# FILED

March 16, 2000 Cecil Crowson, Jr. Appellate Court Cle rk NASHVILLE CLUBHOUSE INN, ) CLUBHOUSE INN OF KNOXVILLE ) and CLUBHOUSE INN AND ) CONFERENCE CENTER, ) ) Plaintiffs/Ap

pellees, ) Appeal No.

) M1998- 00898 -COA-R3 -CV v. ) ) Davidson Chancery RUTH E. JOHNSON, ) No. 96-2143-II Commissioner of Revenue, ) State of Tennessee, ) ) Defendant/

Appellant. )
COURT OF APPEALS OF TENNESSEE

APPEAL FROM THE DAV IDSON COUNTY CHANCE RY COURT AT NASHVILLE, TENNESSEE
THE HONORABLE CAROL L. MCCOY, CHANCELLOR WILLIAM F. LONG, JR. 101 Westpark Drive, Suite 250 Brentwood, Tennessee 37027 ATTORNEY FOR PLAINTIFFS/APPELLEES

JOHN KNOX WALKUP Attorney General and Rep orter CHRISTINE LAPPS NATALIE S. PRICE Assistant Attorneys General Office of the Attorney Gen eral Tax Division Cordell Hull Building, Second Floor 425 Fifth A

venue Nor

th Nashville, Tennessee 37243-0489 ATTORNEYS FOR DEFENDANT/APPELLANT

AFFIRMED AND REMANDED
WILLIAM B. CAIN, JUDGE 

## O P I N I O N2 This case is an appeal from the ruling of the Chancellor granting a sales tax refund to Nashville

Clubhouse

Inn, Clubh

ouse Inn of Knoxville,

and Clubho

use Inn and Conference Center.

The taxpayers consist of two ho tels in Nashville and one hotel in Knoxvi

lle th at are licensees of Clubhouse Inns o f America, Inc. These “up scale limited service” hotels cater t

o business tr

avelers, and

a majority

of their guests are repeat customers because of the corporate rates the hotels offer. T he hotels offer oversized rooms with the standard amen ities but do not offer room service, valet service, or a full dining serv ice.

In order t o promote a perception that th eir guests receive “exceptional
va lue” for their money, each Clubhouse Inn provides registered guests with a compli mentar y breakfast each morning and with complimentary alcoholic and nonalcoho

lic beverages at a manager’s recep tion held each

evening. Each hotel’s marketing materialsprominentl y state that hotel g

uests “awake

each mornin

g to
a co mplimentary full, hot break fast buffet and unwind a

t night at our two-hou r guest rec epti on with complimentary beverages.” The purpose of offering complimentary

breakfast and beverages is to obtain a marketing edge on other hotels compe

ting for business custome rs.
This method of o

peration is k

nown as the

“American Pl

an,” a syst

em o f hotel management in which a guest pays a daily rate for room and meals. It can be contrasted t

o the “Euro

pean Plan” i

n which the

rate charge

d to the guest includes on

ly the charg

e for the ro

om and not for meals.

In order to provide the breakfast buffet and the manager’s reception, each hotel has a restaur

ant and lou

nge. Each

hotel must ob

tain approp

riate st at e and local licenses and per

mits inorder to provide these serv ices. Essentially, each hotel must be licensed to operate a restau rant and a cocktail loung e. Thes e facilities are open

to the pu blic as well. P

ersons who

are not regi stered guests must purc hase their br

eakfast or al

coholic bev

erages. Th

e Commissione

r does no t contest the r

etail characte

r of the sales t

o non-gu ests.3 The hotels c arefu lly control access to the complimentary breakfas ts and beverages.Hotel guests

must sign a re

gister at brea

kfast and may

only obtai

n alcoholic beverages a

t the manager ’s reception by presenti

ng dated tic

kets furnished to hotel guests each day of their stay . Since the c ost of the br

eakfast service and the bev erages is included in the price of

the room, th

e hotel gues

ts’ bills do not contain a separate ch arge for either the breakfast or the beverage service. Room rates at Clubhouse Inns do not vary depending on whether the guest eats breakfast or receives beverages at the ma nager’s rece ption. Thu

s, persons who do not take advantage of the complimentary

breakfast and beverages pay the same daily room rate as guests wh o do part a ke of the breakfast and beverage se

rvices.

Persons not

staying at the hotel who are accompanying hotel guests are not entitledto complimen

ta ry breakfast o

r alcoholic b

everages. T

hese non-g

uests must purchase b

reakfast or t

ickets fo r alcoholic beverages at the hotel’s front desk, or the hotel guest may arran ge to have these charges

included on his or her bill. Und er the latter arrangement, the ch arges for the persons who are no t registered hotel guests are itemized separ ately on the guest’s bill and are accounted for separate

ly on the ho

tel’s books.

Persons purchasing separate bre akfasts or alc

oholic beverage ti

ckets must pay the applicab

le sales and alc

oholic beverage ta

xes on their

purchases.Guests do not pay separate sales or alcoh olic beverage taxes on their c omplimentary breakfasts

or beverages. The h

otel collects the applicable sales tax on eac h g uest’s bi ll and remits the appropriate alcoholic beverage taxe s based on the tickets redeemed at the manager’s recepti on.
EachClubhouse Inn incurs substant ial cost in providing breakfast and alcoholic beverages to its registered guests. These cost s are reflected in each hotel’s financial records as separate and distinct comp onents of the hote

l’s overall operating costs. When each hotel purchases the food and be verages for its inventory, it presents its s uppliers wit

h the prop er certificate

and, as a result, does not pay sales tax on these items. The price o f the rooms at each hotel

takes into account the cost incurred for providing the breakfast and beverages, and the prices
are set in order to enable each hotel to make a profit on the entire overnight room1 The audit period for one of the hotels in Nashville covered the period from August 21, 1991 through August 31, 1993. 4 package that

includes the room and the complime ntary break

fast and bev

erages.
The current dispute arises from s ales tax audits performed by the Department of Revenue for the period from January 1, 1990 through August 31, 1993. 1 Following these audits, the Com missioner asses sed the Kno xville Clubhouse

Inn $26,243, the Nashville Clubhouse Inn $25,700, and the Clubhouse Inn and Conference Center $29,296. The hote ls paid the assessed taxes under protest and filed suit in the Chancery Court for Dav

idso n County se

eking to
recover the disputed

taxes. Follo

wing a benc

h trial, the trial court entered an order on Decembe

r 18, 199 8, finding

that each of

the hotels

were notrequired to pay the disputed tax and award ing ea ch ho tel a judgment for the disputed tax, together with interest

and reason

ablelegal expenses pursuant to Tennessee Code Annotated

section 67- 1-1803(d

) (1998).The Commissio ner has appe aled from this order.

Atthe outset it m

ust be noted

that the taxpayer bears the burden of demonstrating its entitlement to the “sales f

or resale” ex

emption in

Tenn. Code Ann. § 67-6-102(24)(A) (1998).
The “for any purpo se other thanfor resale” language in Tenn. Code Ann. § 67-6-102(24)(A)

has been construed as an ex ception to the sales tax statute. See Colemill Enters., Inc. v. Huddleston , 967 S.W. 2d 753, 756 (Tenn. 1998). Accordingly, it must be construed against the taxpayer, and an e xcep tion from sales tax must posi

tively appe

ar because

it wil l not be implied. See, e.g., Hyatt
v. Taylor , 788 S.W. 2d 554, 5 56 (Tenn.1990); American Cya namid C o. v. Huddleston , 908 S.W.2d 396, 400 (Tenn. Ct. App. 1995) . Any w ell-founded doubt is sufficient to defeat a claimed exe mption from taxation. See United Canners, Inc. v. King , 696 S.W.2d 525 , 527 (Tenn. 198 5).

That being said,

however, we must look to the statutes and the regulations to determine the scope of the exemption. In this case, Tenn. Code Ann. § 67-6- 102(24)(A) defines “sale at retail” as “taxable sale of tangible p ersonal property2 It is well to note that the rule as applied in this case as well as Morton , quoted Infra in actuality should be considered “substance over form.” The net effect, however, is the same. The chancellor is affirmed. Our l angu age reflects a deference to the parties here and the supreme court in Morton

. 5 . . . to a consu

mer . . . for

any purpo se other than for resale.” In addition, Tenn. Comp. R. & Regs. r.1320-5-1 -.63(1) (1 987) defin es “sales for resale” as “those whereby a supplier of materials . . . makes avail able to legitimate dea

lers actually selling such property . . . as su ch.” Thus, in order to

prev ail, the hotels must demonstrate

that they are actu

ally selling b

reakfast and beverages “as such” to the registered g

uests at their h

otels.

Tenn. Code Ann.§ 67-6-10 2(25)(A) d

efines a “sal e” as “any transfer of title or possession .

. . of tangible personal pr

operty for a considera

tion.” Thus, there are three elements necessary to constitute a taxable sale: (1) the transfer of title or possession or both, (2 ) of tangible personal pro perty, and (3) for a consideration. See Mast Ad vertising & Pu

blishing, I

nc. v. Moye rs , 865 S.W.2d 900, 902 (Tenn . 1993); Volu nteer Val-Pak v. Celauro , 767 S.W.2d 635, 636 (Tenn

. 198 9). For this purpose, consideration means either a benefit to t he promisor or a detriment to or obligatio n on the promi see . See Trailer Conditioners, Inc. v. Huddleston , 897 S.W.2d 728 , 731 (Tenn. Ct. Ap p. 1995).

The Commissi on er argues that the hotels must live w ith the legal consequences of

their choice to represent to reg isteredguests that they are giving
awa y bre akfasts and beverages free rather than selling them . Thus, the Commissioner

insists that

the form of the transaction is of controlling imp ortance. See Standard Advertising Agency, Inc. v. Jackson , 735 S.W.2d 441, 443 (Tenn. 1987). The hotels respond that th e courts should not applythe “form-oversubstance” doctrine and that the substance of the transaction should co ntrol over its form.

The Tennessee Supreme Court h as applied the “form-over-su bstance” doctrine in a sales tax case involving a tax payer that “gav e” away mercha ndise to i ts customers. 2 This case inv olved a dru

g manufactu

rer that sold pharmaceut

icals directly to h ospitals and physicians. The manufactur er purchased large quantities of non-pharma ceutical items that it “gave” to custo mers when6

they purchased pharmaceuticals fro m a catalogue i n which the prices had been adjusted to reflect the cost of the non- pharma ceuti cal items. The invoices received by customers did not reflect th e cost of the non-pharmac eutical it ems, but the costs o

f these items was carried on the taxpayer’s books as a selling expense. The Commissioner assertedthat the taxpayer was not selling the nonpharmaceutical

items to its customers and thus had purchased these item s for its
own use. Quoting the trial court with approval, th e Court noted

that “[r]ega

rdless of what anything may

be called it remains what it is. . . . So it can b e rightly said that the form of these transactions is a “gift” but the real substan ce is a sale.” Morton Pharmaceuticals, Inc. v. MacFarland , 212 Tenn. 168, 171, 368 S.W.2d 756, 757 (1963). Th

e Court also pointed out th at the customers knew

thatthey
were actually

paying for these items

even though they we

re not separately billed and that the taxpayer had pai d the tax on the entire am ount of its sa

les to its customers.

The same reasonin

g holds for

the case at bar. Eve n though t he hotels’ registered guests were n

ot separately

billed for th

e breakfasts a

nd beverag

es, they knew th a t they were n

ot receiving

these items “fr

ee” and that

the cost of th

ese items was reflected in the p rice of their rooms. What other inference can be drawn from the fact that the hotels were charging non-regist ered guests f

or these items? Secondly, the hotels comp lied stri ctly with the “sales for resale” requiremen

ts in the revenue regulations and accounted fortheir costs to provide these items. They also collected sales tax on the room charges which in cluded their costs to

provide th

e breakfasts a

nd beverag

es.
The burden on

appeal rests

on the Commissioner to show how the evidence preponde rate s aga inst the Chancellor’s findings. We conclude that the Commissioner has not demonstrated such preponderance.
Although there are precedents from other states supporting the Commissione r’s con clusion that the hotels ha

d purchase

d the food

items in inventory for their own use rather than fo the purpose of res ale, the Tennessee SupremeCourt has noted this “disagree ment among the cases .” Nashv ille Mobilphone Co. v. Woods , 655 S.W.2d 934 , 937 (Tenn. 198 3). There are decisions from other j urisdictions that su pport the hotels’ position as well. See7

State v. Delta

Airlines, Inc. , 356 So.2d 1205 (Ala. Civ. App. 1978); Undercofler v. Eastern Airlines, Inc. , 147 S.E.2d 436 (Ga. 1 966); S & R Hotels v. Fitch , 634 So.2d922 (La. C

t. App. 1994); Drury Supp. Co. v. Director of Rev. , No. 95- 000870RV, 1996

WL 633387 Mo. Ad

min. Hrg. Comm’n Oct. 8 , 1996).
Many of the decisions both in favor of and in opp osition to th

e hotels’ arguments

r est on unique provisions of each jurisdictions’ revenue statutes and regulations. Thus, their

precedenti

al value is weakened. We are primarily guided by our statutes and regulatio ns and the judicial preceden ts construing them.

For example, Tenn. Comp.

R. & Regs. r. 1320-5-1-.70(1) (1987) imposes sales tax on the charges for h otel rooms. Similarly, Tenn.Comp. R. & Regs . r. 1320-5-1-.33(1 ) (1987) provides tha t “[m]eals furnished

atany restaurant . . . at which meals are served to the public are sub ject to the Sales Tax.” Tenn. Comp. R. & Regs. r. 1320-5 -1-.35(1 ) (1987) c ontains a simil

ar provisio

n for meals,

food, and drink sold by airlines. Ho wever, Tenn. Comp.R. & Regs. r. 1320-5-1-.35(2) provides that “[i]n cases where the meals or an y other item of fo od o r drink are served without a specific charge th erefor to the passengers, the carrier will be considered to be the user and consumer thereof.”

The undisputed

evidence in

this case shows that, in addition to providing hotel rooms, the taxpayers in this case are al so operatin g restauran

ts and lounges where meals and alcoholic beverages can b e purcha sed for on- premise consumption. They are required to co llect the required

taxes on these activities, and th ere is not dispute that they do . Unlike the regulation g overning ai

rlines , there is no regulation stating that a h otel will be considered

the user or consumer of items of food and dr ink that are served to guests without a specific char ge therefor.

The Chancellor, applying the Tennessee Supreme Court’s decision in Cape Fear Paging Co. v. Huddleston , and Nashville Mo bilephone Co., Inc. v. Woods, foundth at s ince these food and beverage items had value independent of the lodging service bein

g provid ed, and Clubhouse Inns had internally assigned a value to the sale of these services, then th e above food and b

everage items were being sold “at r

et ail”, thus exempting the purchase of the component parts of8

these items from sales and use tax. Cape Fear Pag ing Co. v. Huddleston , 937 S.W.2d 787 (Tenn . 1996).

The applicability of these decisions to the fact s of this case may be somewhat

tenuous at first blush. These cases seem to make two points.First, if taxpayers who are serv

ice provide

rs purchase tangible pe

rsonal prop

erty that is
use d to en able them to provide their service, then they are not resell ing the tangible pe rsonal pr operty and must pay sales tax o n the property. Thus, when Nashville Mobilepho

ne purchased the radio telephones

it supplied t

o its customers,

it should ha

ve paid tax o

n them because these radio telephones had no value to Nashville Mobilephone or its customers independ en t of its voice communications service. Second, if a tax payer w ho is a service provider purchase s ta ngible personal property that could have a value independent from the service the taxpayer provides, th e taxpayer nee d n ot pay tax o n the equip

ment. Thus, Cape Fear’s pu rchase of t he Nokia pagers was not taxable because the pagers had value to Cape Fear and its cus t omers apart from the pager serv ice. Justice Reid went to some lengths to point out that in addition to selling or leasing pagers to customers who purch ased its pagin

g se rvice, Cape Fear also sold or leased pagers to persons who did not subscribe to their p aging service.

The food and beverages

purchased by the hote

ls were not o

nly sold to
re gi steredguests but al so to person s who were n

ot registered

guests. Accordingly, the food had an independent value to the hotels, and the hotels were not required to pay tax on the food and beverages when they purchased them. See Cape Fear and Nashville Mobilephone, supra.

As stated above, the issue in this case is w hether the hotels were selling breakfasts and beverages “as such” to their registered guests. In order for there to be a sale, there must be a transfer of title or possession and consideration. There was a transfer of

possession o

f the food f

rom the hote

ls to their registered guests, and t her e was conside ration for th

e transfer be

cause the pr

oof is undisputed

that the cost o

f providin g the food

and bevera

ges was inclu

ded with the room as part of a package deal . Surely a registered guest would have had a contractual

right to demand breakfast or beverages had one of the hotels declined to give it to him or her.9 The ruling of the Chan

cellor is affir

med in all resp

ects. The cau

se is remanded to the trial court for proceedings pur suant to Ten nessee Code Annotated section 67-1-180

3(d) and su

ch further a

ction as may b

e necessary.Costs o n appeal are taxed against the Co mmissioner.

_______________________________ WILLIAM B. CAIN, JUDGE

CONCUR:

__________________________________ __ BEN H. CANTRELL, P

RES. JUDGE, M.S.

__________________________________ __ WILLIAM C. KOCH, JR., JUDGE