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Service Merchandise Co., Inc. v. Arizona Dept. of Revenue, 188 Ariz. 414, 937 P.2d 336

Facts

Service Merchandise, a Tennessee corporation, operates retail stores in Arizona and distributes catalogs and fliers to its customers throughout the year. The catalogs are designed in Tennessee, printed by out-of-state companies, and then mailed to Arizona households. The taxpayer argued that it did not use the catalogs in Arizona since all actions related to their creation and distribution occurred outside the state.

The material facts are undisputed. Service Merchandise, a Tennessee corporation, does business in 37 states. It operates 390 retail stores, two of which are in Arizona. Customers may either purchase merchandise in a store or order merchandise by telephone or mail and have the merchandise delivered to their homes. Service Merchandise distributes catalogs and fliers to its customers throughout the year. A large fall catalog advertises all of its products. A smaller spring catalog emphasizes items appropriate for the summer, and fliers are periodically distributed to promote special sales.

Issue

Did Service Merchandise 'use' the catalogs and fliers in Arizona, thereby making it liable for the state's use tax?

1 Service Merchandise first contends that the use tax is inapplicable because it did not use the catalogs and fliers in Arizona. We hold that Service Merchandise 'used' the catalogs in Arizona by distributing them to its customers in Arizona and therefore hold that the use tax was properly applied.

Rule

Arizona imposes a tax on the 'use or consumption in this state of tangible personal property purchased from a retailer.' The definition of 'use' includes the exercise of any right or power over tangible personal property incidental to owning the property.

Arizona imposes a tax on the 'use or consumption in this state of tangible personal property purchased from a retailer….' A.R.S. § 42–1408(A) (Supp.1995). 'Every person … using or consuming in this state tangible personal property purchased from a retailer is liable for the tax.' A.R.S. § 42–1408(D) (Supp.1995). 'Use' and 'consumption' are defined by statute as 'the exercise of any right or power over tangible personal property incidental to owning the property….' A.R.S. § 42–1401(8) (Supp.1995).

Analysis

The court determined that Service Merchandise exercised rights incidental to ownership by contracting for the distribution of catalogs to Arizona customers. Although the distribution contracts were executed outside Arizona, the rights to control the delivery were exercised in Arizona through agents. The court found that the distribution of the catalogs constituted a use of the property in Arizona, thus making the use tax applicable.

We hold that distribution of the catalogs and fliers in Arizona was a use by Service Merchandise incidental to its ownership. Service Merchandise contracted for the right to have the catalogs distributed to specified Arizona customers at particular times during the year. Although the distribution contracts were consummated outside Arizona, the rights to control when, where, how, to whom and whether the catalogs would be delivered were exercised in Arizona through Service Merchandise's agents.

Conclusion

The court affirmed the Tax Court's ruling, concluding that Service Merchandise used the catalogs and fliers in Arizona and that the imposition of the use tax was consistent with the Commerce Clause.

We conclude that Service Merchandise used the catalogs and fliers in Arizona, and accordingly that Arizona's use tax applies.

Who won?

Arizona Department of Revenue prevailed because the court found that Service Merchandise 'used' the catalogs in Arizona through their distribution to customers, thus justifying the application of the use tax.

The Arizona Department of Revenue (“DOR”) assessed Arizona use taxes against Service Merchandise Company (“Service Merchandise”) on the price it paid to out-of-state printers to produce catalogs and sales fliers delivered to Arizona households.

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