### IN THE COURT OF APP EALS OF TENNESS EE AT NAS HVILLE Ma rc h 11
, 200 9 S es sio n

CA O HOLD INGS , IN C. v. LO REN L. CH UM LEY , C OMM ISSION ER OF

REV ENU E, STA TE OF TEN NES SEE

Appeal f rom the Chancer y Court for Davidson Cou nty No. 06-719-II Car ol L. McCoy, Chancellor

No. M2008- 01679-COA-R 3-CV - F iled May 27, 2009

F RAN K G. C L EME NT , J R ., J ., dissenting.

Irespe ctfully

disag ree with the majority ’s conclusion that CAO is entitled to the ex emption under Te nn. Code Ann. § 67-6-102( 34)(A) (2006). My differ ing c onclusion arises f rom my belief that the Commiss ioner e stablished that CAO Holding s, I nc. (“CAO” ) was subject to the use tax at issue and that CAO fa iled to establish it was entitled to the exempti on.

Th e u s e t a x a t i s s u e i s i mp o s e d o n a n y d e a l e r w h o b r i n g s t a n g i b l e p e r s o n a l p r o p e rt y int o Tenne ssee f

or use in T ennesse e. Tenn. Code Ann. § 67-6-201; Tenn. Code Ann. § 67- 6-210. One who does not pay

a sale s tax , but w ho purcha ses tang ible persona l pr operty for the pur

pose of lea sing it is ex empt from the use t ax under Tenn. C ode Ann. § 67-6-102( 34)(A) and (36)(A). I n order for an out-of- state purc hase to be treated as one for resa le, the purc haser

must strictly

follow statutory

a nd re g ulator y re qu ir e me nts , two of wh ic h a re the purc ha se r m

us t “ a c tua lly

le a se or re se ll the ite m” and the purcha ser must not make use of the item before such “sa le.” See Te nn . Comp . R. & Re g s. 3120-5-1- .32, -.62, -.63 a nd -.68.

I f the Commissioner establishes that the taxpay er is subjec t to the tax , the burde n of
pers u a s io n s h if

ts to th e taxp a y e r , in

th is c a s e CA O
, to p r o v e it is e n ti tl e d

to th e e xe mption, see Sodexho Mgmt. v. Johnson , 174 S.W. 3d 17 4, 17 7 (T e nn . Ct . App . 2 00 4) ; Prodigy Serv ices Corp. v. Johnson , 125 S.W. 3d

41 3, 41 6 ( Te nn . Ct . App . 2 00 3) ; Jack Daniel Distill ery, Lem Motlow, Prop. v. Johnson , 740 S.W .2d 413, 416 (Tenn. 1987)), a nd there is a presumption ag ainst exempti ons. Id. (citing Kingsport

Publ’g Corp. v. Olsen , 667 S.W .2d 745, 746 (Tenn. 1984) ).

CAO was incor

porate d for the stated purpose of purchasing an airplane, it s sole asset. CAM Manag ement, Inc. (“ CAM”) wa s incorporated on the same da y for the stated purpose of

manag ing and lea sing CAO’ s airplane to thir d p arties via time- sharing ag ree ments. The two entities we re-2-

incorpora ted by the same individual
, t h e share s are solely owned by

the same individual, and that person is the president of both e ntities. CAO states that the purpose of the leasingarr ang ement wa s to isolate potential liabilit y to CAM while fac ilitating a time-sha ring business, which would offse t the cost of the a irplane.

On the day

CAO purcha sed the a irplane, CAO a nd CAM signe d what is identified as a “N onExc lus ive Ai rc ra ft L e a se Ag re e me nt” (h e re ina ft e r t he “ le a se ” ). Mr . Cl a y

ton , th e pr e sid e nt o f b oth CAO and CAM, sig ned the a g ree ment on behalf of ea ch entity

. The lease st ates that CAM will pay

a “ dr y le a se ” rate of $5 50 pe r fl ig ht hou r of us e

. Th e le a se a lso state s tha t re nt wa s p a y a ble a nnua lly and CAO was responsible for collecting and remitting sales tax for all renta l r evenue g ener ated unde r the lease . Fur

ther, the l ea s e st ates that CAM’s possession of the a irplane w as subject to “use by [CAO ], a nd may a lso be su

bje c t to no n- e xclu siv e le a se to oth e rs

. . . .” CA O a lso re ta ine d th e ri g ht, in C AO ’s so le dis c re tio n, to “ a pp ro ve or de ny ” a ny

fl ig ht s c he du lin g by

CA M and

CA O’ s r ig hts to the us e of the a ir pla ne we re su

pe ri or . In th is r e g a rd , the le a se state s, “ [n]otwi ths tand ingany thi ngin thi s A g re e me nt t o th e c on tr a ry , a ny ri g hts [CAM ] may

have in o r t o th e Ai rc ra ft by vir tue of thi s Ag re e me nt, inc lud ing[CAM ]’s ri g hts to p os se ssi on a nd us e of th e Ai rc ra ft , a

re in a ll r e sp e c ts subordinate, junior, a

nd subject to [C AO]’s rig hts and interests.”

The De partment c ontends, int e r a lia
, that the l ease was invalid beca use i t did not give CAM exclusive possession or control of the a irplane. I n making this arg ument, the Dep ar t m en t relies heavily on Lau re l Trans

po rta tio n, In c . v. Zai no , Ta xCom mr

. , 92 Ohio St.3d 220, 749 N.E.2d 296 (2 00 1)

. Al tho ug h I do no t fu lly a g re e wi th the De pa rtme nt’ s c on te nti on that th e le a se wa s in va lid

mere ly becaus e it did not give CAM e x clusive possession or contr ol of the airc raf t, Ido find the

r e a soning in L au re l persua sive. I n Laurel , the Supreme Court of O hio upheld the Ohio Tax Commi ssioner’s a ssessment of L aure l for a use tax bas ed on the pur chase of the a irplane at issue,

rea soning that: “[w] hile users c ould determine w hen and w her e t h ey wanted to tra

vel, L aure l
pr ov ide d th e tr a ns po rt a tio n s e rv ic e that took the m. L a ur e l c on tr oll e d th e a ir c ra ft by c on tr a c tin g wi th Wings to fly

the airc raf

t,” and L aure l “owned the equipment and fu rn i s hed the ope rator, thus

rema ining in posse ssion a nd control of t h e equipment.” Id. at 298. CAO’s c ontrol of the air plane at i ssue here i s not as absolute as in Laurel ; ne verthe less, CAO reta ined control that is so perva sive it undermines CAO’s c ontention that leasi n g wa s t h e p rimary purpose f

or which the airplane was held.

The re g ulations require that wher e “le asing ” the pr operty serve s as the applica

ble “r esale ,” “lea sing” must be the “primary purpose” for whic h the prope rty is held, and if “le asing ” is not the primary purpose f or which the proper

ty is held, the taxpay er w ill be subject to the use tax. See Tenn. Comp. R. & Reg s. 1320-5-1- .32(3); Tenn. L tr. Rul. 07-32; Op. Tenn. Att’y . Gen. No. 84- 213, 1984 W L 1 8 6 3 0 5
, a t* 2 ( 1 9 8 4 )

. T h e p r i m a r y use of personal proper

ty will control for taxability purposes

ov e r t he state d purp os e

. Op

. Te nn

. Att’ y

. Ge n. No

. 84 -2 13 , 1 98 4 WL 18 63 05 , at *2 (1 98 4) (e mph a sis added) . As the cour

t in Fliteways, Inc. v . Lindley , 65 Ohio St.2d 21, 417 N.E.2d 1371 (1981) stated, in determining whether the purchaser shall incur sales tax on its acquisition of an airc raf t, the court looks to the purchase r’s primar y use of the pr operty

as an indication of the purpose.-3-

The flig ht log reve als that CAO was the primary user of the a irplane, not CAM. The f light loga lso re pe a te dly ide nti fi e d the “ op e ra tor of a ir c ra ft ” a s CA O, no t CA M. Th e se un dis pu te d f a c ts undermine CAO’ s contention that the primar y purpose wa s “lea sing.”

As s t at ed ab ove, in an a ction challeng ing the assessment of sa les and use ta x es, the Commi ssioner bea

rs the initial burden of proving that the t axpay er is subject t o the s ales or use tax at issue, b u t o n ce t he Commissi oner c arr ies that burden, the burden of persua sion shifts to t he taxpay er. Se e So de

x ho Mg mt

. , 174 S.W. 3d

a t 17 7; Prodigy Serv ices Corp. , 125 S.W .3d at 416) ; Jack Daniel Distillery, 740 S.W .2d at 416. There is a presumption ag ainst exempti ons, Kingsport Publ’g Corp. , 667 S.W .2d at 746, and in my opinion, CAO failed to over come the pr esumption ag ainst the exemption at is sue.

___________________________________ FRANK G. CL EMENT, JR ., J UDGE