Taxpayers mailing catalogs into states.

• Author: McLoughlin, Michael W.

Over the past few years, the imposition of use tax on catalogs and other promotional materials mailed into a state has been the subject of much litigation. While most of these cases have been victories for the states, two recent decisions in Massachusetts give renewed hope to retailers. The majority of "catalog" cases follow the same basic pattern: A retailer with nexus in a state arranges for catalogs to be sent, free of charge, to residents of that state. The catalogs are printed outside the state and sent by the U.S. Postal Service from outside the state to residents within the state. The issue is whether the retailer has made taxable "use" of the catalogs in the state sufficient to be taxed on the cost of the catalogs.

In D.H. Holmes Co. v. McNamara, 486 US 24 (1988), the U.S. Supreme Court upheld the imposition of a use tax On a Louisiana-based retailer that produced and mailed catalogs to Louisiana residents from outside the state. Because use included the act of distribution under Louisiana law, the case focused on where the distribution of the catalogs occurred. The Court ruled that the placement of the catalogs inside the residents' mailboxes constituted a taxable activity and, thus, a taxable use of the catalogs in the state.

D.H. Holmes involved application of a use tax statute that specifically included distribution as a taxable use. The recent catalog cases, in contrast, have addressed whether a tax can be imposed when a state's use tax statute does not specifically include distribution. While states have come to varying conclusions on this issue, the prevailing sentiment has been that distribution is a taxable use.

Recently, the Massachusetts Appellate Tax Board (ATB) held that two retailers were not liable for use tax on the cost of catalogs and other direct-mail materials distributed to Massachusetts residents from outside the state (J. C. Penney Co., Inc. v. Comm'r of Rev., Outdoor World Corp. v. Comm'r of Rev., Nos. F239234, F239236 (Mass. App. Tax Bd.,Jan. 29, 1999)). Under Massachusetts law, "use" is the exercise of a right or power over property; the use tax statute does not include the term "distribution." The ATB determined that all of the activities related to the production and distribution of the catalogs (such as design, printing, targeting or mailing) occurred outside Massachusetts. Thus, J.C. Penney's activities with respect to the catalogs could not be considered a use in the state, because "mere passivity or...