Michigan sales tax does not apply to property sold incidental to a service.

• Author: Van Tiflin, Patrick R.

As the economy is transformed from one in which sales in goods becomes less predominant and the rendering of services proliferates, a recent decision by the Michigan Supreme Court deserves the attention to today's tax ex ecutive. With increasing frequency, transactions between a business and its customers involves both a service component and the transfer of tangible personal property. The courts have grappled with a standard by which to determine whether the transaction should be considered a sale of personal property or the rendition of the service. The consequence of this determination is that, if a sale of personal property is involved, the transaction may be subject to a state sales or use tax. If, on the other hand, the transaction involves a rendition of the service, unless that service has been specifically subjected to sales or use tax by the individual state, the transaction is free of sales or use tax. The method for making this determination in Michigan has been clarified by a recent decision of its highest court.

The Michigan Supreme Court issued a decision on May 5, 2004, in Catalina Marketing Corporation v Michigan Department of Treasury in which the court adopted for Michigan the "incidental to service" test for determining the taxability of a business relationship that involves both the provision of services and the transfer of tangible personal property as a taxable or non-taxable sale. In so doing, the court overruled lower court decisions of the Michigan Tax Tribunal and the Court of Appeals, which had employed the competing "real object" test. A Revenue Administrative Bulletin published by the Michigan Department of Treasury in 1995 had administratively imposed the real object test without legislative action or adherence to the State's Administrative Procedures Act.

The Nature of Catalina's Business

Catalina Marketing Corporation's clients are consumer product manufacturers. In the words of the Michigan Supreme Court, Catalina provides its clients with "alternative mass marketing strategies" through its "Checkout Coupon" Program. The Checkout Coupon Program utilizes the universal product codes, or bar codes, that appear on the packaging of most consumer goods. The retailer scans 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 to collect data on the products as they are scanned at the checkout register. Under the program, Catalina contracts with its manufacturer-clients to develop a marketing program to target certain specified shoppers as they check out at a grocery store or other retail establishment and to deliver a coupon or advertising message on the basis of what they buy.

In the example used by the Supreme Court, "if Catalina's manufacturer-client is Campbell Soup, Campbell can contract to have a coupon reading 'one...