UPS Succeeds in Bid for $2.7 Million Tax Refund

ALBANY, N.Y. (CN) - In a decision that generated some dissent, a state appeals court found that a shipping company was exempt from paying sales taxes in New York on labels and other materials offered to customers to promote its air-delivery services.

The decision reversed a ruling by the independent state Tax Appeals Tribunal that United Parcel Service Inc. had not met its burden of proof in seeking a refund of $2.7 million for a period covering nearly three years.

At issue were shipping supplies bought by UPS and offered free of charge as part of a "welcome kit" to new customers. The company said the materials - envelopes, boxes, forms, labels, stickers, rate guide and services booklet - were printed promotional materials that under New York's tax law were exempt from the sales taxes levied on most purchases.

A majority of the five justices hearing the appeal agreed. The decision came at the Appellate Division of New York state Supreme Court, Third Department, in Albany.

"The materials were not merely printed with petitioner's [UPS] name or trademark; they were purposefully designed to draw attention to specific aspects of petitioner's business, primarily its air-delivery services, and, thus are promotional in that they 'publicize or advertise a product (or) institution,' " said the majority opinion written by Justice Leslie E. Stein, quoting a common dictionary definition.

The appeals court noted that UPS did not contend the materials were advertising in the traditional sense, so "the question before us is whether they constitute 'related tangible personal property' for the purposes of the statute.

"We are of the view that they do so qualify and, therefore, that petitioner is entitled to the exemption" outlined in Section 1115(n)(4) of the tax law, the opinion states.

Joining Stein in the majority were Justices Thomas E. Mercure and John C. Egan Jr. Justice E. Michael Kavanagh dissented.

Justice William E. McCarthy wrote he agreed partially with the majority and partially with the dissent and so was required to concur with the majority.

UPS, founded in 1907, is best known for its ground-delivery services. Package volume totaled 4 billion last year, according to the company's annual report, in which it boasted of being "the world's largest package delivery company." While UPS moved into air delivery in the 1980s - years behind its competitors - it still ships many more packages by ground than air.

To raise awareness of the air-delivery services, including next-day and second-day, UPS launched various marketing campaigns over the years, including the one focused on the welcome kits.

The company initially paid the sales taxes on materials purchased for the kits, then filed a refund claim for a period stretching from September 1999 to May 2002. The request - originally for a refund of more than $3.1 million - was granted in part at the state Department of Taxation and Finance, which said $35,300 in guides, calendars and other printed matter qualified as exempted promotional material.

After a conciliation conference that sustained the department's ruling, UPS asked for a review by the Division of Tax Appeals, a body independent of the department that hears tax and licensing disputes. There, its claim for a revised exemption of $2.7 million was heard and granted by an administrative law judge. But the Department of Taxation and Finance took the decision to the division's Tax Appeals Tribunal, which reversed the administrative law judge and found that UPS' shipping supplies were not exempt under the tax law.

UPS then appealed the case to the Appellate Division.

The justices' majority opinion found that the shipping supplies "satisfy the ordinary meaning of 'promotional materials' because they were designed and distributed for the purpose of promoting petitioner's business and contain a clear promotional message."

The welcome kit also qualified as tax-exempt under the category of "free gifts," the majority wrote, since customers "were under no obligation to use petitioner's services or to use the supplies when shipping with petitioner."

The majority noted that the provisions of tax law authorizing exemptions "are strictly construed against the taxpayer, who bears the burden of demonstrating unambiguous entitlement to such exemption." But, according to the opinion, UPS "has satisfied its burden."

In his dissent, Justice Kavanagh disagreed with that assessment.

He sided with the Tax Appeals Tribunal that having the UPS logo on the shipping supplies served "primarily as a means by which petitioner was identified as the entity shipping the items and, as designed, were not a solicitation by petitioner that others employ its services."

Kavanagh also agreed with the Tribunal's assessment that the supplies did not constitute free gifts "because they were only provided to current customers who had accounts with petitioner and who had entered into a relationship that supported the conclusion that 'customers would use the supplies to purchase petitioner's shipping services.' "

"Simply stated, there are sound policy reasons for deferring to the Tribunal in its determination as to whether a taxpayer under a given set of circumstances is entitled to a tax exemption under the tax law," he wrote.Arguing for UPS were Scott Brian Clark of SNR Denton US in New York City and Richard D. Birns (pro hac vice) of Birns & Goff in Philadelphia. Kathleen Arnold of the state attorney general's office represented the Tax Appeals Tribunal.

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