Branding and promoting your goods properly can sometimes result in state tax savings, as United Parcel Service (“UPS”) recently demonstrated in a case involving the New York State Tax Law. See Slip Opinion (Aug. 16, 2012).

The case involved $3 million in sales and use tax that UPS paid for the purchase of shipping supplies and other materials that UPS provided free of charge to customers. Those shipping supplies ranged from envelopes and boxes to forms, labels, stickers and pouches.

UPS marketing strategies

When UPS entered the overnight air delivery business, it “implemented certain marketing strategies to promote awareness of its ‘brand’ and services . . . . To that end, the supplies at issue were designed for use in air delivery of packages with various themes specifically related to petitioner’s overnight air delivery services, as well as corporate sponsorships.” The court noted:

For example, one-day air envelopes were designed in red in order to convey urgency, and a diagonal line was used to demonstrate air and lift.

Other items carried designs illustrating petitioners sponsorship of NASCAR and the Olympics. In addition, each item bears petitioner’s logo.” Id. at n.5. The shipping supplies were provided without charge to customers. Of course, recipients of the UPS envelopes and boxes would see designs.

The court found it “significant” that customers were not required to use the supplies in order to use UPS’ services. Indeed, customers could also use the UPS supplies with competitive air delivery services.

Sales and use tax exemptions

New York’s tax law provides an exemption from sales and use tax for printed promotional materials sent to customers by means of a common carrier without charge to the customer. See N.Y. Tax Law § 1115(n)(4). New York defines “promotional materials” to include “advertising literature, other related tangible personal property,” which “includes but is not limited to, free gifts, applications, order forms and return envelopes, . . . but does not include invoices, statements and the like.” See N.Y. Tax Law § 1101(b)(12).

An administrative law judge found that the UPS materials qualified for the exemption, but the Tax Appeals Tribunal ruled that they did not, finding instead that they were primarily shipping supplies used by UPS in its air freight operation and they had only a remote relationship to advertising.

Court finds UPS promotional materials tax exempt

A divided appellate court reversed, and ruled for UPS on two grounds.

First, the court found the items were “promotional materials” because they “were not merely printed with petitioner’s 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.” (Citations omitted.)

Second, the court ruled that the supplies qualified as tax-exempt promotional materials as “free gifts” because customers were not required to use them to use UPS’ service and could use the items for other purposes, including shipping with other common carriers.1

Sources: The New York State, Department of Taxation and Finance; Matter of United Parcel Svc., Inc. v. Tax Appeals Tribunal of the State of N.Y.,, 2012 NY Slip Op. 05991 (N.Y. App. Div. Aug. 16, 2012).


This article was prepared by Sue Ross (sross@fulbright.com / 212 318 3280) of Fulbright’s Intellectual Property and Technology Practice.


1One member of the court found that UPS had met its burden of showing that the Tax Tribunal’s determination relating to “free gifts” was irrational but that UPS had not met its burden that its interpretation of “other related tangible personal property” was not the only possible rational interpretation. Another member of the court would have upheld the Tax Tribunal’s ruling as having a “rational basis.”