Catalina Marketing Sales Corp. v. Department of Treasury

Michigan Supreme Court

Lansing, Michigan 48909

Chief Justice Justices

Opinion
Maura D. Corrigan 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. Respondent, the

Department of Treasury, alleges that petitioners sold

coupons to its manufacturer-clients and that these were

sales at retail on which petitioners owe 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 concerns a taxation dispute between

petitioners, Catalina Marketing Corporation and Catalina

Marketing Sales Corporation (Catalina), and the Michigan

Department of Treasury. Since its inception in 1983,

2

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. Or Campbell’s Soup can

specify that the $1-off coupon for Campbell’s Soup be

printed out whenever a competitor’s brand 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 advertising message is printed. Catalina’s

coupons and advertising messages are printed 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. Retailers scan the bar

code at the checkout register to tabulate the sale,

generate a receipt, and monitor their own 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 of Catalina’s centralized databases in Florida or

California. Catalina has also installed thermal printers

near the checkout scanners, which printers it uses to

produce either coupons or advertising messages. Catalina

owns, installs, and maintains all its hardware and

software, and maintains the stocks of paper utilized by the

printers.

Catalina provides its manufacturer-clients with

exclusive access to a certain product category—such as

soup, diapers, pasta sauce, etc.—in four-week cycles.

Catalina and the manufacturer-clients work 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. If the item falls within a desired product

category, the centralized database will generate one of

three responses. The manufacturer-client chooses what the

response will be.

The first possible response is the creation of a

manufacturer’s redeemable coupon. The centralized database
4

will send data by way of the Catalina network, instructing

a printer near the checkout scanner to produce a

manufacturer’s redeemable coupon. Catalina does not

influence the text or images that appear on the coupon;

these details are left to the sole discretion of the

client-manufacturer. When the supermarket sale 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 is the production of a general announcement

advertising a manufacturer-client’s product. The process

behind producing a general announcement is identical to

that of the coupon: an item that fits into a 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 Good.” The manufacturer-client has full

authority over the text and images that appear on the

general advertising announcement.

The third and final potential response in the Checkout

Coupon™ program is the generation of no response at all. A
5

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. Catalina has developed cost per coupon pricing

according 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 as well as the development of more complex

software. The second tier is for cross-category coupons,

or coupons for items produced by the manufacturer-client,

but are for a product different from the actual item

scanned. Coupons produced and distributed under these

circumstances require less research and less complex

software. The third and least expensive tier is for own

user coupons, or coupons for the exact item that has been

scanned. These coupons require the least amount of

research and software development.

6

 The Department of Treasury conducted a sales and use

tax audit of Catalina for the period from January 1, 1991,

through June 30, 1993. Following the audit, Catalina

submitted a check for $38,002 (plus interest) to the

department intended to constitute full payment of its

Michigan use tax liability for the audit period. The

department contends that Catalina is liable for a total of

$383,856.06 in sales tax and interest. Catalina filed

petitions with the Michigan Tax Tribunal contesting the

sales tax assessment. 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 Court of Appeals affirmed in an unpublished

opinion.1 This Court granted leave to appeal, limiting the

issues 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 Thus, the question before us

is whether the Tax Tribunal and the Court of Appeals

correctly held that Catalina owed sales tax 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 all
tangible personal property, whether acquired in, or out of,
the state subject to a uniform tax burden. Sales and use
taxes are mutually exclusive but complementary, and are
designed to exact an equal tax based on a percentage of the
purchase price of the property in question.” 85 CJS 2d,
Taxation, § 1990, p 950.

4
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 of the advertising
products constituted a sale at retail.

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 of an [RAB], create law or adopt rules

conflicting with applicable statutes and 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). In Bd of

Regents, the question was whether sales tax should be

assessed against (1) photocopies costing five cents each

made by students or others at photocopier machines placed

at the university’s libraries, student dormitories, and

student union and (2) replacement diplomas ordered by

graduates, costing five dollars each. 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 profit-
making 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 services and the university’s

educational mission.” Id. at 670.

12

 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 of a replacement diploma 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. See MCR 7.215(C)(2)

(“A published opinion of the 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 of Regents. A Court of
13

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 course, is not bound by Court of

Appeals decisions. Nor are we bound by the department’s

use of a narrow version of the real object test. Although

this Court affords deference to the 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 of services and the transfer of tangible

personal property as either a service or a tangible

property transaction. 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.” 85 CJS 2d,

Taxation, § 2018, p 976. 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 incidental to services test that we have

adopted today. 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