Michigan Company Owes Use Tax on Direct Mail Distributed in-State by Out-of-State Printer

By:  Tina M. Chunn, SALT Senior Manager

At a glance 

• The main takeaway: A Michigan-based company was subject to use tax on direct mail distributed in the state because it exercised control over the direct mail process within Michigan.
• Assess the impact: Direct mail campaigns can create some complex sales and use tax issues since those transactions often involve multiple parties in multiple states with various state tax rules.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help to ensure that your business complies with its sales and use tax obligations. 

Schedule a free consultation today to learn more!

The full story

It seems that every day, our mailboxes are full of direct mail advertisements, whether it is a charity soliciting donations, a company looking to sell its product or service, or a candidate requesting our vote. Most of us are on the receiving end of these mail campaigns, but if you or your company are the ones directing the campaign, have you considered the sales and use tax implications of these transactions?  

The application of sales and use taxes on direct mail campaigns can be complicated because of the various parties and the number of states that may be involved. There is the company running the direct mail campaign, the company (i.e., printer) preparing the direct mail materials and distributing them through the United States Postal Service, and the direct mail recipients. Given the different location(s) of these parties, varying state sales and use tax rules may be applicable to these transactions.

A closer look at the case

Recently, the Michigan Court of Appeals upheld a use tax assessment against a company headquartered in Michigan for direct mail advertisements distributed into Michigan that were processed, mailed, and printed by an out-of-state third party. The company, AAA Life Insurance Company (AAA), hired American Direct Marketing Resources, LLC (ADMR), located in Missouri, to advertise its insurance products, one of which being direct-term life insurance. The advertising package consists of a brochure, an application for the life insurance products, a letter, and a business-reply envelope. Once AAA selects an advertising package for a specific direct mail campaign, ADMR contracts with a third-party located outside of Michigan for printing and then the items are mailed and distributed by ADMR (using AAA as the Permit holder with the USPS) based on data provided from another third-party contracted by AAA to identify target customers.  

Based on the Michigan’s use tax statutes and corresponding case law, taxable use requires that: 

• Tangible personal property must be involved; 
• The taxpayer must exercise a right or power incident to ownership of that tangible personal property; and 
• The exercise of that right or power must occur in Michigan.

Unpacking the ruling

At issue in this case was whether AAA had sufficient control of the direct mail advertisements in Michigan to establish a taxable use. Even though ADMR was contracted to perform these functions outside of Michigan, the Court ruled that AAA maintained control of the product during the design stage in preparation of the final direct mail advertisements. In particular, AAA drafted a “creative brief” in Michigan and ADMR developed an “advertising draft” that it submitted to AAA for review in Michigan. AAA argued that since it did not exercise control over the final version that was delivered to recipients, the control it may have exercised over the earlier drafts constituted control over intangible property. The Court rejected this argument, noting that the earlier versions constituted what eventually became the final product.

The Court then noted its agreement with the lower court’s identification of several “indicia of control” by AAA over the tangible personal property in Michigan:

• Power to change the advertisements that were printed or to authorize no printing at all.
• Reviewed the proofs for accuracy and legal compliance.
• Contributed to the data that went into deciding the customer mailing list. 
• Received sample advertisements to evaluate how smoothly the process was moving.

Since only “some control need be exercised,” the Court concluded that AAA’s control over the advertisements was sufficient to support the use tax assessment. 

The bottom line

Direct mail campaigns can create some complex sales and use tax issues due to multiple states involved and various state tax rules. Aprio’s SALT team has experience reviewing these types of issues, and we can assist your business to ensure that it complies with its sales and use tax obligations and does not incur unexpected liabilities and penalties.  

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter. 

1. AAA Life Insurance Company v Michigan Department of Treasury (Docket No, 365613), June 20, 2024.
2.  MCL 205.91 et seq.  See also Auto-Owners Ins Co v Dep’t of Treasury, 313 Mich App 56 (2015).