalina
does
a
not
influence the text or images that appear on the coupon;
these
details
are
left
to
client-manufacturer.
the
When
sole
the
discretion
the
sale
supermarket
of
is
complete, the cashier presents the coupon to the consumer
along with the supermarket’s receipt.
The consumer then
has the option of retaining the coupon and redeeming it on
the next visit to the supermarket retailer.
The second possible response in the Checkout Coupon™
program
general
announcement
advertising a manufacturer-client’s product.
The process
behind
that
is
the
producing
of
the
production
a
general
coupon:
an
of
a
announcement
item
that
is
fits
identical
into
a
to
desired
product category triggers a response from one of Catalina’s
centralized databases.
Rather than generating a coupon at
the point of sale, however, Catalina’s centralized database
instead
sends
instructions
to
the
printer
to
produce
a
general advertising announcement, such as “Campbell’s Soup
is
M’m-M’m
authority
Good.”
over
the
The
text
manufacturer-client
and
images
that
has
appear
full
on
the
general advertising announcement.
The third and final potential response in the Checkout
Coupon™ program is the generation of no response at all.
5
A
manufacturer-client can contract for a four-week period in
a certain product category, but choose to have no coupons
or messages printed.
Although the manufacturer-client is
not publishing any coupons or messages of its own, it is
preventing a competitor from using Catalina’s services for
that four-week period.
The manufacturer-clients pay Catalina the higher of a
base program fee or a per coupon rate identified in the
contract.
according
Catalina has developed cost per coupon pricing
to
a
three-tier
scale.
The
first
and
most
expensive tier is for coupons dispensed when a competitor’s
product of the same desired product category is scanned.
Catalina
justifies
this
higher
cost
by
asserting
that
coupons dispensed under these circumstances require more
research
software.
as
well
as
the
development
of
more
complex
The second tier is for cross-category coupons,
or coupons for items produced by the manufacturer-client,
but
are
scanned.
for
product
Coupons
circumstances
software.
a
different
produced
require
and
less
from
the
actual
under
distributed
research
and
item
these
less
complex
The third and least expensive tier is for own
user coupons, or coupons for the exact item that has been
scanned.
These
coupons
require
research and software development.
6
the
least
amount
of
The Department of Treasury conducted a sales and use
tax audit of Catalina for the period from January 1, 1991,
through
June
check
for
to
a
department
Michigan
1993.
intended
submitted
30,
use
tax
Following
$38,002
(plus
constitute
liability
for
the
the
audit,
Catalina
interest)
to
the
payment
of
its
full
audit
period.
The
department contends that Catalina is liable for a total of
$383,856.06
petitions
in
with
sales
the
tax
and
Michigan
sales tax assessment.
interest.
Tax
Tribunal
Catalina
filed
contesting
the
Both Catalina and the department
moved for summary disposition pursuant to MCR 2.116(C)(10).
The Tax Tribunal denied Catalina’s motion and granted the
department’s motion, holding Catalina liable for the sales
tax.
The
opinion.1
issues
Court
of
Appeals
affirmed
in
an
unpublished
This Court granted leave to appeal, limiting the
to
one
question:
“whether
petitioners’
‘coupon
checkout program’ constitutes ‘sales at retail’ under MCL
205.52.”2
II
In the absence of fraud, review of a Tax Tribunal
decision
is
limited
to
determining
whether
the
tribunal
erred in applying the law or adopted a wrong principle.
1
Unpublished opinion per curiam, issued March 5, 2002
(Docket Nos. 221811, 221890).
2
468 Mich 869 (2003).
7
The
Tax
Tribunal’s
factual
findings
are
conclusive
if
supported by competent, material, and substantial evidence
on the whole record.
Const 1963, art 6, § 28.
Michigan
Bell Telephone Co v Dep’t of Treasury, 445 Mich 470, 476;
518 NW2d 808 (1994).
III
The parties have conceded that petitioners owe either
the use tax already paid by Catalina, or the sales tax
assessed by the department.3
is
whether
correctly
the
held
Tax
that
Thus, the question before us
Tribunal
Catalina
and
the
owed
Court
sales
of
tax
Appeals
on
its
transactions with its merchant-clients.
As a general rule, sales tax applies only to sales of
tangible personal property, not sales of services.4 When a
single transaction, as here, involves both the provision of
services and the transfer of tangible personal property, it
3
“A sales-use tax scheme is designed to make
tangible personal property, whether acquired in, or out
the state subject to a uniform tax burden.
Sales and
taxes are mutually exclusive but complementary, and
designed to exact an equal tax based on a percentage of
purchase price of the property in question.”
85 CJS
Taxation, § 1990, p 950.
4
all
of,
use
are
the
2d,
Although there are specific exceptions, such as sales
of transmission and distribution services for electricity,
MCL 205.51(d), none of those exceptions applies in this
case.
See also MCL 205.51(h), enacted after the present
case arose, which provides that a “commercial advertising
element” is not a sale at retail. 1995 PA 209, § 1.
8
must
be
categorized
as
either
a
service
or
a
tangible
property transaction.
Catalina contends that its business is a service-the
provision
of
advertising
research
and
expertise
to
manufacturers, that the transfer of the slips of paper with
coupons
or
advertising
messages
to
the
manufacturers
is
incidental to this service, and that its transactions are
therefore
not
subject
to
sales
tax.
The
department
contends that the direct object of the contract between the
petitioners and the manufacturers is the transfer of the
coupons
and,
therefore,
the
transactions
are
subject
to
sales tax.
In determining whether Catalina’s transaction with a
manufacturer was a retail sale or a sale of services, the
Tax Tribunal applied a narrow version of the “real object
test,”
as
set
forth
by
the
Department
of
Treasury
in
Revenue Administrative Bulletin 1995-1 (RAB 95-1):5
5
The real object test originated with Shelby Graphics,
Inc v Dep’t of Treasury, 5 MTT 63; 1986 Mich Tax LEXIS 59
(1986), decided nine years before the issuance of RAB 95-1.
There, the petitioner furnished advertising products, such
as signs and banners, to a chain of grocery stores.
The
products were designed by the petitioner’s graphic artist,
and a representative of the grocery store testified that it
relied heavily on the creative skills of the artist.
The
state assessed sales tax on the sale of the signs and
banners.
Shelby Graphics argued that its customers were
paying for creative design services, not the actual
advertisements. The Michigan Tax Tribunal adopted the real
9
Accordingly, 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 consumers, of tangible coupons pursuant to
contracts
between
Petitioners
and
the
manufacturers, or whether the real object sought
by the manufacturers consisted of the receipt of
nontaxable computer and informational services
from Petitioners.
[MTT order, entered August 9,
1999, p 15 (emphasis in original).]
Applying that test, the Tax Tribunal held that the
direct
object
of
the
transaction
was
the
coupon
and,
therefore, the entire transaction was subject to sales tax.
In this “mixed” service/sales transaction,
the objective evidence shows the “customized”
(SOF, Ex. I) 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 Petitioners. It is
that 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.
[MTT
order, entered August 9, 1999, p 30 (emphasis in
original).]
object test and held that the sale
products constituted a sale at retail.
of
the
advertising
We note, however, that the sales tax act was
subsequently amended to remove sales tax liability in
circumstances similar to Shelby Graphics. 1995 PA 209, § 1
added MCL 205.51(h), which specifically excludes custom
developed commercial advertising from the definition of
“sale at retail.”
As noted in n 4, the statutory amendment does not
affect the outcome in this case. However, the legislative
reaction calls into question the continued vitality of the
Shelby Graphics analysis, upon which RAB 95-1 is based.
10
RAB
95-1
was
not
adopted
under
the
Administrative
Procedures Act, MCL 24.201 et seq., and, therefore, does
not have the force of law.
Danse Corp v Madison Hts, 466
Mich 175, 181; 644 NW2d 721 (2002).
RAB 95-1 merely states
the department’s interpretation of the statutes.
In its
brief, the department concedes that “it may not, through
the
issuance
conflicting
of
with
an
[RAB],
create
applicable
statutes
law
and
or
adopt
rules
binding
court
decisions.”
During the years at issue, the General Sales Tax Act,
MCL 205.51 et seq., provided that
there shall be collected from all persons engaged
in the business of making sales at retail, as
defined in section 1, an annual tax for the
privilege of engaging in that business equal to
4% of the gross proceeds of the business. . . .
[MCL 205.52(1).][6]
Sale at retail is defined in MCL 205.51(1)(b) 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 . . . .
In
1996,
the
Court
of
Appeals
issued
a
published
opinion holding that when tangible goods were provided as
an incidental part of a service, the goods were not subject
6
The sales tax is now set at six percent, effective
May 1, 1994.
11
to sales tax.
Univ of Mich Bd of Regents v Dep’t of
Treasury, 217 Mich App 665; 553 NW2d 349 (1996).
Regents,
the
question
was
whether
sales
tax
In Bd of
should
be
assessed against (1) photocopies costing five cents each
made by students or others at photocopier machines placed
at
the
student
university’s
union
and
libraries,
(2)
student
replacement
graduates, costing five dollars each.
dormitories,
diplomas
ordered
and
by
The Court of Appeals
first said:
Fundamentally, the sales tax is a tax upon
sellers for the privilege of engaging in the
business of making retail sales of tangible
personal property.
“Business” is defined in the
sales tax act as “an activity engaged in by a
person or caused to be engaged in by that person
with the object of gain, benefit, or advantage,
either direct or indirect.”
MCL 205.51(1)(j).
The university was not in the business of selling
photocopies as a retail enterprise with a profitmaking objective; the five-cent charge closely
approximated the actual cost of one photocopy.
Rather, the university provided an academic
library, and the convenience of and charge for
photocopies were an incidental part of library
operations. [Bd of Regents, at 669 (citations
omitted).]
The
Court
concluded
that
the
photocopies
were
not
subject to sales tax because “the photocopies in this case
were not sold at retail to generate a profit.
Rather,
students’ use of the photocopier machines was incidental to
the
library’s
circulation
educational mission.”
services
Id. at 670.
12
and
the
university’s
In examining the sale of the replacement diplomas for
five dollars, Bd of Regents concluded that the university
was offering a customized service to which the tangible
paper was merely incidental.
The Court explained that “the
purchaser
diploma
of
a
replacement
was
paying
for
the
services of the university’s office of the registrar in
reviewing
its
records
and
then
producing
a
document
containing highly personalized information, including the
name of the graduate, the degree obtained, and the date of
graduation.”
Id. at 670.
In this case the Tax Tribunal and the Court of Appeals
erred in following RAB 95-1 rather than the “incidental to
service” test set forth in Bd of Regents.
The Michigan Tax
Tribunal, as a tribunal inferior to the Court of Appeals,
did
not
have
the
authority
to
reject
and
replace
the
statutory interpretation set forth by the Court of Appeals
in a binding, precedential opinion.
(“A
published
opinion
of
the
See MCR 7.215(C)(2)
Court
of
Appeals
has
precedential effect under the rule of stare decisis.”) and
Michigan Bell, supra at 476, citing Const 1963, art 6, §28
(the appellate courts may reverse the decision of the Tax
Tribunal if it misapplied the law or adopted a wrong legal
principle).
The Court of Appeals panel here also erred in
applying the department’s narrow version of the real object
test
instead
of
following
Bd
13
of
Regents.
A
Court
of
Appeals
opinion
published
after
November
1,
1990,
is
binding precedent not only on the lower courts, but on
subsequent
panels
of
the
Court
of
Appeals.
MCR
7.215(C)(2), (I)(1).
This
Court,
of
Appeals decisions.
course,
is
not
bound
by
Court
affords
of
Nor are we bound by the department’s
use of a narrow version of the real object test.
this
Court
deference
to
the
Although
construction
of
statutory provisions by any particular department of the
government and used for a long period, the department’s
interpretation “is not binding on this Court and ‘cannot be
used to overcome the statute’s plain meaning . . . .’”
Ludington Service Corp v Ins Comm’r, 444 Mich 481, 505; 511
NW2d 661 (1994) (citation omitted).
We reject the department’s narrow reading of the real
object test.
Under RAB 95-1 the question is whether, from
the perspective of the client, the real object sought by
the client was the purchase of the tangible good or the
receipt of the services.
The weakness of this test is that
it is not consistent with the statutory definition of “sale
at retail.”
The real object test focuses exclusively on
the perspective of the purchaser.
However, the purchaser’s
point of view is not given special consideration under the
language
of
the
statute.
Instead,
the
statute’s
perspective is more broadly focused and requires a fuller
14
analysis
that
weighs
not
only
the
perspectives
of
the
parties to the sale, but also the nature of the product and
service.
This
latter
approach
is
subsumed
within
the
“incidental to service” test articulated by the Court of
Appeals in Bd of Regents, supra.
Accordingly, we adopt the “incidental to service” test
for categorizing a business relationship that involves both
the
provision
personal
of
services
property
as
property transaction.
and
either
the
a
transfer
service
of
tangible
a
tangible
or
Under this test, “sales tax will not
apply to transactions where the rendering of a service is
the
object
of
the
transaction,
even
though
personal property is exchanged incidentally.”
Taxation, § 2018, p 976.
tangible
85 CJS 2d,
The “incidental to service” test
looks objectively at the entire transaction to determine
whether
the
transaction
is
principally
a
transfer
of
tangible personal property or a provision of a service.
The sales tax is a tax on sellers for the privilege of
engaging
in
the
business
of
retail
sales.
If
the
consideration paid in a transaction is not paid for the
transfer
of
the
tangible
property,
but
for
the
service
provided, and the transfer of the tangible property is only
15
incidental to the service provided, the transaction is not
a sale at retail under MCL 205.51(b).7
We agree with the statement in Am Jur 2d that the
court
must
objectively
examine
the
totality
of
the
transaction in determining whether it is subject to sales
tax:
When tangible goods or items are provided in
conjunction with services, courts examine the
totality of the transaction to determine its
taxability.
The essence of the transaction test
specifically applies to those sales tax cases in
which it is initially unclear whether the
transaction mixes sales and services.
For
purposes of determining whether a transaction
falls within a sales tax statute, the court
considers whether the tangible personal property
serves exclusively as the medium of transmission
for an intangible product or service; if the
7
Additionally, although not outcome determinative in
this case, as the language of the statute is our primary
consideration, we note that the “incidental to service”
test we adopt today is consistent with test utilized to
differentiate goods from services under the Uniform
Commercial Code. The UCC, found at MCL 440.1101 et seq.,
applies only to transactions in goods, not services. MCL
440.2102. In contracts involving both goods and services,
it must be determined whether the contracts are governed by
the UCC. In Neibarger v Universal Cooperatives, Inc, 439
Mich 512, 534; 486 NW2d 612 (1992), this Court adopted the
following test to determine whether mixed contracts are
governed by the code:
The test for inclusion or exclusion [in the
UCC] is not whether [the contracts] are mixed,
but, granting that they are mixed, whether their
predominant factor, their thrust, their purpose,
reasonably stated, is the rendition of service,
with goods incidentally involved . . . or is a
transaction of sale, with labor incidentally
involved . . . ." [Quoting Bonebrake v Cox, 499
F2d 951, 960 (CA 8, 1974).]
16
intangible component is the true object of the
sale, the intangible object does not assume the
taxable character of a tangible medium.
Where
the item is the substance of the transaction, and
the
service
or
skill
provided
is
merely
incidental, the transaction is one for tangible
personal property, to which sales tax may be
applied.
The focus belongs on the transaction,
not the character of the participants.
[68 Am
Jur 2d, Sales and Use Taxes, § 62 pp 51-52.]
In
determining
whether
the
transfer
of
tangible
property was incidental to the rendering of personal or
professional services, a court should examine
what the
buyer sought as the object of the transaction, what the
seller or service provider is in the business of doing,
whether the goods were provided as a retail enterprise with
a
profit-making
motive,
whether
the
tangible
goods
were
available for sale without the service, the extent to which
intangible services have contributed to the value of the
physical item that is transferred, and any other factors
relevant to the particular transaction.
We vacate the Court of Appeals opinion that applied
the wrong test and remand to the Michigan Tax Tribunal for
application
of
the
incidental
to
service
test,
in
recognition of that quasi-judicial agency’s expertise in
questions concerning the factual underpinnings of taxes.
Romulus City Treasurer v Wayne Co Drain Comm’r, 413 Mich
728, 737; 322 NW2d 152 (1982).
17
CONCLUSION
The Court of Appeals decision is vacated and we remand
this case to the Michigan Tax Tribunal, with instructions
to
apply
the
adopted today.
incidental
to
services
test
that
we
have
The Michigan Tax Tribunal’s decision must
be filed within ninety days of the date that this opinion
is issued.
The parties are ordered to submit briefs within
thirty-five days after the decision of the Michigan Tax
Tribunal.
At that time the parties may request that the
Court grant reargument.
We retain jurisdiction.
Elizabeth A. Weaver
Maura D. Corrigan
Michael F. Cavanagh
Marilyn Kelly
Clifford W. Taylor
Robert P. Young, Jr.
Stephen J. Markman
18
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