The Third Department, reversing a decision of the Tax Appeals Tribunal, has held that purchases of shipping supplies by UPS were exempt from sales tax as “promotional materials.” Matter of United Parcel Serv., Inc. v. Tax Appeals Trib., Memorandum and Judgment, No. 512224, 2012 WL3481291 (App. Div., 3d Dep’t, Aug. 16, 2012).
United Parcel Service (“UPS”) is a common carrier that transports property for customers. At issue were its purchases of shipping supplies —– principally, shipping envelopes, packaging and boxes, shipping labels, and shipping stickers — which it furnished to its customers free of charge. UPS paid sales tax on the shipping supplies, and then sought approximately $2.7 million in refunds on the purchases on the grounds that they qualified as exempt “promotional materials” under Tax Law § 1115(n)(4). That section provides, in part, that printed “promotional materials,” furnished without charge to actual or prospective customers by common carrier, are exempt from sales tax. “Promotional materials” are defined to include “any advertising literature, other related tangible personal property,” and include “free gifts . . . with respect to such advertising literature.” Tax Law § 1101(b)(12).
UPS did not claim that the shipping supplies were themselves “advertising literature,” but rather that they constituted “other related tangible personal property.” The Department argued that the supplies were not promotional in nature, but were used to facilitate UPS’s delivery services, and were in the nature of taxable packaging materials.
Initially, an administrative law judge held in favor of UPS, finding that the shipping supplies were furnished as an inducement for customers to use UPS’s delivery services, particularly its overnight air delivery services, and thus were exempt promotional materials. The Tax Appeals Tribunal reversed, holding that UPS failed to carry its burden of proving that the shipping materials were either “advertising literature” or “related tangible personal property.” The Tribunal rejected the company’s argument that by branding the shipping supplies with UPS’s distinct logo, slogan, and colors, UPS was in effect engaging in advertising or marketing. This appeal followed.
The Appellate Division has now reversed the Tribunal, holding that the shipping supplies were exempt as “related tangible personal property,” concluding that they were distributed for advertising purposes. Employing a commonly used definition of the term “advertisement,” the court found that the shipping supplies qualified as promotional materials under the law “because they were designed and distributed for the purpose of promoting [UPS’s] business and contain[ed] a clear promotional message.”
The court took note of the testimony of two employee witnesses regarding the reasons UPS created and distributed the supplies. UPS had recently entered into the overnight air delivery market and at the time the supplies were purposefully designed to promote awareness of that new business, both to existing customers and to recipients of the shipped goods who may not have been UPS customers. According to the court, the Tribunal’s decision that the materials were merely branded with the taxpayer’s logo and did not constitute a form of solicitation was “so narrow and literal as to defeat the provision’s settled purpose.” The court also ruled in favor of UPS on the alternative grounds that the shipping supplies qualified as exempt promotional materials under the “free gifts” category, holding that the Tribunal’s decision that there was “distinct mutual consideration” for the supplies was not supported by the record. Therefore, the court concluded that the shipping supplies were exempt promotional materials and that UPS’s interpretation of the exemption provision was “the only reasonable construction” of the statute.
One judge concurred as to the result, but only on the basis that the supplies were promotional “free gifts.” Another judge dissented, finding that the use of logos, color, and slogans on the packaging materials bore only a “tangential relationship to advertising,” and finding that the materials were not truly “free gifts” because they were only provided to existing customers.
Additional Insights. The court’s decision is significant, if for no other reason than Appellate Division reversals of Tribunal decisions are not commonplace. Such reversals are particularly unusual where, as here, the issue was the taxpayer’s interpretation of, and claimed entitlement to, a tax exemption provision in the law, for which taxpayers bear a heavy burden. The decision is also a reminder that the statutory definition of exempt “promotional materials” is not restricted to materials that are exclusively advertising, but is more broadly defined, and the fact that the printed materials also serve a utilitarian business purpose does not necessarily defeat the exemption.