News and Insights

Indiana Supreme Court Upholds Use Tax on Promotional Items Mailed to Residents

Tax Development May 04, 2012

In Indiana Department of State Revenue v. AOL, LLC, the Indiana Supreme Court (“Court”) recently reversed a Tax Court decision and held an out-of-state online service provider was liable for use tax on certain packages and promotional materials sent from out-of-state producers to Indiana residents.

AOL, LLC (“AOL”) sent packages containing copies of its software and promotional materials to prospective and current customers in numerous states, including Indiana. The packages included a software CD, a paper or plastic CD case, printed promotional materials and instructions, and terms and conditions of use. AOL contracted with third-party vendors to produce each of the individual components and separate third-party assembly houses to assemble the final packages from those parts. Likewise, AOL also contracted third-party letter shops to print and produce the promotional materials to be sent to its current customers.

AOL provided the third parties with some of the materials and supplies necessary to perform their respective services. None of the entities paid sales or use taxes on the packages or promotional items. All of the third-party vendors, assembly houses, and letter shops were located outside of Indiana. Upon completion, the assembly houses and letter shops mailed the packages and promotional materials to residents in Indiana.

The Court decided that the assembly houses and letter shops acquired the raw materials and component parts for resale. The Court looked to the fact that tax was never paid on the raw materials and that the third-party contractors completely consumed the materials to produce a separate and distinct final product.

The Court concluded that a sale occurred when the third-party contractors transferred title to the completed packages and promotional materials in exchange for consideration from AOL. The Court held that because the third-party contractors were making retail sales, AOL was liable for Indiana use tax when the packages and promotional items were delivered to potential and current customers in Indiana at AOL’s request.


Randy Hilger