# FILED

May 13, 1997 Cecil Crowson, Jr . App ellate C ou rt Clerk IN THE COU RT OF A PPEA LS OF TENN ESSEE EASTERN SECTION A T KNOXVILLE

UPPER EAST TENNE SSEE ) W ASHINGTON CHANCERY DISTRIBUTING, ) ) NO. 03A01-9701- CH-00011 Plaintiff/Appellee ) ) HON. LEW IS W . MAY, v. ) CHANCELL OR, By Inte rchange ) RUTH E. JOHNSON, ) JUDGMENT REVERSED; Commissioner of Revenue, ) MOTION OF THE DEFENDANT State of Tennessee, ) GRANTED; ) REMANDEDFOR ENTRY OF Defendant/Appellant ) JUDGMENT F OR THE STATE. ) )

Forrest B. Bigham, Nashv ille, for Appel lant. Walter Lee Davis, Jr ., Johnson Cit y, for Appell ee.

O P I N I O N

INMAN, Se nior Jud ge This complaint was heard by the Chancello r upon stipul ated facts, trial briefs and oral argument. Motions for Summary Judgment were filed by both parties; the trial court granted Plaintiff’s motio n. Defenda nt app eals and present s the follow ing issue, repro duced verbati m: 1. Rule 96 of the Department of Revenue is

a valid example of the express statutory authority of the Commissioner of Revenue to implement rul es and regul at ions concerni ng sales for resa le. A. Plaintiff’s ini tial sale w as taxab l e as a retail sale because i t fai l ed toqua lify as a tax-exempt sale for res ale und e r Rule 96. B. Rule 96 is val id and consist ent with Tennessee sales and use tax statute s and is reasonable, pr actical and necessa ry to effectuate the purposes of t he la w. Plai ntiff argues that

R ULE 96 does notapply because Plaintiff ’s sale was a sale forresale and not a retail sale under the u ndis pute d fac

ts. In t he al ter nati ve, if R ULE 96 is found to apply, t hen R ULE 96 is v oid beca use it is i nconsistent w ith T. C. A. § 6 7-6- 102(23)(A) and T. C. A. § 67-6-313 (a).2 I The parties sti pulated 32 parag raphs of facts for tr ial. We paraphr ase those material to our

decision: Plai ntiff [hereinafter “ Seller”] i s a manufacturer and dealer of coin-o perated amusement game machines w ith offices and facili ties in Gra y, Tennessee. Between January1991 and December 1 993, Seller s old for resale various coin-operated amusement mach ines

to C oin Concepts , Inc ., [ here inaft er “Buyer ”] a New

Jersey corporation with no physical presence in Tennesse e. Buyer effected the sale by sending purchase order s to Seller in Ten nessee, but left the machines at Seller’s Tennessee facility and subsequentl y re-s old them to Buyer’s customer , Aladdin’s Castle, Inc., a Delaware corporation which uses the machines in its business operations throughout the United State s. Seller agreed to ac

t as Buyer ’s agent t o d eliver the machines to Buyer’s customer, Aladdin’s C astle. Posses sion of the machines was transferred from Sel l er directly to Buyer’ s customer, Al addin’s Cast le, at Seller’s faciliti es in Tennessee. Two mach in es were us ed by Aladdi n’s Castle facilities i n Tennessee, and Aladdin’s Castle paid Tenne ssee use tax on those two machines. The remaining [presumably 98] machines were sentto other states, and in each stat e which impo ses a use t ax, Al add in’s C astl e pai d the tax. Seller did not collect an y Tennessee sal es or use tax or pay any

t ax in connection with the sales ofthe machines to B uyer or t he deliver ies of the machines to Aladdin’s Castle. No arrangements were made b etwee n Seller and t he Tennessee Commissioner

of Rev enue regar ding the sales to Buyer or the deliveries to Aladdin’s Castle. The Tennessee Department of Revenue asse ssed Seller $18,753.00 for sales and use tax, l ocal tax and interest. The trial court found the Department of R evenue’s ass essment to be err oneous and not due, and awarded jud gment including attorney’s fees to Seller.3 II Retail sales in Tennessee are subject to Sales and Use Tax under T. C. A. § 67- 6-101, et seq, Retailers ’ Sales Tax Act. The Act defines taxable retail sales as “taxable sale of tangible personal property . . . to a consumer or to any person f or any purpose other than for r

esale [emphasis added]” Stipulation of Fac

t #6 at trial in this cas e provides : “B etween Janu ary

1991 and D ecem ber 1993Pla inti ff sold for res al e [emphasis added] v

arious coin- operated amusement g ames

. . . to Coin Concepts, Inc. . . . “ Notwithstanding this stipul ation, the Commissioner arguesthat Plainti ff’s sale of the machines to Buyer, alt h ough a sale for resale, was subject to taxation “as a retail sale” because it fail ed to qualify as a tax- exemptsale for resale under Sales and Use Tax Rules of the Tennessee Department of Revenue, Rul e 1320-5-1.96: 1320-5-1.96 Tangi ble P ersonal Proper ty Sold By

Dealers to Other Vendors, Where delivery is Made for U se and Consumption: Except in cases where specific and satisfacto ry arrangements are made with the Commissione r before s ales and deliver ies are made, sa les of tangible per

sonal property

. . . by a dealer to an out of state vend or who directsthat the dealer act as [the vendor’s] agent to deliver or ship [to the vendor’s] customer, who is a user or consumer, are subject to the Sales or Use Tax. The dealer so acting as agent for the out of st ate vendor must colle ct th e tax i nvo lved on the transacti on unless the tr ansaction comes withi n the conditions indicated herein. In thi s ca se, the d eale r (S ell er) sol d to a n out of stat e vendor ( Buyer), w ho dire cted th at Seller act as his agent to deliver the property to vendor’s customer, Aladdin, who is a user of the machines. Thus R ULE 96 requires Seller to collect retail tax on the transact ion unless spe cific and sati sfactory ar rangementswere made w ith the Commissioner

before sale and deli very were made. The p arties stipulated that no such arrangements were made. Therefore,according to the undisputed facts, the sale w as

a sale for

resale under T. C. A. § 67-6- 101 et seq , which nevertheless became subject to retail sal es tax und er R ULE 96 because Sell er made delivery for Buyer to its

cu stomer/user

without t he require d arrangements having been made with the Commissioner prior to the sale or tran sfer of possession.1 There i s no ev idencethat t he Commi ssion er att empted t o coll ect thesame

Tennessee tax from both the agent and t he principal . Moreover, R ULE 96 requires the Seller to collect

the t ax, ind icatingone v ery pra cti cal pur poseof R ULE 96: the Seller has contact wit h the out-of-State B uyer, and i s therefore in a better positi on to collect the tax than the Commissione r. 4 III Seller argues that R ULE 1320-5-1-.96 i s only appl icable tosales in whic h the principa l is undisc losed, citing R ULE 1320-5-1-.01. 1320-5-1-.01 Auctionee rs-Agents-Factors Every factor, auctioneer , or agent ac ting for any unknow n or

undisclosed principal entrusted w ith any bi ll of lading , customho use p ermit, or warehouse receipt

for d elive ry of t angib le pe rson al pro pert y, or entrusted with possessio n of any s uch personal pr operty for thepurpose of sale, shall be deem ed the owner thereof, and, up on the sale at retail of such prop erty, shall be req uired to file a return of the re ceipts ofsales and pay a tax thereon. Asale by s uch factor, aucti oneer or agent, w hen acting for a known or disclosed principal shall be taxable to the principal. The same rule applies to lien holders, such as stora g e men, pawnbrok ers and artisans. Seller cites no reference for his ass ertion that R ULE 96 i s li mite d by R ULE 1, or that a sale which is taxabl e to a known or disclosed pr incipal cannot therefore be taxed to an agen t, an d we f ind n o suc h aut hori ty. 1 IV Seller argue s tha t in th e even t we find R ULE 96 applicable, then R ULE 96 is void because it is inconsistent with T. C. A. § 67-6-102(2 3)(A) and T. C. A. § 67-6-313(a). T. C. A. § 67-6-102(23)(A) provides: “Retail sales” or

“sale at retail” means a taxable sal e of tangible per sonal property or specifical ly taxable serv ices to a cons umer or to any

person fora ny pur pose other than fo r resale. “Retail sales” or “sales at retail” means and includes al l such trans action s a s the commissi oner, upon investig ation, finds to be in lieu of sales. An y sale f or resale must, however, be in strict compliance w ith rulesand regulati ons promulgate d bythe commissioner . Any dealer makinga sale for resale which is not in strict compl iance wi th rules and regulations shall be personally liable for and pay the tax ; Seller arg ues that the cit ed statute indicates the legi slature did n ot intend to tax sales for resale. Therefo re, under Covington Pik e Toyota, Inc. v. Caldwell, 829 S.W .2d 132 (Tenn. 1992), “it is fun damen tal that the Com mission er canno t enlarge the scope of a taxing statute by regulation, and rules contrary to the express directives of a taxingstatute are v oid.”2 As argued by the Commissione r, “The ver y logi cal and legi timate purpose of Rule 96 makes emi nently g ood sense and is necessary for the enforcement of the sales tax law. It is carefully and specificall y direct ed at the not-infrequent efforts of sellers to avoid the tax

by using out-of-state thi rd parties a s intermediar ies in a ser ies of transactions.” Although no bad faith is alleged in this case, the imp ortance of this court’s atten tion to the reg ulations of the Co mmissioner desi gned to avoi d such “notinfrequent” s cenarios is clear. 5 Our reading of

T. C. A. § 67-6-102(23)(A) indicates, however, that the legislature clearlyintended to limit the tax-exempt status o f sales for re sale t o those sales which

were in str ict co mpli ance wi th the rules and regulations promulgated by

the Commissioner. Ther efo re, since Sel ler was not in complia nce with R ULE 96, having failed to make “specific and satisf actory arrangements” with the Commissioner bef ore sale and deliver

y, the Commissione r was s pecifically authorized by statute to tax the sale as if it were a retail sale. V The Seller ass erts that R ULE 96 is voi d because the leg islature int ended to exempt from tax

all Tennessee pr

oducts manufactured for e xport. T. C. A. § 67-6-313(a) provides: It is not the intention of th is chapter to levy a tax upon articles of tangible personal property imported into this state or produce d or manufactured in this state for ex port. There is no proof on therecord that the machines sold were produced for ex port, alt hough th is asserti on is made in Sel ler’s appel late brief. Therefore, we decl ine to address this issue. VI The stipulated facts

indicate that the transacti on at issue was one anticipat ed by the legislature and prov ided for in T. C. A. § 67-6-102( 23)(A) and Sal es and Use Tax R ULE 96. We find R ULE 96 to be in ha rmony w ith the statute, and that it suppo rts the Commissioner’s assessment of sale s tax in this cas e. 2 Therefore, the judg ment of the trial court is reversed and the case is remanded for entry of jud gment for the Commissioner

of Revenue as upon Sum mary Judgment. Co sts are assessed t o the Appellee.6 __________________________________ W illiam H. I nman, Senior Ju dge CONCUR:

_______________________________ Housto n M. Godd ard, Pre siding Jud ge

_______________________________ Charles D. Susano , Jr., Jud ge