Update on Michigan Supreme Court sales tax decision for Catalina Marketing.

• Author: Van Tiflin, Patrick R.

In the July-August 2004 issue of The Tax Executive, we wrote about the Michigan Supreme Court decision in Catalina Marketing. (1) In that May 2004 decision, the court held that a different test applied for determining the taxability of "mixed" transactions for sales and use tax purposes than the one promulgated by the Department of Treasury. Before Catalina, the Department used the "real object" test, described in a 1995 Revenue Administrative Bulletin (RAB), (2) to determine taxability when a transaction involves both the provision of services and the transfer of tangible personal property. Both the Michigan Tax Tribunal and the Court of Appeals applied the real object test when deciding Catalina. The Michigan Supreme Court overruled the lower court decisions and applied the "incidental to service" test. The decision represented the second time in two years that the Supreme Court rejected a position taken by Treasury in a RAB.

Catalina's clients are consumer product manufacturers. Catalina provides its clients with "alternative mass marketing strategies" through its "Checkout Coupon" program. The program utilizes the universal product bar codes, which retailers scan at the checkout register. Catalina has developed hardware and software to collect data on the products as they are being scanned. The data is then transferred electronically to Catalina's computers in Florida or California. Catalina computers in each retail store analyze whether to produce a coupon or an advertising message printed by thermal printers near the checkout scanners. The computers, printers, hardware, and software, as well as the paper stock utilized by the printer, are all owned by Catalina. Catalina has 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 at that time.

The manufacturer acquires exclusive access to a certain product category (e.g., soup, diapers, pasta sauce), as determined by the manufacturer, in four-week cycles. The content of the coupon or the advertising message is provided by the client-manufacturer. Catalina plays no role in coupon design. When the Catalina software program analyzes the bar code information read by the supermarket checkout scanner, the software can cause a coupon or other advertising message to issue or prevent one from being issued by a competitor. However, the most frequent consequence of a scanned product purchase is that the purchase is...