### IN THE COURT OF APPEALS OF TENNESSEE AT MEM PHIS MAY 19, 2003 Session
SECURITY FIR

E PROTECTION C OMPANY, IN C. v. JOE B. HUDDLESTON,

Commissioner of R

evenue, State of Tennessee
Direct Appeal from the Chancery Court for Shelby County No. 104530-1 Walter L. Evans, Chancellor

No. W2002-01175-COA-R3-CV - Filed Dec ember 31, 2003

Security Fire Protection Company c hallenged the Commissioner of Revenue’s assessment of sales and use taxes arising from an audit of Security F

ire’s transactions with out-of-state customers from January 1, 1990, through March 31, 1993. The Shelby County Chancery

Court granted th e Commissioner’s motion for summary judgme nt, holding 1) material purchased in Tennessee under
a certificate of resale wer

e not resold for purposes of the sales tax exemption; 2) material purchased by Security Fire

out of Tennessee, stored and part ia lly fabrica

ted in Tennessee, and utilized by Security Fire in performance of contracts out of Te nnessee was subject to Tennessee use tax; and 3) no credi t was due for taxes p aid out-o f-state . We affir m the judgment of the

trial cou rt.

Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Chancery Court Affirmed

A LAN E. H IGHERS , J., delivered the opinio n of th e cou rt, in whic h W. F RANK C RAWFORD , P.J., W.S., and H OLLY M. K IRBY , J., joined. William H. D. Fones, Jr., John B. Burns, Memphis, TN, for Appellant

Paul G. Summers , Attorney Gen era l an d R epo rte r, M ich ael E. M oor e, S ol ici to r Ge ner al, Ch arl es L. Lewis, Deputy

Attorney Gene

ral, Wyla M. Posey , Assistant Attorney Gene ral, for Appellee
OPINION Security

Fire Protection Co mpany , Inc . (“Secu rity Fire”) is a Tenne ssee cor poration with its principal place of

business in Shelby County , Tennessee. Security Fire fabricates and

installs fire protection systems for commerc ial and industrial properties. During the per iod releva

nt to this lawsuit, Security Fire

was registered with the Tennessee Department of Revenue and the depar tments of reve nue of nineteen ( 19) other states.1 Commiss ioner ass esse d no ta x on materi als wh ich Securit y Fir e purchased out -of- stat e, st ored in Tenness ee without further

fabr icat ion, and trans porte d to ot her s tat es f

or use there . Securi ty Fi re paid appli cable Tenness ee taxes on materi als i t purcha sed out- of-s tate and used i n projects in Tenness ee. These mat erial s are not part of thi s dispute. -2- The Tennessee Department of Revenue (“ Commissioner”) audited Sec ur it y F ire for the period January 1, 1990, through Ma rch 31, 1993. Following the audit, Commissioner assessed Security Fire a total of $98,072 in sales and use taxes, plus interest of $20,103, for the audit period. In August 1994, Secur ity Fire filed a complaint in the Shelby County Chancery

Court to set aside the ass ess men t. In its complaint, Security Fire c onceded that it owed $4,334 of the assessed tax and interest on over- the-cou

nter sale s m ade in Te nnessee. However, Security Fire challenged Commissioner’s assessment of the remaining $113,841. Security Fire disputed Commissioner’s assessment of Te nnessee tax on two types of materia ls, identified by the par

ties as Type A a

nd Type B . The parties stipulated to the factual issues regarding these materials. Security

Fire purchased

Typ e A mater

ials in Tenness ee unde

r a cer tificate of resale, which exempted these materials from Tennessee sales tax at the time of purchase as sales for resale . It pu

rchase d Ty

pe B mate

rials outside of Tenne ssee, pla ced them into inven

tory at its Memphis warehouse, and fabric ated the

m into compo nent par

ts for fire protection sy stems. Sec urity Fire transpor

ted Ty pe A and T

ype B mater ia ls to co nstruction sites out of Tennessee, and incorporated

them in fire pr otection sy stems which it installed in commercial and industrial properties. Upon installation, the materials became part of the re al property. Security Fire p aid neither T ennessee sales nor use taxes on either Ty pe A or Type

B materia ls. Howeve

r, Secur ity F ire paid sales an d/or use

taxes in the states where it installed the fire protection sys tems. The

parties e xpressly didnot stipula

te whethe r this pra ctice wa s legally c orrect

. The Commissioner assessed Tennessee sales tax plus interest of $88,446 on Type A materials, and use tax plus interest

of $24,81 5 on Ty

pe B mate

rials. 1

The pivotal issue bef

ore the t rial cou rt was whether Se curity

Fire wa s liable

for the Tennessee sales and use taxes assessed by Commissioner pursuant to the Retail Sales Ta x Act, codified at Tenn. Code Ann § 67-6-101 et seq . After stipulating to the releva nt facts, the parties filed cross motions for summary judgme

nt. The trial court determined Security Fire was liable fo

r the sale s and use taxes, plus interest, as assessed by Commissioner. The trial court accordingly granted Commissioner’s motion for summary judgment.

Secur ity Fire now appeals to this Court. We affirm the award of summary judgmen t t o Commissioner.-3- ISSUES PRES ENTED FOR REVIEW Security Fire ra ises the f ollowing issues, a s we rest

ate them, for review by

this Court:
1) Whether the trial cou

rt erre d in failing

to find tha

t a factu al dispute

regar ding the passing of title to the materials precluded the award of summary judgment to Commissioner. 2) Whether the trial court erred in its interpretation of the parol e vidence rule. 3) Whether the trial court erred in finding that Security Fire wa s not eng aged in

the resa le of go ods. 4) Whe ther the

tr ial cour

t erred in finding

that mate

rials pur chased i n Tennes see on a r

esale cert ific ate a nd use d out o f Ten

ness ee a re su bjec t to Te

nnes see s ales tax. 5) Whether the trial court erred in finding that materials imported from other states a nd processed for e xport a re su bjec t to Te

nnes see u se ta

x. 6) Whether

the trial cou

rt erre d in failin g to find

Security Fire ha d paid taxe s on the ma

terials t o other states, a nd in ref usin g to giv e Security F

ire credit for the amount of taxes paid to the other states.
STANDARD OF REVIEW

This appeal i s before us from a gran t of summar

y ju dgment. Summary

judgmen t is prope rly granted when there is no genui ne issue a s to any materia l fact and the movin g party is entitle d to judgmen tas a matter of law. Tenn. R. Civ. P. 56.04. We review a trial court's a ward of summary judgment de novo , with no presumption of correctness. Guy v. M utual of Om

aha Ins. Co. , 79 S.W.3d 528, 534 (Tenn.2002).
ANALYSIS

We begin our

ana lysis of this case by

noting that this Court must construe taxation and exemption statutes differently. Covington Pike Toyota, Inc. v. Cardwell, Comm’r of Revenue , 829 S.W.2d 132, 135 (Tenn. 1992). Taxation statutes are construed liberally in favor of the taxpayer and strictly agains tthe taxing authority. Id. Thus taxation statutes will not be extended beyond the clear intention of the legislature. Id. Statutes granting exemptions from taxation, however , are str ic tly construedagainst the taxpaye r. Id. It is the taxpay er who carries the burden of proving entitlement to an exemption. Id. Additionally, where a word employed by

the legislature in thestatute has not been defined

in th e st atute, the Court em ploy s the natu

ral and o rdinary meaning of the wo

rd to determine the intent of the legislature. Id. Because this dispute concerns tran sactions whi ch occurred from January 1990 throug h March 1993, we must consider it under the Tenness ee Code i n effect at that time.

Title to Material We first address the threshold question of whether a factual dispute precluded an award of summary judgment in this case. The trial court should award summary judg ment only where the moving party

can demo nstrate

that there are no genuine issues re garding materia l facts of the caus e-4-

of action, and that it is entitled to a judgmen t as a matt er of la w. Tenn. R. Civ. P. 56.04; Byrd v. H all , 847 S. W. 2d 2 08, 214 (Te nn. 199 3). In determin ing whe ther to a ward summary

judgmen t, the court must view the evidence in the light most favorable to the nonmoving pa rty, drawing

all reas onable inferences in favor of the nonmoving party

. Stapl es v. CB L & A ssocs. , 15 S.W.3d 83, 89 (Tenn. 2000). Security

Fire submits that there exists a disputed issue of material fact re garding when t itle to the mater

ials at iss ue passe d from Sec urity Fire to the owner or

general contractor at the out- ofstate job site. Genera

lly, in deter

mining wh

en title to personal property

has been transferred from
a seller to a buyer f or Tennessee sales tax purposes, the court looks to the provisions of the Uniform Commercial Code (“UCC”). Eusco, Inc. v. Huddleston, Comm’r of Revenue , 835 S.W.2d 576, 579 (Tenn. 1992). Th

e UCC as a

d opted in Tennessee provides: “[u]nless otherwise explicitly ag reed, title passes to the buyer

at the time and place at which the sel ler co mpletes hi s perfor mance w ith reference to the physical delivery

of the goods . . . .” Id. ; Tenn. Code Ann. § 47-2-401(2)(1979). With respec t to delivery of ma terials in the contractor-subcontractor rela tionship, however , unless expressly provided by co ntract, title to materials supplied by a subcontrac tor remains with the subcontractor until attached to the re al prope

rty or acce pted by the prope rty owner a s his pr op er ty. Vinsant Plumbing and Hea ti ng Co. v. Rubber Constr. Co. , 486 S.W.2d 540, 543 (Tenn. Ct. App. 1971)(perm. app. denied). Security Fire argues that although its contra cts are silent as to the passing of title, the fact

that materia ls were inv oiced se

parately or as sep arate

items on job invoices evidences that title passed upon delivery

to the job site. It further submits that the trial court erred in applying the r easoning of Vinsant

to this cas e, and tha

t its contr acts wer e similar to those of

the taxpayer in Hearthstone, Inc. v. Moye rs, Acting Comm’r of Revenue , 809 S.W.2d 888 (Tenn. 1991). The trial court concluded that, under Vinsant , title to the materi als did not pass fro m Security

Fire until after installation of the fire protection systems. The interpr etation of a contract is a qu estion of law which we review de
novo
. General Const. Contractors Ass'n, Inc. v. Greater St. Thomas Baptist Church , 107 S.W.3d 513, 520 (Tenn. Ct. App. 2002).

In Hearthstone , the taxpa ye r sold kits for the construction of log homes. Hearthstone, 809 S.W.2d at 889. These homes were then erected on the customer’s foundation either by Hearthstone
or another contractor. Id. Commissioner assessed sales and use tax on the materials included in the kits, arguingthat Hearthstone was a contractor of homes, and not a reseller of the materials. Id. The Tennessee Supreme Court held that the determinative inquiry was whether

title to the kits pa ssed to the buyer bef

ore construction of

the homes

. Id. at 890. The court f ound, as a factua l matter, that title to the log home kits passed to the end buyer upon de livery of the kits and bef

ore the kits were used by H earthstoneto erect the homes. Id. The court accordingly affirmed the chancellor’s determination that Hearthstone was not liable for the tax assessed by Commissioner. Id. at 891.

Th is Court revisited this issue in Honest Abe Log Homes, Inc. v. Huddleston, Com m’r o f Revenue , where ta

xpay er deliv ered ma

terials to job sites for use by its dealer, 4A Construction, in homes under construction. Honest Abe Log Homes, Inc. v. Huddl eston, Comm’r of Revenue , No.-5-

01A-01-9405-CH-00224, 1994 WL 594960 (Tenn. Ct. App. Nov. 2, 1 994 )(p erm . ap p. d eni ed) . In Honest Abe , we noted that the pivotal issue was whether title passed to the owner bef ore use by 4A Construction in a home on the owner’s property

. Id. at *3. We also distinguished Honest Abe from Hear thstone , noting that in Hearthstone there wa s no delive ry to a site w

here co nstructio n was i n progre ss, and title to the prop erty had pa ssed to the end consumer before construction had beg un. Id. In Honest Abe , we held that title h ad not pas sed to th e ultimate con sumer before use by 4A Construction, and accordingly affirmed judgment for Commissioner. Id. Upon review of the contracts in the record before us, we agree

with the tr

ial cour t that title to the materials utilized by Secu rity Fire at its out-of-state job sites did not pass to the owner or contractor

before instal lation by Security Fire. Se curity

Fire’ssubcontr

acts do not specifi cally provide when title to materials supplied by Security Fire

shall be considered to have passed to the general contractor or

owner. Thus, under Vinsant , title to the materials remained with Security Fire. Moreover, as in Honest Abe , Security Fire delivered materials to a job site, where it then used them in fire pr otection sys tems which it

installed. We also note that most of the contracts required that Security Fire provide insurance coverag e, an insura nce cer tificate , or other

wise prot ect the ma terial, while others were silent on the issue of insuranc e. I

n all insta nces, ho wever, Security

Fire delivered materia ls to which it

had title t

o a job site

for inco rporatio n into s ystems which it installed. The responsibilities incidental to ownership of these materials clearly remained with Security

Fire.

We agree with the trial court’s application of the reasoning of Mainland v. Alfred Brown Co. , 461 P.2d 8 62 (N ev. 1969), as quoted in Vinsant , to this case. There is nothing in the contracts at issue providing that title to the materials passed upon delivery . Moreover, as in Mainlan d a nd Vinsant , the contracts at

issue here were subcontracts for mate rials and labor to be incorporated by Security Fire into real property

. Security Fire’scontracts unambig uously were su bcontra cts for the design, building, and installation of fire protection sys tems. Security

Fire maintained control over the materials, and there is no pr oof in this record that title to the materials passed to the genera l contractors bef

ore they were us ed by

Security Fire in c onstruct

ion of the fire protection sy stems. Security Fire also contends that the trialcourt erred in its interpretation of the parol evidence rule. It submits that the trial court erred in not permitting the introduction o f parol evidence regarding the cour se of conduct

between the parties to determine when title to the materials passed. Security Fire argues that the trial c ourt should have admitted the deposition of Claude Chafin, President of Secur ity F ire, and that this de

position su

pports a f inding th at title to t

h e mat erials in question passed to the general contractor upon delivery.

T he parol evidence r

ule is a ru

le of subs tantive la

w which pr

ohibits the

use of pa

rol o r extrinsic evidenc e to alter

a writte n contra ct or instr ument. 32A C.J.S. Evidence §§ 1132-1133 (1996). The rule serves to guard ag ainst fraud by a party who seek s to disavo w contra ctual ter ms. Tidwell v. Morgan Bldg. Sys., Inc. , 840 S.W.2d 3 73, 376 (T enn. Ct. Ap p. 1992). Thus cour

ts prohibit the introduction of parol

evidenc e where

a contra ct is unamb iguous o n its face. Id. The rule has many exceptions, however , and parol evidence genera lly is admissible where one of the parties to the lawsuit is not a party to the writing . 32A C.J.S. Evidence § 1143.-6-

Having reviewed the deposition of Mr. Chafin, we find it unnecessary to address whether the trial court er

red in its interpretati on of the parol evidence rule. Any such error would have been harmless , as Mr. Chafin’s depositio n does not n

egate the chancellor’ s finding

that title d

id not pass to buyers bef

ore use by Security Fire . Mr. Chafin’s deposition makes clear the fact that the contracts involved here ar

e for the installat ion of fir e secur ity/sprinkle

r sy stems, inc luding th

e materi al. Alth ough the contracts included costs for materials and labor, and pa yment terms differ

ed from project to project, the ge

neral c ontract

ors in this case we

re not buy

ing mate rials, or fire protection kits, but install ed sy stems. Mr. Chafin’sdepositio n does not s upport a c onclusion that title t

o th e materials passed to the contractor before use by Security

Fire.

Like the taxpayer in Honest Abe , Security Fire delivered materials to which it had title from its warehouse in Tennessee to on-going construction sites for its own use. Security Fire’scontracts were for the design and installation of complete s ystems, not fo r the sale of tangible personal pro per ty. In light of the foreg oing, we affirm t he trial c ourt’s finding tha t title to the

materia ls did not pass to the contractors/buye rs before use by

Security Fire

. Sales Tax on T ype A Mat erials

We next turn to whether S ec ur it y F ire is lia ble for T ennesse e sales ta x on materia

ls it purchased

in Tenne sse e unde r a certificate of resale a nd then incorporated into fire protection sys tems it installed out of Tennessee. The Retail Sales Tax Act, as codified at Tenn. Code Ann § 67-6-101 et seq ., provide s:
It is declared to be the le gislat ive in tent t hat ev ery person is ex ercis ing a ta xabl e priv ilege who: (1) Engag es in the business of selling tangibl e personal propert y a t retail in this state; (2) Uses or consumes in this state any item or article of tang ible personal propert y as defined in this chapter, ir respe ctive of the ownership thereof or any tax immunity

which may be e

njoyed by the owner thereof; (3) Is the recipient of

any of the thing s or services taxable under this chapter; (4) Rents or

furnishe s any

of the things or se

rvices ta xable unde

r this chapter; (5) Stores for

use or co nsumption in

this state any item or ar

ticle of t angible personal property

as defined in this chapter; (6) Leases or

rents such prop erty , either as lessor or lesse e, within t

he state of Tennessee; (7) Charges admission, dues or fees taxable under this cha pter; or (8) Sells space under this chapter. Tenn. Code Ann. § 67-6-201(West, WESTLAW through 1993).-7-

The statu te defines a “sa

le” as: any transfe

r of title or possession, or both, exchange, barter , lease o r renta l, conditio na l, or otherwise, in any manner or by

any means wha

tsoever of tangibl e personal property for a consideration, and

includes the fabrication of tangibl e persona

l proper ty f or consume rs who furnish, either directly or in di re ct ly, the materials used in fabrication work, and th e furni shin g, repairing or servi ng for a consider ation of a ny t angible personal propert

y consumed on the premises of the person furnishing, preparing or serving such tangible personal property

. . . . Tenn. Code Ann § 67-6-102(23)(A) (West, WESTLAW throug h 1993).

A retail sale unde r the stat ute is:

a taxable sa

le of tan gible pe

rsonal pr operty or speci fically

taxable se

rvices to a consumer or to any

person for any

purpose other than

for resale

. Tenn. Code Ann. § 67-6-102(22)(A)(West, WESTLAW through 1993) (emphasis added). Thus the code excludes sales for resale from the defi nition of ordinary re

tail sales. The section further provides , “[a]ny

sales fo r resale must, however, be in strict compliance with rules and regulations promulgated by the commissioner .” Id. (emphasis added).

Rule 1320-5-1-.0 8 (“Rule 8") as promul gated b y Co mmissioner permits contractor-dealers to purchase materials under a cer tificate of resale, which exempts or delays the pay

ment of sale s tax. Rule 8 pro vides:

(1) Contract

ors an d sub- contr actors engaged i n the b usin ess of erecti ng, building or oth erwise

improving, altering and repairing real property

for others, and al so enga ged in t he bus iness of sel ling b uild ing m at erials and supplies to other c ontract

ors, cons umers, and users, and who may notbe able to segre gate th at p ortion of the materials and supplies that they will use or
consume in the fulf illment of their co ntracts from that portion of the materia ls and supplies th at they

will sell at retail, may g

ive a resale certificate to the seller of the mater

ials and s upplies. (2) Contract

or-dea lers making sale s of tangible personal property shall re port all sal es made, and all withdrawals from inventory for use as a contractor eachmonth, and

pay any applica ble Sales or U se Tax due. Any withdrawa l from inventory for use

as a contractor sha

ll b e reported and the tax due thereon shall be paid with th e r et ur n f or th e l oc at io n o f t he in ve nt or y, regardless of the place of use, either in or out of the state. (3) Suppliers making sales of materials and supplies to contractor-dealer s and delivering such mate

rials and su pplies to a job site for use, or tagging or-8- marking particular mat erials an d supplies for a particular job being perfor med by the contrac tor-dealer , shall collect the applicable Sales or Use Tax on those sal es. Tenn. Comp. R. & Regs. 1320-5-1-.08.

Commissioner does not di spute that Security Fire

is a contractor-dealer for the pur poses of Rule 8, or that it wrongfully purchased

materia ls under a certifi cate

for res ale. Commi ssioner a sserts, however, that Security Fire is liable for the sales tax on materials purchased in Tennessee under a certifi cate of resale and

then incorpor

ated into fire protection sy stems insta lled by Security Fire out

of-state (Ty

pe A materials). Security Fire, on the other hand, contends that it i s not liable for the sales tax on Type A materia ls. Security

Fire’sargume

nt, as we percei ve it, is thr

ee-fol d. First, Security Fire asserts that it resold the materials, rather than used them, and t

here fore is not liabl e for the T enne ssee

sale s tax. Second, Security Fire

relies on Young Sales Corp. v. Benson , Comm’r of Revenue , 450 S.W.2d 574 (Tenn. 1970), for the proposition that there is no distinction between the application of the sales and
use taxes, and that Tennessee may not look to Security Fire’s use of the materia ls out-of- state to determine wh et he r t he y ar e subject to Tennessee sales tax. Third, Security Fire asserts that the im position o f Tennessee sales tax on Ty pe A materials violates Tenn. Code Ann. § 67-6-313(a), which providesthat no ta x shall be levied on “articles of tang ible per sonal pro perty imported into this state or produced or manufactured in this state for export.” Security Fire’s lengthy

argument that the application of sales and use tax are no t distingu is hable, and its over-reliance on Young Sales , a case dealing with use tax, obfuscate what is actually

clear f rom a pla in reading of Rule 8. Further, Security Fire’s contention that Ty pe A materials are not distinguishable from materials purcha sed out of Tennessee, stored in Tennessee, and then e

xported to jo

b sites out o f Tenne ssee reflects a misreading of the rules and the statutory scheme of taxation . Clearly , Tennes se e canno t impose a sales tax on materials purchased out of Tennessee. Whether T ennesse e can imp ose a use tax on such materia

ls depend s on whether, as a factual matter, any

use occurred in Tennessee, and will be fur ther addressed below.
Young Sales is distinguishable from the case nowbefore this Court. Young Sales involved the imposition o f Tenne ssee use tax on mater

ials purchased

out of Tennessee, stored in Tennessee withoutfabrication, and shipped to another state for use there

. Young Sales , 450 S.W.2d at 5 75. It has no ap plication

whatsoever to the

question o f whethe

r Tenne ssee may

impose a s ales ta

x o n materia ls purchased in Ten nes see . It is perhaps unfortunate, but Tennessee simply has no author

ity to impose a tax on sales made out of Tennessee. Further, we do not read Young Sales to stand for the proposition that there is no distinction between materials purchased by a contractor in Tennessee for use out-of-state, and those purchased out-of-state for use in a third state. As Security Fire not es, the Young Sales court observed that the sales and use taxes “applied toge ther provide a uniform tax upon either the sale or use of all tangible prope rty irrespective of where it may be purchased.” Id. at 576. This must be rea d in li ght o f the cour t’s th orou gh a

naly sis of the p urpo se of

the u se ta

x,-9-

however, which is applied to “prevent evasion of the sales tax . . . .” Id. Together, the two taxe s form a comple te retail ta x scheme. T

he taxes a re not, however, indistinguishable. Hearthstone, Inc.
v. Moyers, Acting Comm’r of Revenue , 809 S.W.2d 8 88, 890 (T enn. 1991 ). We must e xamine thei

r application separately , and, in each case, determine whethe r a taxable event

occurred in Tennessee. See id

. Cl ea rl y, but for the certifi cate of resale , Securit

y Fire would have been required to pay sales tax on Type A mater

ials when it purchased them in Tennessee. See Nasco, Inc. v. Jackson, Comm’r of Rev enue , 748 S.W .2d 193, 19 5 (Tenn. 1998). Under Rule 8 , a contr actor- dealer

may purchas e materia ls under a certificate of resa le where it is not known, at the time of p urchas e, whether the materia ls will be re sold or use d by the contr actor- dealer

in performance

of a contract. Tenn. Comp. R. & Regs. 1320-5-1-.08(1). If th e contra ctor-de aler re sells the material s, he must collect and pay the applica

ble sale s tax. Tenn. Comp. R. & R egs. 13 20-5-1- .08(2). I

f he wit hdraws them from inventory for his us e as a co ntracto r, he is li able f

or the applicable tax, “regardless of the pla ce of use, either in or out of the state.” Id. Moreove r, “[c]er tificate s of resa

le may not be use d to obtain tangibl e personal property

. . . to be used by the purc haser. . . .” Tenn. Comp. R. & Regs. 1320-5-1- .68(2)( “Rule

68"). Additionally, Commissioner may revoke the registration

certificate of one who wrongfully

misuses the certificate to obtain tangible personal prope rty for his own use. Id. Read together, the rules provide a mec hanism through which

the imposition of sales tax is delayed until such time as the property is either resold or used by a contra ctor-de aler who , at the tim e of purchase, does not know whether the property will be used by him or resold. The pur chase by the contractor-dealer

is not exempt from tax unless it is specifically resold. Nasco , 748 S.W.2d at 195. There is no exempti on from sales taxation of property e xported by a taxpay

er for his own use. Hearthstone , 809 S.W.2d at 891.

Subsection three of

Rule 8 fur

ther indic ates tha

t materia ls used by

a contra ctor-de aler in performance

of hisown c ontra

ct ar e not exemp t fro m sale s tax. The subsect ion provid es that a supplier who delivers materials to a job site for use in a job being performed by the contractor-dealer “shall” collect t

he applic able tax on

those sal es. Tenn. Comp. R. & Regs. 13 20-5-1- .08(3). T hus, suppliers may not sell property under a certifi cate of

resale where th ey know the p

roperty is not for resale, but for the contra

ctor-de aler’s o wn use. Mo reover, Commissione r may re voke the registration certifi cate of a wholesale supplier who sells property under a certificate of resale whe n the supplier know s that the property is not for r esale but for the purchaser’s own use or consumption. Tenn. Comp. R. & Regs. 1320-5-1-.68(3). Reading Rule 8 and

Rule 68 tog ether, it is clear that a co ntracto

r-deal er who us es mater

ials in performance of his own contract is not exempt from the pay ment of sales tax on those materia ls. The tax liability on property used in the performance of a contra ctor-dealer’s own contracts is incurred at the time of purchase as a retail sale, as the sa les tax would be collecta

ble at that time but for the certificate of resale. I f the propert

y is resold, t

he contr actor- dealer

must collect and pay

the tax on the resale as a sale at retail. I f the goods are not resold but used by the contractor-dealer, he must pay the sa les ta x. Nasco , 748 S.W.2d a

t 196. Des pite Secu

rity Fi re ’s as se rt io n t o t he co nt ra ry,-10-

determining whether the tax was due based on subsequent events is not “contrary to the concept of
a contractor-dea

ler.” Ra ther, Rule 8 provide s an exempt

ion that is conditioned on subsequent resale. Id.

Our

inquiry must therefore

tur n to Security Fire ’s contention that it resold the Type A materia ls. As discussed at length above, Security Fire incorporated the materials into fire protection sys tems which it designed and installed as a su bcontra ctor at c ommercia

l and indus trial job s ites. It therefore “use[d] [them] as a contractor” in the context of Rule 8 and, accordingly , is not exempt from liability for the sales tax that would have been due but for the certificate for re sale.

We next address Security Fire ’s assertion that Rule 8 conflicts with Tenn. Code Ann. § 67-6- 313(a). Rule 8 provides for the imposition of tax on ma terials purchased in Tennessee on a certificate of resale but then used by the contractor in his bu siness, r egard less or wh

ether su ch use occurred in or out of the state. Tennessee Code A nnotated § 67-6-313(a) prohibits the imposition of tax on artic les in

interstate commerce

or which are produced or manufactured in Tennessee for export. Security

Fire argues tha

t th is Court sho

uld make n o distincti on betwe en mater ials it purchased

out of Tennessee and used in third states, and m aterial s it p urchased in Tenne ssee, in determining whether Ty

pe A materials are exempt from Tennessee sales tax. Security

Fire sta tes, “the Commissio ner conc edes that it ca nnot tax Ty

pe C mater

ials - impo

rted mate rial, held in in ve nt or y, withdrawn from inventory , shipped out of Tenn essee w ith nothing more done

to it in Tennessee. However, the Commissioner seeks to tax Type A materials[,] which differ from Type C materials only in that the Ty pe A materials were purchased in Te nnessee .” I

n support o f its argume nt, Security

Fire sub mits that Young Sales “in no way implies that a distinction should b e drawn betwee n ma terials in a contractor-dealer’s inventory based on where the materials were purchased.” Security Fire ’s argument, as we perce ive it, is that Type A mater ials are exempt from Tennessee sales tax because they were used at out-of-state job sites and, accordingly , are exempt as articles in interstate commerce under Young Sales v. Benson, Comm’r of Revenue , 450 S.W.2d 574 (Tenn. 1970).

We disagree with Secur

it y F ire’s reading of Young Sales and its assertion that Type A materia ls are exempt from taxation as articles in interstate commerce. The proper ty at issue in Young Sales came into Tennessee as articles in interstate commerce, were not used in Te nnessee, and were shipped to third states. The Young Sales court held the property was exempt fromTen nessee tax because withdrawing imported

goods from a Tennessee ware house and shipping them out-of-state, withoutmore, is not a taxable event. Young Sales, 450 S.W.2d 57 7-78. The propert y in Young Sales
never lost its character as articles in interstate commerce . Thus taxation of the Young Sales propert

y would have v iolated the prohibition against taxing articles in interstate commerce a s provided, at that time, at Tenn. Code Ann. § 67-3007 (current version at Tenn. Code Ann. § 67- 6-313(a)).

Unlike Young Sales , the issue here is whether Tennessee may impose a tax on sales made in Tennessee, sales whi ch would h ave bee n taxable a

t the time o f purcha se but f or a certificate of-11-

resale. Contrary

to Security

Fire’s argument, the factthat the materials were purchased in Tennessee is the determin ative fa

ctor. The origina l sale of T ype A materi als to Security Fire , unlike the mere withdrawal of imported goods from a warehouse for interstate shipping, was a taxable event. When Security Fire pur chased t he Ty pe A mate

rials in Te

nnessee , they

alr eady were pa rt of the mass propert y of this state as defined at Tenn. Code Ann § 67-6-211 (West, WESTLA W, through 1993). See Young Sales , 450 S.W.2d a t 574 (noti ng: taxpa

ye r proper ly paid Tennessee sales tax onover-thecounter sales of imported property made from Memphis warehouse). Rule 8 provided a limited exemption from sales taxation insofar as the materials were to be resold. Once Sec urity Fire determi ned the materia

ls were f or its own u se in fulf

illment of its contra

cts, howe ver, it became liable for the Tennessee sales tax. Use Tax on Ty

pe B Mate rials Security Fire also challenges Commissione r’s asse ssment of Tennesse e use tax on Type B materia ls. Type B materials are tho se materials which Securi ty Fi re imported f rom other states, stor ed, parti ally

fabric ated, and transpo

rted to oth

er state s for use

in perfo rmance of its con

tracts. Security Fire contends these materials are e xem pt fr om taxation under the import-for-export and produced/manufactured for export exemptions provided by Tenn. Code Ann. § 67-6-313(a).

In its argument to this Court reg ardi ng the app lica

tion o f use

tax, Security

Fire co ntinues to assert that the materials were resold and to meld sales and use tax conce pts. We have held that Security Fire did not rese ll the mate

rials, bu t used the m in perfor

mance of its own con

tracts. We

also have dispensed with the theory that the two ta xes should be considered without distinction

. We accord ingly percei ve the iss ues pert

aining t o the use t

ax assesse d on Ty

pe B mate

rials as f ollows:
1) whether Security

Fire’s withdrawal from inventory and pa rtial fa

bricatio n in Tenness ee of imp orted ma terials c onstitutesuse unde r the use taxation sta

tutes; 2) if so, whether such materials, which Security Fire subseque

ntly transpor ted to its out-of- state

job sites, are exempt from use taxes under the imported-f or-export or manufactured-f

or-expor t exemptions ; 3) whet her such

materia ls are exempt from u se taxes un der the c ontract or’s u s e statute codified at Tenn. Code Ann. § 67-6-209.

The primary purpose

of the use tax is to prevent evasion of Tennessee’s sales tax. Young Sales , 450 S.W.2d at 576. Accord ingly , the use t

ax levies a

tax on pers onal prop erty

that is not s old in Tennessee but is “used, consumed, distributed, or stored for use or c onsumption in thi s state; provided, that there s hall be no dupl ication o f the tax.”Tenn. Cod e Ann. § 67 -6-209 (

West, WESTLAWthrough 1993). Thecode further provides that a dealer who imports property from other states “shall pay the tax imposed by this chapter on all articles of tangible personal pr opert y s o imported and used , the same as if the artic les had been sold at retail f or use or consumpti on in this state.” Tenn. Code Ann. § 67-6-210 (West, WESTLAW through 1993). This section also provides that there “shall be no duplication of the tax . . . .” Id.-12-

Thus, the use tax levies a tax on property purchase d out of Tennessee but used in this state where such property w ould have been subject to sales tax had it been purchased in Tennessee. Young Sales , 450 S.W.2d at 576. I t allows a credit, however , for taxe s previou sly incurre d and paid in other states. Id. As a result, taxpayers who import prope rt y for use i n Tennes see pay the same amount in taxes as they would have paid ha d they purcha sed the property in Te nnessee. The sales and use taxes, therefore , c omplemen t each ot her to impo se a unif

orm amoun

t of tax on pr

operty purchased

in Tennessee and property purchased out-of-state but used in Tennessee. Id. The use tax thereby puts Tenness ee vendors on par ity with out-o f-state

vendors w

ho sell pr operty for use i n this state. Id.

In order to

determine whethe

r a use ta x is due on pr

operty importe d into Te nnessee and subseque ntly shipped into another state, we must first determine whether a taxable event ha s occurred in Tennessee. See id. at 577. Mere withdrawal of property from a warehouse is not use for purposes of the use tax. Id. Moreover, such taxation would violate the prohibition on taxing interstate commerce. Id.

The parties in this case do not dispute that Security F ire importedthe T ype

B mater ials, fabricated them, and transported them out of Tennessee for installation as component parts in fire protection systems. Thus our inquiry turns to whether Sec urity Fire’ s fabrication of

those mate

rials constitutes use unde

r the stat ute. Commis sioner a sserts tha t it does. Security Fire , on the other hand, contends the materials were resold and used out of Tenne ssee, and relies on Hearthstone for the proposition that it is not liable for Tennessee tax.

We begin our analy sis of this issue by ag ain distinguishing Hearthstone from this case. The
use tax question addressed by the Hearthstone court co ncerne d the impos ition of the tax on prope

rty purchased

in Tenne ssee and

used in Tennessee to manufacture log home kits which the taxpayer then exported and sold out-of-state. Hearthstone, Inc. v. Moy ers, Acting Comm’r of Revenue , 809 S.W.2d 888, 891 (Tenn. 1991). The Hearthstone court opined that, under Tenn. Code Ann. § 67-6-313(a), the property wa s exempt from taxation as property manufactured in this state for export. Id

. The sub sequent

use of the property

by the taxpay

er to erect the log homes, moreover, oc curre d exclusively

in the othe

r states, after title to the homes had passed to the ultimate purchasers. Thus it was not exported from Tennesseefor the taxpayer’ s own use in performance of a contract, but was resold and used only af

ter title had passed. Id. Therefore, there was no taxable po st-sale

use of the materia ls by the taxpay

er in Tennessee. Accordingly , there could be no imposition of the Tennessee
use tax under Tenn. Code A nn . §§ 67-6-203, 210 or the contractor’s use statute codified a t Tenn. Code Ann. § 67-6-209.

The threshold determination here is whether Security F ire’s withdrawal from inventory of imported materia

ls for fa bricatio n into comp onent par ts was a taxa ble even t for use tax purpose s. The code defines use as “the exercise of any

right or power over tangible pe rsonal property

incident to the owne

rsh ip ther eof, except that it does not include the sale at retail of that property in the regular course of business.” Tenn. Code Ann. § 67-6-102(28) ( A)(West, WESTLAW through 1993). Cl ea rl y, had Secu

rity Fire not fabric ated or o therwise

altered the mater ials, it would not be liable for-13-

a use tax. Young Sales , 450 S.W.2d 577-78. Inde ed, the parties here have stipulated that Commissioner did notassess a tax on such material. We agree with Commissioner, however, that when Security Fire

fabricated the materials, it exercised co ntrol ove r th e materials such that the mate rial s lost their char acte r as a rtic les in inter state comme rce a nd be came

subje ct to u se ta

x.
We next must determine whether Type B materials are exempt

from the use tax under Tenn. Co de Ann. 67-6 -313(a) as prope rty imported f

or export o

r manufa ctured f or export. Property imported i nto Tennessee and exported from this state without use clearly is exempt from taxation under the import for export provision of section 313(a). Young Sale s, 450 S.W.2d at 577. However, in the current case, Security Fire did not import and ex po rt Ty pe B mate

rials without use in Tennessee. A taxable event occurred in Tenn es see when Security Fire fabricated the Ty

pe B materia ls in this state. Thus Typ e B mate rials are not exempt from taxation as articles imported for export. Likewise, the

manufactured fo

r export exemption doe s not apply t o property whic

h a taxpayer transports to another state for its own use in performance of a contract. Hearthstone , 809 S.W.2d at 891; see Nasco, Inc. v. Jackson Comm’r of Revenue , 748 S.W.2d 193, 194 (Tenn. 1988); Honest Abe Log Homes, Inc. v. Huddleston, Comm’r of Revenue , No. 01A-01-9405-CH-002 24, 1994 WL 594960 at *3 (Tenn. Ct. App. Nov. 2, 1994)(perm. app. denied). Thus Ty pe B material is not exempt from taxation under section 313(a).

Ad dition al ly, the contractor’s use statute provides that a contractor is liable for Tennessee tax where he uses property in the performance of his contract. Tenn. Code Ann. § 67-6-20 9(b)(We st, WESTLA

W through

1993). Th

e contra ctor inc urs this tax liability regardless of w ho holds title to the property or w

hether the title holder

would be liable for

sales or use tax. Id. The sec tion prohi bits dual ta xa ti on of

th e p ro pe rt y, however, by exempting property whic h previously has bee

n subjected to a sales or use tax. Id.

U nder the rationa

le d eveloped by the

Tennessee Supreme Court in Young Sales , Hearthstone , and Nasco , we agree with Commissioner that Type B materials arenot exempt f rom Tenne ssee use tax. A taxable e

vent occurred in

Tenness ee when

Security Fire withdrew the Ty

pe B materials from the stream of interstate commerce and fabr icated them in this state. Security Fire did not manufactureor fabricate the mater ial s for expor

t, moreov er, but us ed them in perfor mance of its contr acts. We accordingly affirm the chancellor’s determination that Security Fire is liable for Tenness ee use ta

x on Ty pe B mate

rials.
Credit for Tax Paid to Other States Security Fire asserts that, under Hearthstone , it should receive a credit for sales a nd use taxes paid on Type A

and Type B materials in other states. Commissioner concedes that Security Fire paid sales and/or us e taxes in th e states w

here the materia ls were installed. Comm issioner doe s not stipulate, however, that such tax pay ments wer

e lega lly c orrect

. Commissioner accordingly refutes Security Fire’s claim that these sums should be credited ag ainst Security Fire ’s Tennessee t a x li ab il it y.-14-

We agree with Security

Fire that the entire statutory tax scheme clearly

see ks to avo id duplication of tax es. Te nn. C ode An n. §§ 6 7-6-2 03, 20 9, 210 , 507 ( West , WES TLAW th rough 1993). Where a t

axpayer has pr

operly paid a le gally

imposed sales or use tax on materials purchased
or used in another state an d imported

into Tenne ssee for

use here , the taxpa

ye r may claim a credit of that a moun t aga inst it s use tax liability in Tennessee. Tenn. Comp. R. & Reg s. 1320-5-1- .91(“Rul e 91"); Bellsouth Adver. and Publ’g Co. v. Johnson, Comm’r of Revenue , 100 S.W.3d 202, 204 (Tenn. 2003). Howeve r, contr ary to Security Fire ’s assertion otherwise, we do not read the code, Hearthstone, or Bellsouth as manda ting tha t a taxpayer should rece

ive credit in Tennessee for taxes paid in other states where the taxpa ye r inc urre d the

Tenn esse e tax beforea taxable event occurred in another state.

In Hearthstone , there was no taxable event in Tennessee such that taxpay er incurred a Tennessee use tax before a use tax was assessed and properly paid in another state. Hearthstone , 809 S.W.2d at 891. Similarly, in Bellsouth , the court determined that taxpay er was entitled t o a cred it agains t T ennessee use taxes for sales taxes incurred and paid in another state prior to use of the propert y in Tennessee. Rule 91, moreover, provides a cr edit where t he previously paid tax was “legally imposed” and paid. Tenn. Comp. R. & Regs. 1320-5-1-.91.

Cl ea rl y, the taxpay

er in Bellsouth was liabl e for sa les taxes in

the state of orig in befor

e it brought the materials into Tennessee for use here. L ikewise, in the case before us, Security Fire became liable for Tennessee sales tax on Ty pe A materials when Sec uri ty F ire purc hased tho se materia ls in Tenne ssee unde

r a cer tificate of resa le and the n did not re sell them. Security Fire did notincur a legally

imposed tax in another state o n Type A materia ls befor e it purc hased the

m in Tennessee. Therefore, it cannot c laim a credit against Tennessee sale s tax. Security Fire also became liable for Tenne ssee use tax when Security F ire used Typ e B materia ls in Tennessee before it used the materials in performance of contracts in other states. After
a taxpayer has withdrawn property fr om the strea

m of inter state

commerce, it is liable for the use tax where the property w ould have been subjec t to a sale s t ax had it been purchased in Tennessee. Bellsouth , 100 S .W.3d at 206. As discuss ed above , Securit y F ire withd rew the T ype B mater ials from the stream

of inters tate comm

erce. B ecause

it used the

m in perfor

mance of its own con

tracts, Security Fire would havebeen liable for sales tax on Type B materials had Security Fire purchased the materials in Tennessee. Again, a subs equently incurr ed tax in another state cannot relieve Security Fire of its prior tax liability in Tennessee.

Whether Security Fire’s pay

ment of taxes in states where it subsequently use d the material
was proper, or whether Security Fire should receive a cr edit in thos e states f or taxes inc

urred in Tennessee, are not issues for determination by t he court s of this sta

te. Additi onally , Securit

y Fire does not claim a credit for sales or use taxes paid to other states before Ten nessee taxes were incurre d. We acc ordingl

y a ffirm the judgmen t of the tr ial cour t.-15- CONCLUSION

In light of the fore going , we hold Security Fire is li able

for the Tennessee sales tax assessed by Commissione

r on Ty pe A mate rials, and for the

Tenness ee use ta

x assessed

on Ty pe B mate rials. We also hold Security Fire is not entitled to a cre dit on taxes p aid to othe r states w here it installed the materia

ls, beca use S ecurity F

ire’s liability for Tenne ssee taxes pre-existed the imposition or payment of taxes to those states. We affirm judgment of the trial court awarding summar y judgment to Commissioner. Costs of this appeal are taxed to Security F ire Prote ction Compa

ny, Inc ., and its
su re ty, fo r w hi ch ex ec ut io n m ay i ss ue if ne ce ss ar y.

___________________________________

ALAN E. HI

GHERS, JUDGE