Title: CATALINA MARKETING SALES CORP V DEPT OF TREASURY
Citation: N/A
Docket Number: 121674
State: Michigan
Issuer: Michigan Supreme Court
Date: May 5, 2004

Michigan Supreme Court  
Lansing, Michigan 48909  
Chief Justice 
Justices 
Maura D. Corrigan 
Michael F. Cavanagh 
Elizabeth A. Weaver 
Marilyn Kelly 
Clifford W. Taylor 
Robert P. Young, Jr. 
Opinion 
Stephen J. Markman 
FILED MAY 5, 2004  
CATALINA MARKETING SALES CORPORATION, 
Petitioner-Appellant, 
v 
No. 121673 
DEPARTMENT OF TREASURY, 
Respondent-Appellee. 
_______________________________ 
CATALINA MARKETING CORPORATION, 
Petitioner-Appellant, 
v 
No. 121674 
DEPARTMENT OF TREASURY, 
Respondent-Appellee. 
_______________________________ 
BEFORE THE ENTIRE BENCH 
WEAVER, J.   
The issue in this case is whether the Michigan Tax 
Tribunal and the Court of Appeals erred in holding that 
 
 
 
 
 
 
petitioners’ Checkout Coupon™ program, which involves both 
the 
transfer 
of 
tangible 
personal 
property 
and 
the 
provision of services, constitutes a sale at retail that is 
subject to sales tax under MCL 205.52. 
Respondent, the 
Department of Treasury, alleges that petitioners sold 
coupons to its manufacturer-clients and that these were 
sales at retail on which petitioners owe sales tax. 
Petitioners contend that they were selling services, not 
goods, and that the delivery of the manufacturer-clients’ 
coupons and advertising messages was only one part of the 
sophisticated targeted marketing distribution services they 
provide to their manufacturer-clients. 
We 
adopt 
the 
“incidental 
to 
service” 
test 
for 
categorizing a business relationship that involves both the 
provision of services and the transfer of tangible personal 
property as either a service or a tangible property 
transaction and we remand the case to the Michigan Tax 
Tribunal (MTT) for application of the “incidental to 
service” test, consistent with this opinion. 
I 
This 
case 
concerns 
a 
taxation 
dispute 
between 
petitioners, Catalina Marketing Corporation and Catalina 
Marketing Sales Corporation (Catalina), and the Michigan 
Department of Treasury. 
Since its inception in 1983, 
2  
 
 
 
 
 
 
Catalina has provided its clients, consumer products 
manufacturers, with alternative mass marketing strategies. 
Catalina developed the Checkout Coupon™ program, under 
which Catalina contracts with its manufacturer-clients to 
deliver 
a 
coupon 
or 
advertising 
message 
to 
certain 
specified shoppers as they check out at a grocery store on 
the basis of what they buy at that time. 
For example, if 
Catalina’s manufacturer-client is Campbell’s Soup, Campbell 
can contract to have a coupon reading “$1 off your next 
purchase of Campbell’s Soup” printed out at the supermarket 
checkout counter whenever someone purchases a can of its 
soup to encourage repeat business. 
Or Campbell’s Soup can 
specify that the $1-off coupon for Campbell’s Soup be 
printed out whenever a competitor’s brand of soup is 
purchased or whenever someone buys a box of crackers. 
If 
the shopper does not buy any of the triggering items, no 
coupon or advertising message is printed. 
Catalina’s 
coupons and advertising messages are printed on thermal 
paper; they do not use sharp graphics or bold colors. 
The Checkout Coupon™ program takes advantage of the 
Universal Product Codes, or bar codes, that appear on the 
packaging of most consumer goods. 
Retailers scan the bar 
code at the checkout register to tabulate the sale, 
generate a receipt, and monitor their own inventories. 
Catalina has developed hardware and software that collect 
3  
 
 
 
 
data on the products as they are being scanned at the 
checkout register. 
The collected data are transferred to 
one of Catalina’s centralized databases in Florida or 
California. 
Catalina has also installed thermal printers 
near the checkout scanners, which printers it uses to 
produce either coupons or advertising messages. 
Catalina 
owns, 
installs, 
and 
maintains 
all 
its 
hardware 
and 
software, and maintains the stocks of paper utilized by the 
printers. 
Catalina 
provides 
its 
manufacturer-clients 
with 
exclusive access to a certain product category—such as 
soup, diapers, pasta sauce, etc.—in four-week cycles. 
Catalina and the manufacturer-clients work together to 
identify the desired product category. 
A software program installed in Catalina’s centralized 
databases analyzes the product information it receives from 
the supermarket checkout scanners and determines whether an 
item fits into any desired product categories. If the item 
is not part of a desired product category, no response is 
generated. 
If the item falls within a desired product 
category, the centralized database will generate one of 
three responses. 
The manufacturer-client chooses what the 
response will be. 
The first possible response is the creation of a 
manufacturer’s redeemable coupon. The centralized database 
4  
 
 
 
 
 
will send data by way of the Catalina network, instructing 
a 
printer 
near 
the 
checkout 
scanner 
to 
produce 
a 
manufacturer’s redeemable coupon. 
Catalina does not 
influence the text or images that appear on the coupon; 
these details are left to the sole discretion of the 
client-manufacturer. 
When 
the 
supermarket 
sale 
is 
complete, the cashier presents the coupon to the consumer 
along with the supermarket’s receipt. 
The consumer then 
has the option of retaining the coupon and redeeming it on 
the next visit to the supermarket retailer. 
The second possible response in the Checkout Coupon™ 
program is the production of a general announcement 
advertising a manufacturer-client’s product. 
The process 
behind producing a general announcement is identical to 
that of the coupon: an item that fits into a desired 
product category triggers a response from one of Catalina’s 
centralized databases. 
Rather than generating a coupon at 
the point of sale, however, Catalina’s centralized database 
instead sends instructions to the printer to produce a 
general advertising announcement, such as “Campbell’s Soup 
is M’m-M’m Good.” 
The manufacturer-client has full 
authority over the text and images that appear on the 
general advertising announcement. 
The third and final potential response in the Checkout 
Coupon™ program is the generation of no response at all. A 
5  
 
 
 
 
manufacturer-client can contract for a four-week period in 
a certain product category, but choose to have no coupons 
or messages printed. 
Although the manufacturer-client is 
not publishing any coupons or messages of its own, it is 
preventing a competitor from using Catalina’s services for 
that four-week period. 
The manufacturer-clients pay Catalina the higher of a 
base program fee or a per coupon rate identified in the 
contract. 
Catalina has developed cost per coupon pricing 
according to a three-tier scale. 
The first and most 
expensive tier is for coupons dispensed when a competitor’s 
product of the same desired product category is scanned. 
Catalina justifies this higher cost by asserting that 
coupons dispensed under these circumstances require more 
research as well as the development of more complex 
software. 
The second tier is for cross-category coupons, 
or coupons for items produced by the manufacturer-client, 
but are for a product different from the actual item 
scanned. 
Coupons produced and distributed under these 
circumstances require less research and less complex 
software. 
The third and least expensive tier is for own 
user coupons, or coupons for the exact item that has been 
scanned. 
These coupons require the least amount of 
research and software development. 
6  
 
 
 
 
   
 
                                                 
 
The Department of Treasury conducted a sales and use 
tax audit of Catalina for the period from January 1, 1991, 
through June 30, 1993. 
Following the audit, Catalina 
submitted a check for $38,002 (plus interest) to the 
department intended to constitute full payment of its 
Michigan use tax liability for the audit period. 
The 
department contends that Catalina is liable for a total of 
$383,856.06 in sales tax and interest. 
Catalina filed 
petitions with the Michigan Tax Tribunal contesting the 
sales tax assessment. 
Both Catalina and the department 
moved for summary disposition pursuant to MCR 2.116(C)(10). 
The Tax Tribunal denied Catalina’s motion and granted the 
department’s motion, holding Catalina liable for the sales 
tax. 
The Court of Appeals affirmed in an unpublished 
opinion.1  This Court granted leave to appeal, limiting the 
issues to one question: “whether petitioners’ ‘coupon 
checkout program’ constitutes ‘sales at retail’ under MCL 
205.52.”2 
II 
In the absence of fraud, review of a Tax Tribunal 
decision is limited to determining whether the tribunal 
erred in applying the law or adopted a wrong principle. 
1 Unpublished opinion per curiam, issued March 5, 2002
(Docket Nos. 221811, 221890). 
2 468 Mich 869 (2003). 
7 
 
 
  
                                                 
 
  
 
The Tax Tribunal’s factual findings are conclusive if 
supported by competent, material, and substantial evidence 
on the whole record. 
Const 1963, art 6, § 28. 
Michigan 
Bell Telephone Co v Dep’t of Treasury, 445 Mich 470, 476; 
518 NW2d 808 (1994). 
III 
The parties have conceded that petitioners owe either 
the use tax already paid by Catalina, or the sales tax 
assessed by the department.3  Thus, the question before us 
is whether the Tax Tribunal and the Court of Appeals 
correctly held that Catalina owed sales tax on its 
transactions with its merchant-clients. 
As a general rule, sales tax applies only to sales of 
tangible personal property, not sales of services.4 When a 
single transaction, as here, involves both the provision of 
services and the transfer of tangible personal property, it 
3 “A sales-use tax scheme is designed to make all
tangible personal property, whether acquired in, or out of,
the state subject to a uniform tax burden. 
Sales and use 
taxes are mutually exclusive but complementary, and are
designed to exact an equal tax based on a percentage of the
purchase price of the property in question.” 
85 CJS 2d,
Taxation, § 1990, p 950. 
4 Although there are specific exceptions, such as sales
of transmission and distribution services for electricity,
MCL 205.51(d), none of those exceptions applies in this
case. 
See also MCL 205.51(h), enacted after the present
case arose, which provides that a “commercial advertising
element” is not a sale at retail. 1995 PA 209, § 1.
8 
 
 
 
 
                                                 
 
 
must be categorized as either a service or a tangible 
property transaction. 
Catalina contends that its business is a service-the 
provision 
of 
advertising 
research 
and 
expertise 
to 
manufacturers, that the transfer of the slips of paper with 
coupons or advertising messages to the manufacturers is 
incidental to this service, and that its transactions are 
therefore not subject to sales tax. 
The department 
contends that the direct object of the contract between the 
petitioners and the manufacturers is the transfer of the 
coupons and, therefore, the transactions are subject to 
sales tax. 
In determining whether Catalina’s transaction with a 
manufacturer was a retail sale or a sale of services, the 
Tax Tribunal applied a narrow version of the “real object 
test,” as set forth by the Department of Treasury in 
Revenue Administrative Bulletin 1995-1 (RAB 95-1):5 
5 The real object test originated with Shelby Graphics, 
Inc v Dep’t of Treasury, 5 MTT 63; 1986 Mich Tax LEXIS 59
(1986), decided nine years before the issuance of RAB 95-1.
There, the petitioner furnished advertising products, such
as signs and banners, to a chain of grocery stores. 
The 
products were designed by the petitioner’s graphic artist,
and a representative of the grocery store testified that it
relied heavily on the creative skills of the artist. 
The 
state assessed sales tax on the sale of the signs and
banners. 
Shelby Graphics argued that its customers were
paying for creative design services, not the actual 
advertisements. The Michigan Tax Tribunal adopted the real
9 
 
 
 
 
                                                 
Accordingly, the linchpin issue requiring
review and resolution is whether, 
from the 
perspective 
of 
the 
manufacturer-clients, 
the 
“real object” sought by them from the business 
activities of CMC and CMSC during the audit 
period involved the purchase, for distribution to
retail consumers, of tangible coupons pursuant to
contracts 
between 
Petitioners 
and 
the 
manufacturers, or whether the real object sought
by the manufacturers consisted of the receipt of
nontaxable computer and informational services 
from Petitioners. 
[MTT order, entered August 9,
1999, p 15 (emphasis in original).] 
Applying that test, the Tax Tribunal held that the 
direct object of the transaction was the coupon and, 
therefore, the entire transaction was subject to sales tax. 
In this “mixed” service/sales transaction,
the objective evidence shows the “customized” 
(SOF, Ex. I) Checkout Coupons and advertising
messages, 
which 
are 
printed 
at 
supermarket
checkout 
lanes 
for 
distribution 
to 
targeted
retail consumers, to be the “real object” of the
manufacturers’ contracts with Petitioners. It is 
that end product, the tangible personal property,
which promotes a manufacturer’s product(s) and
which 
attempts, 
through 
discount 
offers 
and 
advertising messages, to convince consumers to
purchase its product(s) in the future. 
[MTT
order, entered August 9, 1999, p 30 (emphasis in
original).] 
object test and held that the sale of the advertising
products constituted a sale at retail. 
We 
note, 
however, 
that 
the 
sales 
tax 
act 
was 
subsequently amended to remove sales tax liability in 
circumstances similar to Shelby Graphics. 1995 PA 209, § 1
added MCL 205.51(h), which specifically excludes custom
developed commercial advertising from the definition of
“sale at retail.” 
As noted in n 4, the statutory amendment does not
affect the outcome in this case. 
However, the legislative
reaction calls into question the continued vitality of the
Shelby Graphics analysis, upon which RAB 95-1 is based.
10 
 
 
 
                                                 
   
RAB 95-1 was not adopted under the Administrative 
Procedures Act, MCL 24.201 et seq., and, therefore, does 
not have the force of law. 
Danse Corp v Madison Hts, 466 
Mich 175, 181; 644 NW2d 721 (2002). RAB 95-1 merely states 
the department’s interpretation of the statutes. 
In its 
brief, the department concedes that “it may not, through 
the issuance of an [RAB], create law or adopt rules 
conflicting with applicable statutes and binding court 
decisions.” 
During the years at issue, the General Sales Tax Act, 
MCL 205.51 et seq., provided that 
there shall be collected from all persons engaged
in the business of making sales at retail, as
defined in section 1, an annual tax for the
privilege of engaging in that business equal to
4% of the gross proceeds of the business. . . .
[MCL 205.52(1).][6] 
Sale at retail is defined in MCL 205.51(1)(b) as 
a transaction by which the ownership of tangible
personal 
property 
is 
transferred 
for 
consideration, if the transfer is made in the
ordinary course of the transferor’s business and
is made to the transferee for consumption or use,
or for any purpose other than for resale . . . . 
In 1996, the Court of Appeals issued a published 
opinion holding that when tangible goods were provided as 
an incidental part of a service, the goods were not subject 
6 The sales tax is now set at six percent, effective
May 1, 1994. 
11  
 
 
 
 
 
to sales tax. 
Univ of Mich Bd of Regents v Dep’t of 
Treasury, 217 Mich App 665; 553 NW2d 349 (1996). In Bd of 
Regents, the question was whether sales tax should be 
assessed against (1) photocopies costing five cents each 
made by students or others at photocopier machines placed 
at the university’s libraries, student dormitories, and 
student union and (2) replacement diplomas ordered by 
graduates, costing five dollars each. The Court of Appeals 
first said: 
Fundamentally, the sales tax is a tax upon
sellers for the privilege of engaging in the
business of making retail sales of tangible
personal property. 
“Business” is defined in the 
sales tax act as “an activity engaged in by a
person or caused to be engaged in by that person
with the object of gain, benefit, or advantage,
either direct or indirect.” 
MCL 205.51(1)(j).
The university was not in the business of selling
photocopies as a retail enterprise with a profit­
making objective; the five-cent charge closely
approximated the actual cost of one photocopy.
Rather, 
the 
university 
provided 
an 
academic 
library, and the convenience of and charge for
photocopies were an incidental part of library
operations. [Bd of Regents, at 669 (citations
omitted).] 
The Court concluded that the photocopies were not 
subject to sales tax because “the photocopies in this case 
were not sold at retail to generate a profit. 
Rather, 
students’ use of the photocopier machines was incidental to 
the library’s circulation services and the university’s 
educational mission.” Id. at 670. 
12  
 
 
 
In examining the sale of the replacement diplomas for 
five dollars, Bd of Regents concluded that the university 
was offering a customized service to which the tangible 
paper was merely incidental. The Court explained that “the 
purchaser of a replacement diploma was paying for the 
services of the university’s office of the registrar in 
reviewing its records and then producing a document 
containing highly personalized information, including the 
name of the graduate, the degree obtained, and the date of 
graduation.” Id. at 670. 
In this case the Tax Tribunal and the Court of Appeals 
erred in following RAB 95-1 rather than the “incidental to 
service” test set forth in Bd of Regents. The Michigan Tax 
Tribunal, as a tribunal inferior to the Court of Appeals, 
did not have the authority to reject and replace the 
statutory interpretation set forth by the Court of Appeals 
in a binding, precedential opinion. 
See MCR 7.215(C)(2) 
(“A 
published 
opinion 
of 
the 
Court 
of 
Appeals 
has 
precedential effect under the rule of stare decisis.”) and 
Michigan Bell, supra at 476, citing Const 1963, art 6, §28 
(the appellate courts may reverse the decision of the Tax 
Tribunal if it misapplied the law or adopted a wrong legal 
principle). 
The Court of Appeals panel here also erred in 
applying the department’s narrow version of the real object 
test instead of following Bd of Regents.
 A Court of 
13  
 
 
 
 
 
Appeals opinion published after November 1, 1990, is 
binding precedent not only on the lower courts, but on 
subsequent 
panels 
of 
the 
Court 
of 
Appeals. 
MCR 
7.215(C)(2), (I)(1). 
This Court, of course, is not bound by Court of 
Appeals decisions. 
Nor are we bound by the department’s 
use of a narrow version of the real object test. 
Although 
this Court affords deference to the construction of 
statutory provisions by any particular department of the 
government and used for a long period, the department’s 
interpretation “is not binding on this Court and ‘cannot be 
used to overcome the statute’s plain meaning . . . .’” 
Ludington Service Corp v Ins Comm’r, 444 Mich 481, 505; 511 
NW2d 661 (1994) (citation omitted). 
We reject the department’s narrow reading of the real 
object test. 
Under RAB 95-1 the question is whether, from 
the perspective of the client, the real object sought by 
the client was the purchase of the tangible good or the 
receipt of the services. The weakness of this test is that 
it is not consistent with the statutory definition of “sale 
at retail.” 
The real object test focuses exclusively on 
the perspective of the purchaser. However, the purchaser’s 
point of view is not given special consideration under the 
language 
of 
the 
statute. 
Instead, 
the 
statute’s 
perspective is more broadly focused and requires a fuller 
14  
 
 
 
 
 
analysis that weighs not only the perspectives of the 
parties to the sale, but also the nature of the product and 
service. 
This latter approach is subsumed within the 
“incidental to service” test articulated by the Court of 
Appeals in Bd of Regents, supra. 
Accordingly, we adopt the “incidental to service” test 
for categorizing a business relationship that involves both 
the provision of services and the transfer of tangible 
personal property as either a service or a tangible 
property transaction. Under this test, “sales tax will not 
apply to transactions where the rendering of a service is 
the object of the transaction, even though tangible 
personal property is exchanged incidentally.” 
85 CJS 2d, 
Taxation, § 2018, p 976. 
The “incidental to service” test 
looks objectively at the entire transaction to determine 
whether the transaction is principally a transfer of 
tangible personal property or a provision of a service. 
The sales tax is a tax on sellers for the privilege of 
engaging in the business of retail sales. 
If the 
consideration paid in a transaction is not paid for the 
transfer of the tangible property, but for the service 
provided, and the transfer of the tangible property is only 
15  
 
 
 
     
                                                 
 
incidental to the service provided, the transaction is not 
a sale at retail under MCL 205.51(b).7 
We agree with the statement in Am Jur 2d that the 
court 
must 
objectively 
examine 
the 
totality 
of 
the 
transaction in determining whether it is subject to sales 
tax: 
When tangible goods or items are provided in
conjunction with services, courts examine the 
totality of the transaction to determine its 
taxability. 
The essence of the transaction test 
specifically applies to those sales tax cases in
which 
it 
is 
initially 
unclear 
whether 
the 
transaction mixes sales and services. 
For 
purposes of determining whether a transaction 
falls within a sales tax statute, the court 
considers whether the tangible personal property
serves exclusively as the medium of transmission
for an intangible product or service; if the 
7 Additionally, although not outcome determinative in
this case, as the language of the statute is our primary
consideration, we note that the “incidental to service”
test we adopt today is consistent with test utilized to
differentiate 
goods 
from 
services 
under 
the 
Uniform 
Commercial Code. The UCC, found at MCL 440.1101 et seq.,
applies only to transactions in goods, not services. MCL
440.2102. In contracts involving both goods and services,
it must be determined whether the contracts are governed by
the UCC. In Neibarger v Universal Cooperatives, Inc, 439
Mich 512, 534; 486 NW2d 612 (1992), this Court adopted the
following test to determine whether mixed contracts are
governed by the code: 
The test for inclusion or exclusion [in the
UCC] is not whether [the contracts] are mixed, 
but, granting that they are mixed, whether their
predominant factor, their thrust, their purpose,
reasonably stated, is the rendition of service,
with goods incidentally involved . . . or is a
transaction of sale, with labor incidentally
involved . . . ." [Quoting Bonebrake v Cox, 499 
F2d 951, 960 (CA 8, 1974).]
16 
 
 
 
 
 
intangible component is the true object of the
sale, the intangible object does not assume the
taxable character of a tangible medium.  Where 
the item is the substance of the transaction, and
the 
service 
or 
skill 
provided 
is 
merely
incidental, the transaction is one for tangible
personal property, to which sales tax may be
applied. 
The focus belongs on the transaction,
not the character of the participants. 
[68 Am
Jur 2d, Sales and Use Taxes, § 62 pp 51-52.] 
In determining whether the transfer of tangible 
property was incidental to the rendering of personal or 
professional services, a court should examine 
what the 
buyer sought as the object of the transaction, what the 
seller or service provider is in the business of doing, 
whether the goods were provided as a retail enterprise with 
a profit-making motive, whether the tangible goods were 
available for sale without the service, the extent to which 
intangible services have contributed to the value of the 
physical item that is transferred, and any other factors 
relevant to the particular transaction. 
We vacate the Court of Appeals opinion that applied 
the wrong test and remand to the Michigan Tax Tribunal for 
application 
of 
the 
incidental 
to 
service 
test, 
in 
recognition of that quasi-judicial agency’s expertise in 
questions concerning the factual underpinnings of taxes. 
Romulus City Treasurer v Wayne Co Drain Comm’r, 413 Mich 
728, 737; 322 NW2d 152 (1982). 
17  
 
 
 
 
CONCLUSION 
The Court of Appeals decision is vacated and we remand 
this case to the Michigan Tax Tribunal, with instructions 
to apply the incidental to services test that we have 
adopted today. 
The Michigan Tax Tribunal’s decision must 
be filed within ninety days of the date that this opinion 
is issued. The parties are ordered to submit briefs within 
thirty-five days after the decision of the Michigan Tax 
Tribunal. 
At that time the parties may request that the 
Court grant reargument. We retain jurisdiction. 
Elizabeth A. Weaver 
Maura D. Corrigan
Michael F. Cavanagh
Marilyn Kelly
Clifford W. Taylor
Robert P. Young, Jr.
Stephen J. Markman 
18