                     Nebraska Advance Sheets
	             VALPAK OF OMAHA v. NEBRASKA DEPT. OF REV.	497
	                         Cite as 290 Neb. 497

                  Valpak of Omaha, LLC, appellant,
                     v. Nebraska Department of
                      R evenue et al., appellees.
                                  ___ N.W.2d ___

                       Filed March 27, 2015.    No. S-14-125.

 1.	 Administrative Law: Judgments: Appeal and Error. A judgment or final order
     rendered by a district court in a judicial review pursuant to the Administrative
     Procedure Act may be reversed, vacated, or modified by an appellate court for
     errors appearing on the record.
 2.	 ____: ____: ____. When reviewing an order of a district court under the
     Administrative Procedure Act for errors appearing on the record, the inquiry is
     whether the decision conforms to the law, is supported by competent evidence,
     and is neither arbitrary, capricious, nor unreasonable.
 3.	 Administrative Law: Appeal and Error. In an appeal under the Administrative
     Procedure Act, an appellate court will not substitute its factual findings for
     those of the district court where competent evidence supports the district
     court’s findings.
 4.	 Administrative Law. Agency regulations that are properly adopted and filed
     with the Secretary of State of Nebraska have the effect of statutory law.
 5.	 Ordinances: Presumptions: Proof. In considering the validity of regulations,
     courts generally presume that legislative or rulemaking bodies, in enacting ordi-
     nances or rules, acted within their authority, and the burden rests on those who
     challenge their validity.

   Appeal from the District Court for Lancaster County: Paul
D. Merritt, Jr., Judge. Affirmed.

   William Hargens, Nicholas K. Niemann, and Matthew R.
Ottemann, of McGrath, North, Mullin & Kratz, P.C., L.L.O.,
for appellant.

  Jon Bruning, Attorney General, and L. Jay Bartel for
appellees.

  Wright, Connolly, Stephan, McCormack, Miller-Lerman,
and Cassel, JJ.

    Wright, J.
                   NATURE OF CASE
   Between October 1, 2004, and December 31, 2009, Valpak
of Omaha, LLC (Valpak), paid over $5.5 million to Val-pak
    Nebraska Advance Sheets
498	290 NEBRASKA REPORTS



Direct Marketing Systems, Inc. (Direct Marketing), to print
direct mail advertisements and distribute them in and around
Omaha, Nebraska. When Valpak was assessed use taxes on
that amount, it asked for a redetermination that no taxes
were due. It claimed that the payments to Direct Marketing
were not transactions that were subject to use taxes under
Nebraska law.
   The Tax Commissioner of the Nebraska Department of
Revenue (Department) rejected Valpak’s argument and denied
its petitions for redetermination. The district court affirmed,
and Valpak now appeals. Because we conclude that Valpak
was liable for use taxes on its payments to Direct Marketing,
we affirm the judgment of the district court which affirmed
the decision of the Tax Commissioner.

                      SCOPE OF REVIEW
   [1,2] A judgment or final order rendered by a district court
in a judicial review pursuant to the Administrative Procedure
Act may be reversed, vacated, or modified by an appellate
court for errors appearing on the record. Nebraska Account.
& Disclosure Comm. v. Skinner, 288 Neb. 804, 853 N.W.2d
1 (2014). When reviewing an order of a district court under
the Administrative Procedure Act for errors appearing on the
record, the inquiry is whether the decision conforms to the law,
is supported by competent evidence, and is neither arbitrary,
capricious, nor unreasonable. Skinner, supra.
   [3] In an appeal under the Administrative Procedure Act, an
appellate court will not substitute its factual findings for those
of the district court where competent evidence supports the
district court’s findings. Skinner, supra. “But ‘[t]o the extent
that the meaning and interpretation of statutes and regulations
are involved, questions of law are presented, in connection
with which an appellate court has an obligation to reach an
independent conclusion irrespective of the decision made by
the court below.’” Id. at 806, 853 N.W.2d at 6 (alteration
in original).
                  Nebraska Advance Sheets
	          VALPAK OF OMAHA v. NEBRASKA DEPT. OF REV.	499
	                      Cite as 290 Neb. 497

                            FACTS
                           Background
   Valpak is a Nebraska limited liability corporation with its
principal place of business in Omaha. It is owned by Scott
Farkas and Mary P. Rogers-Farkas and is a franchisee of Direct
Marketing. Direct Marketing is a Delaware corporation with its
principal place of business in Florida.
   Direct Marketing sells advertising and marketing services.
Principally, it offers “cooperative direct mail services,” which
services consist of printing and distributing “cooperative direct
mail advertising.” This advertising is a “method of advertising
in which advertisements from multiple businesses are included
in a single envelope or package for mailing.”
   The cooperative direct mail advertising offered by Directing
Marketing employs “VALPAK® Envelopes” (envelopes),
which bear one or more of Direct Marketing’s trade names,
trademarks, or logos. The envelopes are filled with mul-
tiple printed advertisements from national, regional, and local
advertisers.
   Direct Marketing distributes the envelopes according to
a “unique proprietary segmentation system” that allows for
targeted advertising. This system is based on “Neighborhood
Trade Areas.” Each “Neighborhood Trade Area” (NTA) is a
“geographic area containing 10,000 residential addresses” that
have been grouped “based on income demographics, purchase
behaviors, proximity to retail shopping locations, traffic pat-
terns and postal carrier routes.” The envelopes sent to each
NTA contain different advertisements. Purchasers of Direct
Marketing’s cooperative direct mail services designate which
NTA’s should receive their advertisements.
                  P roduction and Mailing
                        of Envelopes
   As one of Direct Marketing’s franchisees, Valpak “sells and
markets” Direct Marketing’s cooperative direct mail serv­ices
to businesses who wish to have advertisements included in the
envelopes. Henceforth, we refer to such businesses as “clients.”
    Nebraska Advance Sheets
500	290 NEBRASKA REPORTS



   At the beginning of the production and mailing process,
clients enter into a “Participation Agreement” with Valpak.
This agreement specifies the “amount and type of advertis-
ing services purchased,” which NTA’s the client wants to
target, and with what frequency the client wants its adver-
tisements included in the envelopes. Through the agreement,
Valpak “agrees to provide . . . assistance in planning and
preparation of rough copy, proof, printing, insertion, address-
ing, postage, envelopes, and mailing distribution specified in
this agreement.”
   A client often provides its own art for its advertisements.
Where the client does not, the art is created by Direct Marketing
using a template chosen by the client, as well as information
provided by the client. Whether supplied by the client or cre-
ated from a template, all art is reviewed by Direct Marketing
for compliance with production specifications (such as size and
resolution) and intellectual property law.
   Valpak places an order for the printing and mailing of
advertisements by submitting an “Insertion Order” to Direct
Marketing. Direct Marketing is responsible for (1) printing the
advertisements, (2) collating them with other advertisements
designated for delivery in the same NTA, (3) inserting the
advertisements into the envelopes, and (4) labeling the enve-
lopes for distribution to the residential addresses within the
specified NTA. On a date set by Direct Marketing, it delivers
the envelopes to a U.S. Postal Service facility in Florida to be
sent by direct mail. At no point in the process does Valpak have
physical possession of the advertisements or the envelopes. It
receives a “de minimis number” of the envelopes for “record
keeping or other business purposes.”
   For each “mailing” completed by Direct Marketing, Valpak
receives an invoice and remits payment. Its clients do not
receive an invoice from Direct Marketing. They are billed by
and make payments to Valpak. Valpak does not collect sales
taxes from its clients.
                 Nebraska Advance Sheets
	         VALPAK OF OMAHA v. NEBRASKA DEPT. OF REV.	501
	                     Cite as 290 Neb. 497

              Legal R elationship Between Valpak
                     and Direct M arketing
   The franchise agreement between Valpak and Direct
Marketing states that Valpak is an independent contractor and
“[d]ealer” of Direct Marketing. Valpak has the right “to sell,
and place orders for distribution of advertising, Advertising
Inserts, or other products and/or services offered by [Direct
Marketing], to be placed in [the envelopes] to be distributed
within the Territory.” Valpak is contractually obligated to pay
Direct Marketing “for Production of [the envelopes] for all
Mailings within the Territory, and for any other products and
services ordered from” Direct Marketing.
   Under the franchise agreement, Direct Marketing is desig-
nated as the “sole publisher and distributor” of the envelopes.
It is obligated to “produce and distribute, or arrange for the
Production and distribution, of all” the envelopes, including
the advertisements sold by Valpak. Direct Marketing provides
“all goods and services in connection with the Production” of
the envelopes. Valpak is prohibited from printing, publishing,
or distributing the envelopes itself.
   With certain exceptions not applicable to this case, Direct
Marketing has no liability for any taxes, including use taxes,
levied on Valpak “in connection with sales made, services per-
formed or business conducted by [Valpak], or payments made
to [Direct Marketing] by [Valpak].”

                        Tax Assessments
   On January 2, 2008, the Department issued a “Notice of
Deficiency Determination and Assessment” to Valpak indicat-
ing that it owed $183,071.72 in use taxes, plus penalties and
interest, for the tax period from October 1, 2004, to October
31, 2007. The use taxes were assessed on “Untaxed Invoiced
Amounts” and “Valpak Direct Marketing System Amounts.”
The amounts described as “Valpak Direct Marketing System
Amounts” reflected payments made by Valpak to Direct
Marketing for mailings.
    Nebraska Advance Sheets
502	290 NEBRASKA REPORTS



   On July 2, 2009, the Department notified Valpak that it
owed $49,194 in use taxes, plus penalties and interest, for the
tax period from December 1, 2008, to May 31, 2009. The use
taxes were assessed on payments made by Valpak to Direct
Marketing. During the proceedings that followed, the assess-
ment was amended by stipulation of the parties and the amount
of use taxes was reduced to $48,518.10.
   On February 10, 2012, the Department issued a “Notice of
Deficiency Determination” to Valpak indicating that it owed
$185,697.27 in use taxes, plus penalties and interest, for the tax
periods from November 1, 2007, to November 30, 2008, and
June 1 to December 31, 2009. The use taxes were assessed on
payments made by Valpak to Direct Marketing.
   Together, the three assessments covered the tax period from
October 1, 2004, to December 31, 2009, and assessed a total
of $417,287.09 in use taxes on Valpak’s payments to Direct
Marketing. Because Valpak claimed that these payments were
not subject to use taxes under Nebraska law, it did not pay
any of the taxes in question. Instead, in response to the assess-
ments, it timely filed three separate petitions for redetermina-
tion, which were consolidated for consideration. During the
proceedings that followed, Valpak agreed to pay $1,367.40 of
the use taxes assessed against it. The Department also agreed
to reduce the assessment for the tax period from October 1,
2004, to February 28, 2005.
   After an administrative hearing, the Tax Commissioner
determined that Valpak was an “advertising agency” subject
to use taxes under the Department’s sales and use tax regula-
tions, specifically 316 Neb. Admin. Code, ch. 1, § 056 (1994).
The Tax Commissioner explained (1) that in Val-Pak of Omaha
v. Department of Revenue, 249 Neb. 776, 545 N.W.2d 447
(1996), use taxes had been imposed on a licensee of Direct
Marketing and (2) that the “business model and transactions”
in the instant case did “not differ in any material respect from
the business model and transactions” in Val-Pak of Omaha.
The Tax Commissioner denied Valpak’s petitions for rede-
termination, except for the use taxes assessed from October
1, 2004, to February 28, 2005, which the Department agreed
to reduce.
                  Nebraska Advance Sheets
	          VALPAK OF OMAHA v. NEBRASKA DEPT. OF REV.	503
	                      Cite as 290 Neb. 497

   Valpak petitioned for review with the district court, claim-
ing that the hearing officer erred in “determining that the
assessments of sales and consumers use tax set forth in the
Notices (as amended) were correct.” On January 14, 2014, the
court affirmed the decision of the Tax Commissioner. It con-
cluded that there were two alternative grounds for assessing
use taxes against Valpak—the regulation upon which the Tax
Commissioner had relied and Neb. Rev. Stat. § 77-2703(2)
(Cum. Supp. 2004). In particular, the court found (1) that
Valpak was an advertising agency for purposes of § 056
and (2) that Valpak “exercised sufficient rights and powers
over the Envelopes with advertising inserts incident to owner-
ship and possession to meet the statutory definitions of ‘use’
and ‘purchase.’”
   Valpak timely appeals. Pursuant to our statutory authority
to regulate the dockets of the appellate courts of this state, we
moved the case to our docket. See Neb. Rev. Stat. § 24-1106(3)
(Reissue 2008).

                 ASSIGNMENT OF ERROR
   Valpak assigns, restated, that the district court erred in con-
cluding that Valpak was liable for use taxes on its payments
to Direct Marketing.

                          ANALYSIS
   [4,5] The State’s authority to impose use taxes is estab-
lished by statute. See § 77-2703(2). However, there are vari-
ous regulations which also relate to use taxes. See 316 Neb.
Admin. Code, ch. 1 (2013). In particular, § 056 of the sales
and use tax regulations addresses the imposition of sales and
use taxes on advertising and advertising agencies. Agency reg-
ulations that are properly adopted and filed with the Secretary
of State of Nebraska have the effect of statutory law. Smalley
v. Nebraska Dept. of Health & Human Servs., 283 Neb. 544,
811 N.W.2d 246 (2012), cert. denied ___ U.S. ___, 133 S.
Ct. 1631, 185 L. Ed. 2d 616 (2013). And, in considering the
validity of regulations, “courts generally presume that legis-
lative or rulemaking bodies, in enacting ordinances or rules,
acted within their authority, and the burden rests on those
    Nebraska Advance Sheets
504	290 NEBRASKA REPORTS



who challenge their validity.” Smalley, 283 Neb. at 557, 811
N.W.2d at 256.
   There is no challenge to the validity of § 056 in the instant
case. Valpak did not bring a facial or as-applied challenge to
§ 056, and it does not argue that the Department exceeded its
authority in enacting § 056. Thus, if Valpak was an advertis-
ing agency during the relevant tax periods, § 056 controls
whether Valpak was required to pay use taxes on the payments
in question.
   The district court concluded that Valpak was an advertising
agency governed by § 056 and that it was liable for use taxes
pursuant to the regulation. We review these determinations
for errors appearing on the record. See Nebraska Account. &
Disclosure Comm. v. Skinner, 288 Neb. 804, 853 N.W.2d 1
(2014). Because we find no error on the record, we affirm.

                       Advertising Agency
   Section 056 of the Department’s regulations governs the
imposition of sales and use taxes on purchases and sales made
by advertising agencies. “An advertising agency performs
advertising services and develops advertising materials for its
clients.” 316 Neb. Admin. Code, ch. 1, § 056.01 (1994). For
purposes of § 056, advertising materials “include all types of
printed material, audio tapes, video tapes, signs, posters, pic-
tures, drawings, computer graphics, computer music, paste-ups,
mechanicals, or other artwork.” See 316 Neb. Admin. Code,
ch. 1, § 056.05C(1) (1994). See, also, 316 Neb. Admin. Code,
ch. 1, §§ 056.03C(1) and 056.04C(2) (1994).
   In the instant case, the evidence established that Valpak pro-
vided advertising services. The participation agreement used
by Valpak stated that it would provide “assistance in plan-
ning and preparation of rough copy, proof, printing, inser-
tion, addressing, postage, envelopes, and mailing distribu-
tion” of advertisements. In practice, this “assistance” included
assimilating the abundance of information provided by Direct
Marketing and using it to guide clients through the process of
developing advertisements to be included in the envelopes.
Farkas testified that Valpak filtered through the “thousands” of
blank templates available to find ones which were appropriate
                  Nebraska Advance Sheets
	          VALPAK OF OMAHA v. NEBRASKA DEPT. OF REV.	505
	                      Cite as 290 Neb. 497

for a particular client and selected “two or three” blank tem-
plates to present to that client. He explained that Valpak used
its knowledge of “best practices” in advertising to explain
to a client how it could design an advertisement to be most
effective. And he stated that Valpak supplied its clients with
research that was relevant to deciding where and how fre-
quently to send advertisements.
   We consider the services of assimilating information and
using it to guide clients through the process of developing
advertisements to be advertising services, as did Valpak. Per
its own description, it had a franchise to “offer . . . [a]dvertis-
ing services.”
   There was also evidence that Valpak developed advertising
materials. To develop is to “evolve (as an idea) into a clear,
full, and explicit presentation (as in a drawing or specifi-
cation).” See Webster’s Third New International Dictionary
of the English Language, Unabridged 618 (1993). As noted
above, Valpak was integrally involved in the process of choos-
ing a template for each client. It then obtained the necessary
information from the client, filled in the template, “prepare[d]
a draft,” and submitted the draft to Direct Marketing as part
of an “Insertion Order.” Through such actions, Valpak evolved
each of its clients’ desires and ideas into explicit, full designs
for advertisements that could be sent to Direct Marketing
for production.
   The paper advertisements which ultimately were printed
from these designs qualified as advertising materials, because
they were “printed material.” See § 056.05C(1). Accordingly, it
could be ascertained from the foregoing evidence of Valpak’s
activities that it developed advertising materials. Valpak itself
describes the advertisements it helped to create as “advertising
materials.” See brief for appellant at 22.
   The aforementioned evidence established that Valpak pro-
vided advertising services and developed advertising materials.
Therefore, there was competent evidence to support the district
court’s finding of fact that Valpak was an advertising agency.
This finding was neither arbitrary nor unreasonable.
   In addition to being supported by competent evidence, the
district court’s conclusion that Valpak was an advertising
    Nebraska Advance Sheets
506	290 NEBRASKA REPORTS



agency is consistent with Val-Pak of Omaha v. Department of
Revenue, 249 Neb. 776, 545 N.W.2d 447 (1996), which recog-
nized that a licensee of Direct Marketing was an advertising
agency under the sales and use tax regulations. The version of
§ 056 in effect at that time differed in many respects from the
current regulation. See 316 Neb. Admin. Code, ch. 1, § 056
(1984). But the use of the term “advertising agency” is con-
sistent in both versions.
   For purposes of applying the definition of an advertis-
ing agency, we find no significant differences between the
actions of the licensee in Val-Pak of Omaha, supra, and of
Valpak in the instant case. The licensee had an agreement with
Direct Marketing that allowed it to sell advertisements that
would be printed and distributed by Direct Marketing. The
franchise agreement granted this same right to Valpak. The
licensee entered into “‘participation agreements’ with local
businesses” in which it “agreed to provide assistance in plan-
ning and preparing draft copies and proofs of the proposed
advertising.” See id. at 778, 545 N.W.2d at 448. Valpak agreed
to provide identical services to its clients. The licensee “pre-
pared the preliminary advertising material for submission to
Direct Marketing” and then “forwarded” the advertisements to
Direct Marketing to be printed and distributed. See id. at 778,
545 N.W.2d at 448-49. In this case, the evidence showed that
Valpak also performed these tasks.
   During the relevant tax periods, Valpak provided the same
services to its clients as did the licensee in Val-Pak of Omaha,
supra, and performed a substantially similar role in the develop-
ment of advertisements. The actions of the licensee in Val-Pak
of Omaha qualified it as an advertising agency. Therefore, by
engaging in comparable actions, Valpak also acted as an adver-
tising agency for purposes of the regulation.

               Tax Liability Under Advertising
                     Agency R egulation
   Section 056 of the Department’s regulations imposes sales
and use taxes on the purchases and sales of advertising agen-
cies. Advertising agencies are taxed differently depending on
whether they are designated as the agents of their clients. See
                  Nebraska Advance Sheets
	          VALPAK OF OMAHA v. NEBRASKA DEPT. OF REV.	507
	                      Cite as 290 Neb. 497

316 Neb. Admin. Code, ch. 1, § 056.02 (1994). In the instant
case, Valpak was not designated as the agent of its clients.
Accordingly, its tax liability must be determined according to
316 Neb. Admin. Code, ch. 1, § 056.05 (1994), which “applies
when the client has not designated the advertising agency as its
agent for tax purposes.”
   Section 056.05 imposes taxes on specific types of pur-
chases made by an advertising agency. As is relevant for our
purposes, 316 Neb. Admin. Code, ch. 1, § 056.05A (1994),
imposes a tax “on labor or creative talent purchased from
third-parties for the development or production of the ideas or
for work on advertising materials.” The tax is assessed against
the advertising agency purchasing the labor or creative talent.
See id.
   Valpak’s payments to Direct Marketing fall within the cat-
egory of purchases for which an advertising agency must pay
taxes under § 056.05A. During these proceedings, Valpak
conceded that its payments to Direct Marketing constituted
purchases of services. Valpak stated that it purchased services
only and that it did not purchase any tangible property. In
light of this concession, we treat the entire amount of Valpak’s
payments to Direct Marketing as corresponding to purchases
of services.
   The services purchased with Valpak’s payments to Direct
Marketing were those performed by Direct Marketing in com-
pleting mailings, including printing and collating advertise-
ments, inserting the advertisements into the envelopes, label-
ing the envelopes, and delivering the envelopes to the U.S.
Postal Service. Valpak’s purchase of these services was func-
tionally equivalent to the purchase of the labor required to per-
form such services. And such labor was performed during the
production of paper advertisements that constituted advertising
materials. Thus, we conclude that each time Valpak remit-
ted payment to Direct Marketing for the services it provided,
Valpak purchased labor for work on advertising materials.
In the case of some payments, Valpak also purchased cre-
ative talent for work on advertising materials, because Direct
Marketing’s services occasionally included creating artwork
for advertisements.
    Nebraska Advance Sheets
508	290 NEBRASKA REPORTS



   The entire amount of Valpak’s payments to Direct Marketing
was taxable under § 056.05A, because those payments consti-
tuted purchases of labor and, in some cases, creative talent for
work on advertising materials. The regulation speaks of taxes
generally and does not differentiate between sales and use
taxes. See id. However, it is well established that if an “item is
purchased in Nebraska, the sales tax applies. If the item is pur-
chased outside of Nebraska, the use tax applies.” See Interstate
Printing Co. v. Department of Revenue, 236 Neb. 110, 119, 459
N.W.2d 519, 526 (1990). Accordingly, the taxes imposed on
Valpak’s purchases from Direct Marketing, a Florida business,
were properly classified as use taxes.
   Under § 056.05A, Valpak was required to pay use taxes
on the payments it made to Direct Marketing. Therefore, the
district court did not err by upholding the assessment of such
taxes on those payments.
                        CONCLUSION
  For the foregoing reasons, we find no error on the record
in the district court’s conclusion that under § 056 of the
Department’s regulations, Valpak was an advertising agency
and was liable for use taxes on its payments to Direct
Marketing. Therefore, we affirm the judgment of the district
court which affirmed the decision of the Tax Commissioner to
deny Valpak’s petitions for redetermination.
                                                 Affirmed.
  Heavican, C.J., participating on briefs.



            Thomas R. Griffith and Heather Griffith,
              appellees, v. Drew’s LLC, appellant.
                                  ___ N.W.2d ___

                      Filed March 27, 2015.    No. S-14-456.

 1.	 Appeal and Error. To be considered by an appellate court, an alleged error must
     be both specifically assigned and specifically argued in the party’s brief.
 2.	 Courts: Appeal and Error. The district court and higher appellate courts gener-
     ally review appeals from the county court for error appearing on the record.
