IN THE SUPREME COURT OF TENNESSEE
AT NASHVILLE
COLEMILL ENTERPRISES, INC., ) FOR PUBLICATION
) Filed: March 30, 1998
Plaintiff/Appellant, )
) DAVIDSON CHANCERY
v. ) # 94-3217-I
)
) Hon. Irvin H. Kilcrease, Jr.,
JOE HUDDLESTON, Commissioner ) Judge.
of Tennessee Department of Revenue, )
) NO. 01S01-9706-CH-00143
Defendant/Appellee. )
For the Plaintiff: For the Defendant:
Richard L. Colbert John Knox Walkup
Cornelius & Collins Attorney General and Reporter
Nashville, Tennessee
Michael E. Moore
FILED Solicitor General
Charles L. Lewis
Deputy Attorney General
March 30, 1998
Gary N. Meade, Jr.
Cecil W. Crowson
Assistant Attorney General
Appellate Court Clerk Nashville, Tennessee
OPINION
Reversed and Remanded. Drowota, J.
We granted the applications of both Colemill Enterprises, Inc. and the Department
of Revenue in this action in which Colemill Enterprises, Inc., pursuant to Tenn. Code Ann.
§ 67-1-1801, challenges an assessment against it of state and local sales taxes. The
assessment was based on transactions whereby Colemill Enterprises, Inc. substantially
modified airplanes for out-of-state customers.
For multiple reasons hereinafter described, we conclude that neither of the
identified transactions on which the assessment was based is subject to sales taxes on (i)
sales of tangible personal property pursuant to Tenn. Code Ann. § 67-6-202 or (ii) the
installing of tangible personal property under Tenn. Code Ann. §§ 67-6-102(23)(F)(vi) and
67-6-205. Based on this determination, we find it unnecessary to address the other issues
presented in the respective applications. The judgment of the Court of Appeals and that of
the trial court are reversed, and the plaintiff’s suit challenging the assessment of sales taxes
is upheld. The plaintiff is entitled to summary judgment, and to reasonable attorney’s fees
and expenses of litigation pursuant to Tenn. Code Ann. § 67-1-1803(d).
BACKGROUND
Colemill Enterprises, Inc., which conducts its business at Cornelia Fort Airpark in
Nashville, has challenged an assessment of sales taxes that the Department of Revenue
made for the audit period January 1991 through March 1994. The assessment, which was
made on July 25, 1994, was for $17,122 in sales taxes, which amount included local option
taxes. The assessment additionally included interest that had accrued through the date of
the assessment.
Ernest W. Colbert, who is the President of Colemill Enterprises, Inc., submitted an
affidavit accompanying the plaintiff’s motion for summary judgment. The statements
2
contained in that affidavit are uncontroverted for the most part, except inasmuch as they
include the characterization of Colemill Enterprises, Inc.’s activities as “manufacturing.”
The Department of Revenue contends that the taxpayer’s activities in question did not
constitute “manufacturing.” As explained later in this opinion, a determination whether the
taxpayer was engaged in manufacturing is not necessary for our disposition of this case.
The facts as set forth in Mr. Colbert’s affidavit included the following:
“2. The July 25, 1994, sales tax assessment in the amount of
$20, 714, challenged in this action, is an assessment for taxes
on work which Colemill is engaged which is commonly
referred to as the aircraft ‘conversion’ business. A portion of
the assessment includes sales tax amounts for ‘conversions’
produced or manufactured by Colemill for export out of the
state of Tennessee. The assessment also includes amounts
for a ‘conversion’ sold to an out-of-state customer exempt
from sales tax in its home state, as well as amounts allegedly
owed on a ‘conversion’ sale to an out-of-state customer
acquiring it under a blanket certificate of resale. Finally, the
assessment includes local option sales tax under Tenn. Code
Ann. § § 67-6-701 et. seq. on articles of tangible personal
property produced or manufactured by Colemill in this state
for export and on separate components of ‘conversions’
manufactured and sold by Colemill. It is in these respects
that the assessment has been challenged by Colemill in this
action.
3. Aircraft are manufactured under ‘type certificates’ issued
by the Federal Aviation Administration under 14 C.F.R.
Section 2141. The Federal Aviation Administration also
issues ‘supplemental type certificates’ under 14 C.F.R.
Sections 21.111 et. seq., under which the holder of the
‘supplemental type certificates’ is authorized to alter the
aircraft covered by the certificates by introducing a major
change in the type of design. A ‘supplemental type
certificate’ consists of the approval by the Federal Aviation
Administration of a change in the type design of the aircraft
together with the type certificate previously issued for
aircraft. 14 C.F.R. Section 21.117. The holder of a
‘supplemental type certificate’ for aircraft is authorized to
obtain new airworthiness certificates for the aircraft
produced or manufactured under the certificate.
4. For its aircraft ‘conversions,’ Colemill introduces major
changes in the aircraft that include changes in engine,
propellers, wings and other fundamental parts of the aircraft.
These major changes alter the essential characteristics of the
aircraft, so that the aircraft after ‘conversion’ leaves
3
Colemill’s facility with a new type designation, new
performance characteristics, a new Pilot’s Operating
Hankbook and a new Federal Aviation Administration
Approved Flight Manual Supplement. These major changes
are performed strictly in accordance with supplemental type
certificates issues to Colemill by the Federal Aviation
Administration for the particular aircraft ‘conversions’
‘Colemill is thereby authorized to manufacture . . .
5. The work performed by Colemill under the supplemental
type certificates issued to it by the Federal Aviation
Administration is not repair work. The work does not involve
correcting any problem, defect or malfunction. The work is
not necessary to preserve or restore the aircraft to its original
condition. In fact, the condition of the aircraft after the work
is performed is substantially different from the aircraft’s
original condition, such that the aircraft leaves the facility
with a new type designation and new performance
characteristics. The work is not performed to correct
disrepair by wear, use, wastage, injury, decay, destruction, or
dilapidation. The purpose of the work is to change entirely
and dramatically improve the performance and safety
characteristics of aircraft, not to repair any part of the
aircraft. In many instances, the work performed by Colemill
under its supplemental type certificate is more expensive
than the air frame upon which the work is performed.
...
7. Colemill does not make separate charges to its customers
for installation services when a ‘conversion’ is
manufactured. Instead, Colemill charges a single price for
the ‘conversion,’ which includes all of the ingredients that go
into the manufacture of the finished product. The
‘conversion’ Colemill is authorized by law to perform under
the supplemental type certificates issued by the Federal
Aviation Administration is a finished product. Colemill’s
supplemental type certificates authorize it to perform all of
the work that comprises that finished product, and do not
authorize it to mix and match separate components in
whatever fashion it sees fit.
8. Attached as Exhibit 3 hereto is a copy of a ‘blanket
certificate of resale’ evidencing the purchase of a conversion
for resale by Bessemer Plywood Corporation, an out-of-state
purchaser, for which sales tax has been included in the
assessment issued by the Tennessee Department of Revenue
that is at issue in this case. Also attached as Exhibit 4 is a
purchase order for a conversion purchase issued to Colemill
by Filtrex, Inc., a New Jersey corporation exempt from sales
tax in the state of New Jersey. Sales tax for this conversion
purchased by a tax-exempt organization is also included in
the assessment that is at issue in this case.”
4
The “blanket certificate of resale” that was attached to Mr. Colbert’s affidavit was
issued by Bessemer Plywood Corporation. It indicates, “the merchandise purchased (from
Colemill Enterprises, Inc.) . . . . is purchased for . . . a component part of an article to be
produced for sale by manufacturing, assembling, processing, or refining.”
The purchase order from Filtrex, Inc. that was attached to Mr. Colbert’s affidavit
indicates that Filtrex, Inc. is a tax exempt organization. This purchase order also states that
the delivery to Filtrex, Inc. by Colemill Enterprises, Inc. was “F.O.B. Destination” in
Wayne, New Jersey.
From the Department of Revenue’s answer to the taxpayer’s application for
permission to appeal, it appears that the only transactions at issue in the challenged
assessment were the conversion work performed by the taxpayer for Bessemer Plywood
Corporation, which involved a purchase for resale, and the conversion work performed for
Filtrex, Inc., which was a sale to a tax exempt organization and with respect to which title
to tangible personal property was transferred by the taxpayer outside the State of
Tennessee.
Both parties moved for summary judgment. The trial court granted the summary
judgment motion of the Department of Revenue and denied that of the taxpayer. In
addition to ruling in favor of the Department of Revenue on all substantive issues
presented, the trial court ruled that the Department is entitled to an award of reasonable
attorney’s fees and litigation expenses under Tenn. Code Ann. § 67-1-1803(d).
Colemill Enterprises, Inc. appealed the trial court’s decision to the Court of
Appeals. The Court of Appeals agreed with the trial court on all of the substantive issues
presented, including the determination that the transactions at issue were subject to sales
5
taxes on “installation services” under Tenn. Code Ann. § 67-6-102(23)(F)(vi). The Court
of Appeals, however, ruled that, “this is a not a proper case for the award of (attorney’s
fees and litigation expenses).”
As indicated, both parties filed applications for permission to appeal, and this Court
granted both applications.
ANALYSIS
The list of the types of transactions that are taxable under the Retailers’ Sales Tax
Act, Tenn. Code Ann. § § 67-6-101, et. seq., is contained in Tenn. Code Ann. § 67-6-201.
That statute includes the following:
It is declared to be the legislative intent that every person is
exercising a taxable privilege who:
(1) Engages in the business of selling tangible
personal property at retail in this state;
...
(4) Rents or furnishes any of the things or
services taxable under this chapter.
The section of the Retailers’ Sales Tax Act that imposes sales taxes on sales of
tangible personal property is §67-6-202. That statute includes the following:
(a) For the exercise of the privilege of engaging in the
business of selling tangible personal property at retail in this
state, a tax is levied at the rate of six percent (6%) of the
sales price of each item or article of tangible personal
property when sold at retail in this state; . . . (emphasis
added).
Services are taxable under Tenn. Code Ann. § 67-6-205, which includes the
6
following:
(a) There is levied a tax at the rate of six percent (6%) of the
gross charge for all services taxable under this chapter.
The list of the kinds of services that are taxable under the Retailers’ Sales Tax Act
is contained in Tenn. Code Ann. § 67-6-102(23)(F). That statute includes the following:
(F) “Retail sale,” “sale at retail” and “retail sales price”
include the following services:
...
(vi) The installing of tangible personal
property which remains tangible personal
property after installation where a charge is
made for such installation whether or not such
installation is made as an incident to the sale
thereof and whether or not any tangible
personal property is transferred in conjunction
with such installation service. (emphasis
added).
The definitional provision contained in Tenn. Code Ann. § 67-6-102(23)(A) sets
forth an exception to the imposition of sales taxes on services, as well as an exception to
the imposition of sales taxes on sales of tangible personal property. That definitional
provision includes the following:
(23)(A) “Retail sales” or “sale at retail” means a taxable sale
of tangible personal property or specifically taxable services
to a consumer or to any person for any purpose other than for
resale. (emphasis added).
Tenn. Code Ann. § 67-6-313(a) provides an exception to the imposition of sales
taxes for certain transactions involved in interstate commerce. That provision is as
follows:
7
(a) It is not the intention of this chapter to levy a tax upon
articles of tangible personal property imported into this state
or produced or manufactured in this state for export.
(emphasis added).
Tenn. Code Ann. § 67-6-322 provides an exemption from the imposition of sales
taxes for transactions in which the customer is a type of organization that is exempt from
federal income taxation under §501(c) of the Internal Revenue code. That statute states
that, “There is exempt from the provisions of this chapter any sales or use tax upon
tangible personal property or taxable services sold, given, or donated to any (tax-exempt
organization of the type exempt from federal income taxation under §501(c ) of the Internal
Revenue Code.)”
Virtually all of the foregoing statutes were dealt with by this Court in an opinion
authored by Chief Justice Anderson in Eusco, Inc. v. Huddleston, 835 S.W.2d 576 (Tenn.
1992). The facts of that case were quite similar to those involved in this case. The
taxpayer in Eusco sold tangible personal property and provided services to out-of-state
customers and charged a lump sum price therefor. We held that the compensation received
by Eusco, Inc. from the out-of-state customers was not subject to taxation under the
Retailers’ Sales Tax Act. We described the facts in Eusco as follows:
The taxpayer, Eusco, Inc., is a Tennessee corporation with its
principal place of business in White House, Tennessee. At
its White House facility, truck bodies and related
components are constructed for electric and telephone utility
trucks. In the course of building the truck bodies, Eusco uses
components it fabricates as well as components made by
other manufacturers.
Generally, the trucks are built and sold by using one of two
different methods. In some cases, a bare truck cab and
chassis is purchased directly from the manufacturer, such as
General Motors or Ford, on which Eusco then builds and
attaches the truck body and related components. Once the
process is complete, the entire utility truck is sold to a
telephone or electric company.
8
In other cases, a bid is made upon a specified contract with a
utility company. When Eusco is the successful bidder, the
utility company purchases a bare truck cab and chassis from
a manufacturer and causes it to be delivered by common
carrier to the White House facility. Under the contract, a
truck body and related components are then fabricated and
attached according to the purchaser’s specifications, and the
completed truck is delivered to the utility company’s place of
business. This kind of transaction is referred to as a “drop
shipment” sale.
On October 3, 1989, after being audited by the Tennessee
Department of Revenue for the period of December 1985
through June 1989, Eusco was assessed a deficiency in sales
taxes and interest of $202,182. The assessment at issue here
is sales taxes and interest of $78,337 upon nine “drop
shipment” sales to out-of-state customers.
The Commissioner taxed the “drop shipment” sales on the
basis of Tenn. Code Ann. § § 67-6-201(1)(1983 & 1989) and
67-6-202(1983 & 1989), which levy a tax upon “the business
of selling tangible personal property at retail in this state.” In
addition, the Commissioner taxed the “drop shipment” sales
on the basis of Tenn.Code Ann.§§67-6-102(13)(F)(vi)(1983)
and 67-6-102(22)(F)(vi)(1989) [now §67-6-102(23)(F)(vi)],
which provide that taxable retail sales shall include “[t]he
installing of tangible personal property . . . where a charge is
made for such installation.”
835 S.W.2d at 577-78.
We concluded in Eusco that the transactions involved were not taxable as sales of
tangible personal property, because the sales did not occur within the State of Tennessee.
In this regard, we provided the following analysis:
The first issue we address is whether the plaintiff’s sales to
out-of-state customers were taxable as retail sales “in this
state” under Tenn. Code Ann. § 67-6-201(1)(1983 & 1989)
and § 67-6-202(1983 & 1989). “The elements necessary to
constitute a sale are (1) transfer of title or possession, or
both of (2) tangible personal property, for a (3)
consideration.” Hearthstone, Inc. v. Moyers, 809 S.W.2d
888, 890 (Tenn. 1991)(quoting Volunteer Val-Pak v.
Celauro, 767 S.W.2d 635, 636 (Tenn. 1989)). See also Tenn.
Code Ann.§§67-6-102(23)(A)(1989) and 67-6-
102(14)(A)(1983). Since it is clear that there was a transfer
9
of tangible personal property for a consideration, we must
determine whether the nine “drop shipment” sales involved a
transfer of title or possession to the utility companies in
Tennessee so as to make them taxable retail sales “in this
state.”
For Tennessee sales tax purposes, the place where title to
tangible personal property is transferred to the buyer is
determined under the applicable provisions of the Uniform
Commercial Code. . . .
All of the “drop shipment” sales at issue in this case were
F.O.B. to the utility companies’ places of business, and there
were no other aggreements between Eusco and the utility
companies as to when or where title to the truck bodies
passed. Title to the truck bodies therefore passed to the
utility companies when Eusco completed its performance by
delivering the trucks out-of-state to their places of business.
...
We conclude that title and possession of the truck bodies was
transferred outside the State of Tennessee when Eusco
employees delivered the trucks to the utility companies’
places of business in accordance with the F.O.B. delivery
terms of the contracts. Since Eusco’s sales and deliveries of
the truck bodies to out-of-state utility companies did not
involve transfers of title or possession of tangible personal
property in Tennessee, we hold that the “drop shipment”
sales were not taxable sales at retail “in this state.”
835 S.W.2d at 579-80.
We also concluded in Eusco that the transactions with out-of-state customers were
not taxable as “installation services” under Tenn. Code Ann. § 67-6-102(23)(F)(vi). In this
regard, we observed as follows:
While it is true that a substantial part of Eusco’s costs were
for purchasing and installing the hydraulic booms, Eusco
made no separate charge for installation services as is
required for the application of Tenn. Code Ann. § 67-6-
102(22)(F)(vi) [now 67-6-102(23)(F)(vi)]. In each of the
sales, the contract provided for one price which covered all
personal property and labor involved in building and
attaching the truck body, including all component parts.
(emphasis added).
10
835 S.W.2d at 581.
This Court further stated in Eusco as follows:
The Retailers’ Sales Tax Act defines “retail sales” or “sale at
retail” as “a taxable sale of tangible personal property or
specifically taxable services to a consumer or to any person
for any purpose other than for resale.” Tenn. Code Ann. §
67-6-102(13)(A)(1983); Tenn. Code Ann. § 67-6-
102(22)(A)(1989) [ now § 67-6-102(23)(A)] (emphasis
added). Items sold for resale, therefore, are exempt from the
definition of ordinary retail sales . . .”
835 S.W.2d at 582.
We also determined in Eusco that the exemption from taxation for interstate
commerce contained in Tenn. Code Ann. § 67-6-313(a) applied. This determination was
predicated on our finding that the taxpayer in that case was a “manufacturer.” However, a
taxpayer’s being a “manufacturer” is not a prerequisite for the application of Tenn. Code
Ann. § 67-6-313(a). This statute applies, when the export requirement is met, to items of
tangible personal property that are (i) imported into this state, (ii) produced in this state, or
(iii) manufactured in this state. There is no requirement that the taxpayer involved be a
“manufacturer.”
In Eusco, this Court rejected the Department of Revenue’s contention that
LeTourneau Sales & Services, Inc. v. Olsen, 691 S.W.2d 531 (Tenn. 1985), applied. The
latter case involved Tenn. Code Ann. § 67-6-102(23)(F)(iv), which includes within the
definition of “retail sale,” “sale at retail,” and “retail sales price” “(iv) the performing for a
consideration of any repair services with respect to any kind of tangible personal property.”
The Department of Revenue makes a similar argument in this case. Based on the
uncontradicted affidavit of Ernest W. Colbert (that Colemill Enterprises, Inc.’s services do
11
“not involve correcting any problem, defect, or malfunction”), Tenn. Code Ann. § 67-6-
102(23)(F)(iv) has no more applicability in this case than it did in Eusco.
Based on the provisions of the Retailers’ Sales Tax Act quoted above and on this
Court’s analysis in Eusco, we conclude that the sale of tangible personal property by
Colemill Enterprises, Inc. to Bessemer Plywood Corporation was not taxable because it
was a sale for resale. If such sale was F.O.B. to an out-of-state destination (as was the sale
to Filtrex, Inc.), then the sale to Bessemer Plywood Corporation was not subject to taxation
as a sale of tangible personal property for the additional reasons (i) that it occurred outside
the State of Tennessee and (ii) that the interstate commerce exemption applies. Colemill
Enterprises, Inc.’s transaction with Bessemer Plywood Corporation was not taxable as
“installation services” because (i) no separate charge was made for installation services,
and (ii) it was a sale for resale. If the transaction was F.O.B. to an out-of-state designation,
then the transaction was not taxable “installation services” for the additional reasons (i)
that it occurred outside the state of Tennessee and (ii) that the interstate commerce
exemption applies.
Based on the same analysis, the taxpayer’s sale of tangible personal property to
Filtrex, Inc. was not a taxable sale of tangible personal property because (i) it occurred
outside the state of Tennessee, and (ii) the interstate commerce exemption applies. Such
sale to Filtrex, Inc. may be exempt from taxation for the additional reason that Filtrex, Inc.
qualifies as a tax exempt entity under Tenn. Code Ann. § 67-6-322. The transaction with
Filtrex, Inc. was not taxable “ installation services” because (i) no separate charge was
made for the installation services and (ii) the interstate commerce exemption applies. The
exemption for tax exempt organizations may also apply with respect to the installation
services issue.
12
CONCLUSION
We conclude that neither the transaction with Bessemer Plywood Corporation nor
the transaction with Filtrex, Inc. involved a taxable sale of tangible personal property or
taxable installation services. Having reached this conclusion, we find it unnecessary to
address the other issues presented in the respective applications. This case is remanded to
the trial court for entry of summary judgment in favor of Colemill Enterprises, Inc. and the
awarding of reasonable attorney’s fees and expenses of litigation, which are mandatory
under Tenn. Code Ann. § 67-1-1803(d). See Carson Creek Vacation Resorts v.
Department of Revenue 865 S.W.2d 1, 2 (Tenn. 1993).
____________________________________
Frank F. Drowota, III, Justice
Concur:
Anderson, C. J.
Birch and Holder, J.
Reid, J. - Not participating.
13
Colemill Enterprises, Inc. v. Huddleston
Combined Opinion