Use tax is often an afterthought for many companies—playing second fiddle to sales taxes. Yet, use tax audits are common—and often costly. Use tax is generally applicable when property is purchased out-of-state and used in state. The Michigan Court of Appeals recently confirmed that the determination of when property is used in state for purposes of the use tax depends on whether the taxpayer has control of the property while in the state. Bed Bath & Beyond, Inc. v. Mich. Dep’t of Treasury, unpublished per curiam opinion of the Court of Appeals, issued July 8, 2021 (Docket Nos. 352088 and 352667).

Facts: In that case, the Michigan Department of Treasury (“Department”) asserted that use tax was due on advertisements that were printed outside the state and delivered to Michiganders by a third party. Id. The advertisements at issue were primarily coupons that were used in-store. The Department asserted that the company “used” the advertisements in Michigan because the company controlled certain aspects of the delivery—such as setting the parameters of when and where the advertisements were to be delivered. Id. The company refuted those assertions as the delivery was handled by a third party and any control the company had over the advertisements ended before the materials reached Michigan. Id.

The Decision: Upon review, the Court of Appeals agreed with the company and determined that the company did not have any “actual control over the process of delivery.” Id. at pg. 11. The court found that the company ceded all control regarding the delivery of the advertisements when the advertisements were sent to the third party for ultimate distribution. Id. The court stated that if the Department’s assertions were correct, “then any direct mail campaign originating entirely outside the state would be subject to taxation.” Id.

This decision solidifies that companies need to pay close attention to the level of control exercised and retained with respect to property brought in from out-of-state when analyzing whether use tax applies. In particular, companies should evaluate their distribution of advertising materials.

Deepak Chopra said that “if you want to reach a state of bliss—make a decision to relinquish the need to control.” Although it is unlikely that he was referring to use taxes when stating that control should be relinquished, the adage applies just as well. While a lower tax bill is not a state of bliss to everyone, it certainly is to tax practitioners!