Service Merchandise Co. v. Arizona Department of Revenue

In Service Merchandise Co. v. Arizona Department of Revenue, 188 Ariz. 414, 937 P.2d 336 (App. 1996), the taxpayer designed its advertising catalogs and flyers out-of-state. It decided how many catalogs and flyers it would produce, what products it would advertise, when its advertising materials would be printed and distributed, and who would receive them. The taxpayer hired out-of-state printers to print and distribute the catalogs and flyers to recipients in Arizona. The taxpayer argued the use tax was inapplicable to the "price it paid to out-of-state printers to produce" the materials because it was not "using" the materials in Arizona. 188 Ariz. at 415-16, 937 P.2d at 337-38. The Court rejected that argument. After explaining that use and consumption are defined by statute as the "exercise of any right or power over tangible personal property incidental to owning the property," the Court held the distribution of the catalogs and flyers in Arizona was a use by the taxpayer incidental to its ownership of the materials: The taxpayer 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 the taxpayer's agents. We see no reason to treat the taxpayer differently for tax purposes merely because it employed agents to do in Arizona what it could have done itself. Id. at 416, 937 P.2d at 338.