FILED

February 27, 1998

Cecil W. Crowson

Appellate Court Clerk

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

RIVERGATE TOYOTA, INC., )

)

Plaintiff/Appellant, )

)

) Davidson Chancery

VS. ) No. 94-1689-I

)

) Appeal No.

JOE B. HUDDLESTON, ) 01A01-9602-CH-00053

Commissioner of Revenue of the )

State of Tennessee, )

)

Defendant/Appellee. )

APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY

AT NASHVILLE, TENNESSEE

THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR

For the Plaintiff/Appellant: For the Defendant/Appellee:

James W. Cameron, III John Knox Walkup

Harwell Howard Hyne Gabbert & Manner Attorney General and Reporter

Nashville, Tennessee

Christine Lapps

Assistant Attorney Genera

MODIFIED AND REMANDED

WILLIAMC.KOCH,JR.,JUDGE
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O P I N I O N

This appeal relates to an automobile dealer’s use tax liability for direct mail

advertising brochures purchased from an out-of-state vendor but mailed to Tennessee

residents. Following an audit, the Commissioner of Revenue assessed the dealer

$8,708 for unpaid use tax, interest, and penalties. The dealer challenged the

assessment in the Chancery Court for Davidson County. Following a bench trial, the

trial court concluded that the Commissioner had correctly assessed the tax and

awarded the Commissioner his legal expenses. The dealer now insists that its use tax

assessment should have been based on the final printed cost of the brochures and that

it was entitled to a credit for its postage expenses. We have determined that the

dealer was not required to pay use tax on the postage but that the remainder of the

Commissioner’s assessment was correct. Accordingly, we affirm the judgment as

modified herein.

I.

Rivergate Toyota, Inc. is an automobile dealership located in Madison. In May

1992, it contracted with Sales Tools Unlimited, Inc., a marketing company located in

Horn Lake, Mississippi, to design and produce advertising brochures and to mail

them directly to Tennessee residents living in Rivergate Toyota’s target market area.

Sales Tools Unlimited designed and produced the brochures, and Rivergate Toyota

determined the number of brochures to be mailed and the frequency and dates of the

mailings. Once the brochures were completed, Sales Tools Unlimited began mailing

approximately 920 brochures per week to vehicle owners whose names appeared on

a list purchased from the Tennessee Division of Titling and Registration. 

Sales Tools Unlimited billed Rivergate Toyota a flat fee for each brochure it

mailed, but neither Sales Tools Unlimited nor Rivergate Toyota collected or remitted

sales or use tax. In 1994, the Tennessee Department of Revenue conducted a routine

field audit of Rivergate Toyota for a period from December 1990 through December

1993. After ascertaining that Rivergate Toyota had paid Sales Tools Unlimited over
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$80,000 for designing, producing, and mailing the brochures, the Commissioner of

Revenue assessed Rivergate Toyota $8,708 for unpaid use tax, interest, and penalties.

Rivergate Toyota disagreed with the Commissioner’s assessment and filed suit

in the Chancery Court for Davidson County challenging the assessment. It asserted

that its use tax liability should have been based on $12,022.23 -- the final printed cost

of the brochures. The trial court upheld the entire amount of the assessment and

awarded the Commissioner $2,032 in attorney’s fees and legal expenses in

accordance with Tenn. Code Ann. § 67-1-1803(d) (1994).

II.

This case presents the first occasion for us to construe Tenn. Code Ann. § 67-

6-203(b) (1994). Specifically, we must determine the proper way to calculate the

“value” of advertising publications subject to taxation therein. Rivergate Toyota

argues that the brochures’ “value” is not the same as their “cost price” and that its tax

liability should be based only on the final printed cost of the brochures without

considering the cost of the labor, services, or other expenses incurred to produce and

distribute the brochures. These arguments are at odds with Tenn. Code Ann. § 67-6-

203(b) and case precedents declining to recognize a distinction for purposes of

taxation between a physical medium and its contents. 

A.

Determining the meaning of statutory language is a judicial function. See

Roseman v. Roseman, 890 S.W.2d 27, 29 (Tenn. 1994); State ex rel. Weldon v.

Thomason, 142 Tenn. 527, 540, 221 S.W. 491, 495 (1920). When called upon to

construe tax statutes, we must give these statutes a fair construction, see United InterMountain Tel. Co. v. Moyers, 221 Tenn. 246, 255, 426 S.W.2d 177, 181 (1968); Knox

v. Emerson, 123 Tenn. 409, 415, 131 S.W. 972, 973 (1910), and we must not enlarge

their operation to embrace situations beyond their expressed scope. See Covington

Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992); Gallagher v.

Butler, 214 Tenn. 129, 147, 378 S.W.2d 161, 169 (1964).
1

See Act of Mar. 13, 1991, ch. 29, 1991 Tenn. Pub. Acts 32 (codified as amended at Tenn.

Code Ann. §§ 67-6-102(30)(B), -203(b) (1994 & Supp. 1997).

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Statutory terms draw their meaning from the context of the entire statute, see

Lyons v. Rasar, 872 S.W.2d 895, 897 (Tenn. 1994); Knox County ex rel. Kessel v.

Lenoir City, 837 S.W.2d 382, 387 (Tenn. 1992), and from the statute’s general

purpose. See City of Lenoir City v. State ex rel. City of Loudon, 571 S.W.2d 297, 299

(Tenn. 1978); Loftin v. Langsdon, 813 S.W.2d 475, 478 (Tenn. Ct. App. 1991).

Unless the statute requires otherwise, we will give statutory terms their natural and

ordinary meaning, see Nashville Golf & Athletic Club v. Huddleston, 837 S.W.2d 49,

53 (Tenn. 1992); Stein Constr. Co. v. King, 643 S.W.2d 329, 331 (Tenn. 1982), and

we will consider the dominant purposes and limitations of the statute “before

becoming too deeply immersed in . . . hairsplitting distinctions.” Young Sales Corp.

v. Benson, 224 Tenn. 88, 92-93, 450 S.W.2d 574, 576 (1970). 

Sales and use taxes provide a comprehensive system for raising public revenue

by taxing the privilege of purchasing and using tangible personal property within the

state. See J.C. Penney Co. v. Olsen, 796 S.W.2d 943, 945 (Tenn. 1990). They are

complementary taxes and thus should be construed in pari materia. See Art Pancake’s

United Rent-All v. Ferguson, 601 S.W.2d 926, 930 (Tenn. Ct. App. 1979).

Accordingly, precedents construing the sales tax statutes may provide helpful

guidance for deciding use tax questions. See Thomas Nelson, Inc. v. Olsen, 723

S.W.2d 621, 622 n.2 (Tenn. 1987).

B.

In 1990, the Tennessee Supreme Court approved the Commissioner’s use of

Tenn. Code Ann. § 67-6-203 to impose use tax on a department store’s catalogues

that were produced outside of Tennessee but mailed to Tennessee residents. See J.C.

Penney Co. v. Olsen, 796 S.W.2d at 946. This tax was based on the “cost price of

each item or article of tangible personal property . . . used, consumed, distributed, or

stored for use or consumption in this state.” The following year, the General

Assembly amended Tenn. Code Ann. § 67-6-203 to codify the Tennessee Supreme

Court’s decision and to clarify the party responsible for payment of the tax.1

 While
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the tax approved in the J.C. Penney Co. case was based on the “cost price” of each

item, the tax imposed by Tenn. Code Ann. § 67-6-203(b) was based on the “value”

of each item. We are, accordingly, called upon to determine whether the General

Assembly’s use of the term “value” in Tenn. Code Ann. § 67-6-203(b) requires a

different calculation than the one based on “cost price.”

Tenn. Code Ann. § 67-6-203(b)’s legislative history contains no indication that

the General Assembly consciously set out either to impose a use tax on catalogues,

advertising fliers, or other advertising publications different from the use tax imposed

upon other items of tangible personal property or to depart from the calculation of this

tax approved in the J.C. Penney Co. case. To the contrary, the bill’s sponsors

explained repeatedly to their colleagues that the bill’s purpose was to put the J.C.

Penney Co. decision “in the law” and to “broaden the definition of use tax.” During

the Senate Finance, Ways & Means Committee’s consideration of the proposal, the

Deputy Commissioner of the Department of Revenue stated that “I don’t really think

the bill does anything different from what we’re doing now.” When asked if the

language of the proposal caused him any difficulty, the deputy commissioner

answered “No, sir.” 

Since Rivergate Toyota is asserting that the enactment of Tenn. Code Ann. §

67-6-203(b) changed the result of the J.C. Penney Co. decision, it had the burden of

showing that the General Assembly intended the change. See Green v. Bock Laundry

Mach. Co., 490 U.S. 504, 521, 109 S. Ct. 1981, 1991 (1989). When the General

Assembly sets out to change settled legal rules, it usually says something concerning

the change either in the statutory text or in the legislative history. However, when the

General Assembly says nothing, it leads to a persuasive inference that the pre-existing

rules are left in place. See William N. Eskridge, Jr., The New Textualism, 37

U.C.L.A.L. Rev. 621, 634 (1990).

We are not required to put aside common sense when we are called upon to

construe a revenue statute. In the absence of any indication in either the statute’s text

or in the legislative history that the General Assembly purposefully used the word

“value” to differentiate between the use tax on advertising publications and the use

tax on other items of tangible personal property, we are not prepared to adopt
2Our conclusion that the General Assembly used the terms “cost price” and “value”

interchangeably in Tenn. Code Ann. § 67-6-203 is buttressed by the fact that the accepted legal

meaning of the two terms is essentially the same. The “cost price” is the amount a buyer pays to

purchase an item. See McCoy v. Hastings & Bradley Co., 61 N.W. 205, 205-06 (Iowa 1894);

Esterman-VerKamp Co. v. Rouse, 278 S.W. 124, 127 (Ky. Ct. App. 1925). The “value” of an item

for tax purposes is the item’s worth in exchange for money as established freely between a willing

buyer and seller. See In re Montpelier & Barre R.R., 369 A.2d 1379, 1381 (Vt. 1977). The terms

have, on occasion, been used interchangeably. See Nieb v. Hinderer, 4 N.W. 159, 160 (Mich. 1880).

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Rivergate Toyota’s view that the measure of the use tax in Tenn. Code Ann. § 67-6-

203(b) differs from the measure of the use tax in Tenn. Code Ann. § 67-6-203(a).

Accordingly, we find that the term “value” in Tenn. Code Ann. § 67-6-203(b) has the

same meaning as the phrase “cost price” in Tenn. Code Ann. § 67-6-203(a).2

C.

Our conclusion that the term “value” in Tenn. Code Ann. § 67-6-203(b) has the

same meaning as “cost price” in Tenn. Code Ann. § 67-6-203(a) forecloses Rivergate

Toyota’s argument that the “value” of the advertising publications taxable under

Tenn. Code Ann. § 67-6-203(b) should not include the costs incurred to design and

distribute its brochures. Tenn. Code Ann. § 67-6-102(5) (Supp. 1997) defines “cost

price” as “the actual cost of articles of tangible personal property without any

deductions therefrom on account of the cost of materials used, labor, or service costs,

transportation charges, or any expenses whatsoever.”

The courts have already recognized that an item may derive the greater part of

its value from the services performed on it. Thus, the Tennessee Supreme Court has

rejected arguments that only the cost of the raw materials should be taxed when the

finished item is the essential part of the transaction. See Thomas Nelson, Inc. v.

Olsen, 723 S.W.2d at 622 (declining to separate the cost of the materials used to

fabricate advertising design models from costs to design and produce these models);

Crescent Amusement Co. v. Carson, 187 Tenn. 112, 116-17, 213 S.W.2d 27, 29

(1948) (declining to recognize a distinction between a motion picture and the film it

was on).

In this case, Rivergate Toyota contracted with Sales Tools Unlimited for the

design, production, and distribution of direct mail brochures. These brochures were

not inconsequential elements of the transaction but, in fact, were the sole purpose of
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the contract. The value to Rivergate Toyota was not just in the brochures themselves

but in the completed brochures in the hands of potential customers. Since Rivergate

Toyota contracted for mailing completed advertising brochures to potential

customers, the trial court correctly concluded that it was liable for the “entire cost of

the transaction” with Sales Tools Unlimited during the audit period.

III.

Rivergate Toyota also argues that the cost of the postage used to mail the

brochures should not have been included in the Commissioner’s assessment. It

asserts that postage is not tangible personal property and points out that the

regulations specifically provide that postage charges for mailing advertising

brochures are not subject to use tax. See Tenn. Comp. R. & Regs. r. 1320-5-1-.67(1),

-.99(3) (1987). While the Commissioner agrees that postage charges are not subject

to use tax, he asserts on appeal that the assessment was correct because Rivergate had

not provided invoices in which these charges were stated separately as Tenn. Comp.

R. & Regs. r. 1320-5-1-.99(3) requires.

The parties stipulated to the introduction of photocopies of the invoices Sales

Tools Unlimited submitted to Rivergate Toyota. While these invoices are based on

a flat fee per brochure mailed, most of the invoices bore attached copies of third class

mailing statements showing the amount of postage attributable to the mailing of the

brochures covered by each invoice. Even though these invoices do not itemize the

postage charges, the attached statements from the United States Postal Service enable

anyone examining the invoices to determine the precise amount of postage associated

with each invoice.

The trial court determined that Rivergate Toyota was not entitled to credit for

the postage charges even though the Commissioner agreed in his answer that “[t]he

value of the postage will be removed from the assessment if plaintiff provides

evidence establishing the amount.” Consistent with the Commissioner’s concessions

during oral argument, we find that the third class mailing statements attached to the

invoices essentially comply with the regulations and that Rivergate Toyota is entitled

to credits against the assessment for all postage charges it can prove by producing
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similar postage statements. Accordingly, on remand, the trial court should amend its

order to direct the Commissioner of Revenue to give Rivergate Toyota a credit

against its assessment for all postage charges evidenced by third class postage

statements attached to Sale Tools Unlimited invoices during the audit period.

IV.

We affirm the judgment as modified herein and remand the case to the trial

court for further proceedings consistent with this opinion. We tax the costs of this

appeal in equal proportions to Rivergate Toyota, Inc. and its surety and to the

Commissioner of Revenue for which execution, if necessary, may issue.

_____________________________

WILLIAM C. KOCH, JR., JUDGE

CONCUR:

_________________________________

HENRY F. TODD, PRESIDING JUDGE

MIDDLE SECTION

_________________________________

BEN H. CANTRELL, JUDGE