# FILED
February 27, 1998 Cecil W. Crowson Appellate Cou rt Clerk 

## IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

RIVERGATE TOYOTA, INC., ) ) Plaintiff/Appell

ant, )

) ) Davidson Chancery VS. ) No. 94-1689-I ) ) Appeal No. JOE B. HUDDLESTON, ) 01A01-9602-CH-00053 Commissione

r 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, II

I John Knox Walkup Harwell Howard Hyne Gabbert & Manner Attorney General and Reporter Nashville, Tennessee Christine Lapps Assistant Attorney Genera



## MODIFIED AND REMANDED

WILLIAM C. KOCH , JR., JUD G E-2- 

## O P I N I O N

This appeal relates to a

n automobile dea

ler’s use tax lia

bility for direc

t mail advertising

brochures purchase

d from an out-of

-state vendor

but mailed

to Tennessee residents. Following an audit, the Commis sione r of Reve nue assessed the dealer $8,708 for unpaid use tax, in terest, and penalties
. The dealer challenged the assessment

in the Chancery

Court for Davidson C

ounty. Followin

g a bench trial,the trial c ourt concluded that the Commissioner had correctly assessed the tax an d awardedthe Commis sioner 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 itwas entitled to a c

redit for it s postage expenses. We have determ ined that the dealer was not re quire d to pay use tax on t he postage but that the

remainder of

the Commissioner’s assessment was correct. Accordingly, we a ffirm the judgment as modified herei

n.
I. Rivergate Toyota, Inc. is an automobile dealership located in Madison. In May 1992, it contracted with Sales Tools U nlimited, Inc ., a marke

ting company

located in Horn Lake, Mississippi,

to design and produce a dve rtisi ng brochures and to m ail them directly to Tennessee residents living in Rivergate Toyota’s target market a rea. Sales Tools Unlim

ited designed and produc ed the brochures,

and Rivergate Toy

ota determined

the number

of brochures to be m

ailed and the freque

ncy and dates of

the mailings. Once the brochures were comple ted, Sales Tools

Unlimited bega

n mailing approximately

920 brochures per w

eek to vehicle owne

rs whose name s appeared on a list purchased from the Ten nessee Division of Ti tling and Registra tion.
Sales Tools Unlimited billed Rivergate Toyota a flat fee for each broch ure it mailed, but

neither Sales Too

ls Unlimited nor

Rivergate Toyota collected or remitted sales or use tax. In 1994, the Tennesse e Departmen

t of Revenue conducte

d aroutine field audit of Rivergate

Toyota for a p

eriod from

December 19 90 through

December 1993. After ascerta

ining that Rivergate

Toyota had paid Sales Tools Unlimited over-3-

$80,000 for designing, produc ing, and mailing

the brochures, the Commissioner of Revenue assessed Rivergate Toy

ota $8,708 for unpaid u se tax, interest, and penalties. Rivergate Toyota disagreed

with the Comm

issioner’s assess

ment and filed s

uit in the Chancery C

ourt for Davidson Co

unty challenging

the assessment. It

asserted thatits use tax liability

should have been based on $12,022.23 -- the final printed co st of the br ochures. The tri

al court upheld the en

tire amount of t

he assessment a

nd awardedthe Commis sione r $2,032 in attorney’ s fees and legal expe nses in accordance with Tenn. Code Ann. § 67-1-1803(d) (1994).
II.
This case presents the f

irst occasion for us to construe Tenn. Code Ann. § 67- 6-203(b) (1994). Specifically, we must determ ine the proper way to ca

lculate the “value” of advertising publications subject to ta xation therein. Rivergate Toy ota argues thatthe 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 br ochures without considering

the cost of the labor, services, or other expenses incurred to produce and distribute the brochures. T

hese arguments

are at odds with Tenn.Code Ann. § 67-6- 203(b) and case preceden ts declining to recogni

ze a distinction f

or purposes of taxation between a ph ysical medium and its contents.
A. Determining

the meaning of s

tatu tory la

nguage is a judicia

l function. See Roseman v . Roseman , 890 S.W.2d 27, 29 (Tenn. 1994); State ex rel. W eldon v
. Thomason , 142 Tenn. 527, 540, 22 1 S.W. 491, 495 (1920). When ca lled upon to construe tax statutes, we must give these statutes a fair co nstruction, see United InterMountain Tel. Co. v. Moyers , 221 Tenn. 246, 255 , 426 S.W.2d 177 , 181 (1968); Knox
v. Emerson , 123 Tenn. 4 09, 415, 13 1 S.W. 972, 973 (1910), and we must not enla

rge their operation to em

brace 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). -4- Statutory terms draw

their meaning f

rom the context of the enti re statute, see Lyons v. Rasar, 872 S.W.2d 895 , 897 (Tenn. 19 94); Knox Cou nty ex rel. Kessel v. L enoir City , 837 S.W.2d 3 82, 387 (Ten n. 1992), an d from the sta tute’s genera l purpose. See City of Lenoir City v. State ex r

el. City of Loudon , 571 S.W.2d 297 , 299 (Tenn. 1978); Loftin v. Langsdon , 813 S.W.2d 475 , 47 8 (T enn. 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 “befor e becoming too deeply im

mersed in . . . hairsplitting distinctions.” Young Sales Corp. v. Benson , 224 Tenn. 88, 92-93, 45 0 S.W.2d 574, 576 (1970)
. Sales and use taxes provide a c omprehensive sy

stem for raising public reven

ue by taxing the privilege o

f purchasing and using t

angible personal prop

erty within the st ate. See J.C. Penney Co. v. Olsen , 796 S.W.2d 943, 945 (Tenn. 1 990). T hey ar e complementary

taxes and thus should

be construed in pari materia. See Art Pancake’s United Rent-All v. F

erguson , 601 S.W.2d 926, 930 (Tenn. Ct . A pp. 1979 ). Acco rdingl y, precedents constru ing the sales tax stat

utes may pr

ovide he lpfu l guidance for deciding use tax questions. See Thomas Nelson, I nc. v . Olsen , 723 S.W.2d 621, 622 n.2 (Tenn. 1987).
B.
In 1990, t he Tenne ssee Supreme Court approved the C

ommissioner ’s use of Tenn. Code A nn. § 6 7-6-2 03 to imp ose us e tax on a department store’s catalogues thatwere produced outs

ide of Tennessee but mailed to Tennessee residents
. See J.C. Penney Co. v. Olsen , 796 S.W.2d at 9 46. This tax was ba sed on the “cost pr

ice of each item or article of tangible personalproperty . . . used, consum ed, distributed, or stor ed for

use or consumption in this state.” The following year, the General Assembly amended Tenn.

Code Ann. § 67-6-203to cod ify the Te nnes see Su preme Court’s decision

and to clarify the party respo nsible for paym

ent of the tax. 1 While-5-

the tax approved in the J.C. Penney C o. case was ba sed o n 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 ar

e, accordi ngly, called upon to determine whether the General Assembly’s use of the term “value” in Te

nn. Code Ann. § 67- 6-203(b) requires a different calculatio n than the one based on “cost price.”

T enn. Code Ann. § 67-6-203 (b)’s legislative history contains n

o indication th a t the General Assem

bly consciously set ou

teither to impose

a use tax on catalogues, advertising

fliers, or other

advertising

publications differ

ent from the

use tax imposed upon other items of tangible personal pr operty or to depa

rt from the

calculation of this tax approved in the J.C. Penne y Co. case. To the contrary, the bill’s sponsors expla i ned 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 definiti

on of use tax.” Dur

ing the Senate

Finance, Way

s & Means Comm

ittee’s consider

ation of the proposal,

the Deputy Commissioner

of the Depar tment of Reve nue stated that “I don’t really think the bill does anything d

ifferent from

what we’re do

ing now.” When a

sked if the language of the propos al caused him any difficulty, the deputy com missioner 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 inten ded the change. See Green v. Bock Laundry Mach. Co. , 490 U.S. 504, 521, 109 S. Ct . 1981, 1991 (198 9). When the General Assembly sets out to change sett

led legal rules,

it usually say s something concerning the changeeither in the statuto ry text or in the

legislative history . However, w hen the General Assembly s ays nothing, it le ads to a pe rs uasive inference t

hat the pre-existing rules are left inplace. See William N. Eskridge, Jr., The New Textualis m , 37 U.C.L.A.L. Rev. 621, 634 (1990).
We are n ot required to put aside common sense when we are called upon to construe a revenue statute.

In the absence of a

ny indication in ei

ther the statute’ s text or in the legislative his

tory t hat the General Assembly purposefully used the word “value” to

differentiate betweenthe use tax on adverti sing publications and the use tax on other items of

tangible personal pr

op erty, we are not prepared t o adopt2 Our conclusion that the General Assembly used the terms “cost price ” and “value” interchangea

bly in Tenn. Code Ann. § 67-6-203 is buttressed by the fact that the accepted l eg al meaning of the two terms is essentially the s ame. The “ cost price” is the amount a buy

er pays to purchase an item. Se e McCoy v. Hast ings & 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). -6- Rivergate Toyota’s view

that the measure of the

use tax in Tenn. Co

de Ann. § 67-6- 203(b) differs from

the measure of

the use tax in Tenn . Code Ann . § 67-6-203(a). Accordi ngly, we find that the term “va lue” 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 te

rm “value ” in Tenn. Code Ann. § 67-6-203(b) has the same meaning as “cost price” in Tenn. Code Ann.§ 67-6-203(a) fore closes Rivergate Toyota’s argument th

at t he “value” of the advertising publications taxable under Tenn. Code Ann. § 67-6-203 (b) should not include th e costs incurred to des

ign and distribute its brochures. Tenn. Cod e Ann. § 67-6-102(5) (Supp.1997) defines “ cost price” as “the actual

cost of articles of

tangible personal pr

operty without

an y deductions therefrom on a ccount of the cost of materials use d, labor, or serv

ice costs, transportation ch arges, or any expenses whats oever.”
The courts have alrea

dy recognized th

at an item m

ay derive the

greater part

of its value from the services perf ormed on it. Thus, the Tennessee Supreme Court has rejected argum

ents that only

the cost of the raw materials should be taxed when the finished item is the esse ntial part o f the transaction. See Thomas Nelson, Inc. v. Olsen , 723 S.W.2d at 62 2 (declining to separ

ate th e cost o f the materia ls used to fabricate advertising design m

odels from cost

s 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 con tracted with Sales Tools Unlimit ed for the design, production, and

distribution of direc

t mail brochures. These

brochures were not inconsequential ele

ments of the tra

nsaction but, in fac

t, were the sole purpose of-7-

the contract. The value to Rivergate Toyota was not just in the brochuresthemselves but in the completed broc

hures in the hands

of potential custom

ers. Since River

gate Toyota contracted for mai ling completed advertising brochures to potential customers,

the trial courtcorrectly con cluded that it was li

able for the “

entire cost

of the transaction” w

ith Sales Tools Unl

imited during the

audit period.
III. Rivergate Toyota also ar

gues that the cost of t

he postage used to m

ail t h e brochures should not have been inc luded in the Comm

issioner’s assess

ment
. It ass erts that postage is not tang ible personal proper

ty and points out tha

t th e regulations specifically p rovide that postage c

harges for ma

iling advertising brochures are not subject to use t ax. 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 sepa rately as Te

nn. Comp. R. & Regs. r. 13 20-5-1-.99(3) re quires.
The parties stipulated to the introduction of photocopies of the invoices Sales Tools Unlimited subm

itted to Rivergate T

oyota. While

these invoices are based o n aflat fee per brochure

mailed, most of the invoic es bore attached c

opies of third class mailing statements show

ing the amount of p

ostage attributable

to the mailing

of the brochures covered by eac h invoice. Even thou

gh these in voices do not itemize th e postagecharges, the attached statements from the United States Postal Ser

vice enable anyone examining the inv

oices to determ

ine theprecise 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 valu e o f the postage will be removed from the assessment if plaintiff provides evidence establishing the am ount.” Consistent w

ith the Comm

issioner’s conce ssions during oral argument, w

e find that the

third class mai

ling statements attached to the invoices essentially com

ply with the regulations

and that Rivergate Toyota is entitled to credit s against the assessm ent for all postage c

harges it can prove b

y producing-8-

similar postagestatements. Accordingly, on remand, the

trial court should am

end its order to direct the Com

missioner of Re

venue t o give Rivergate T oyota a credit against its assessment f

or all postage charg

e s ev idenced by third c lass postage statements att

ached to Sale Tool s Unlimited invoi ces during the audit pe

riod.
IV.
We affirm the judgment as modified herein and rem and the case to the trial courtfor further procee di ngs consistent with thi s opinion. We tax t he costs of this appeal in equal proportions to Rivergate Toy ota, Inc. and its s

ure ty 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