TAX NEWS - January 2010

Sales/Use Tax - Arizona: Company not subject to city use tax on out-of-state purchases of flyers

City of Mesa v. Val-Pak East Valley, Inc., Arizona Ct. App. (1/5/10). An Arizona Court of Appeal reversed a previous Arizona tax court ruling, which had held that a franchisee selling advertising flyers to local businesses via contracts with its out-of-state franchisor for the actual printing/mailing of the flyers was subject to local city use tax on its out-of-state flyer purchases from the franchisor.

The Court explained that because the cost of paper accounted for only 9% of the invoice amounts that the franchisor sent to the franchisee, the "dominant purpose" of the overall transaction was the purchase of a nontaxable job printing service, rather than the purchase of tangible personal property. Also, pursuant to the "common understanding" test, the franchisee had contracted with the franchisor for the purchase of nontaxable job printing services, rather than tangible personal property. Accordingly, the Court held that the franchisee was not subject to local city use tax on the transactions, as city codes do not impose use tax on job printing.