# FILED

March 30, 1998 Cecil W. Crowson Appellate Court Clerk IN THE SUPREME COURT OF TENNESSEE

AT NASHVILLE

COLEMILL ENTERPRISES, INC., ) FOR PUBLICATION ) Filed: March 30, 1998 Plaintiff/Appella

nt, )

) DAVIDSON CHANCER Y v. ) # 94-3217-I ) ) Hon. Irvin H. Kilcrease, Jr., JOE HUDDLESTON, Commissioner ) Judge. of Tennessee Department of Revenue, ) ) NO. 01S01-9706-CH-00143 Defendant/Appellee. )

For the Plaintiff : For the Defendant : Richard L. Colbert John Knox Walkup Cornelius & Collins Attorney General and Reporter Nashville, Tennessee Michael E. Moore Solicitor General Charles L. Lewis Deputy Attorney General Gary N. Meade, Jr. Assistant Attorney General Nashville, Tennessee



# O P I N I O N

Reversed and Remanded. Drowota, J.2 We granted the applications of both Colemill Enterprises, Inc. and the Department of Revenue in this action in which Colemill Enterprises, Inc., pursuant to Tenn. Code Ann. § 67-1-1801, challenges an assessment against it of state and local sales taxes. The assessment was ba

sed on transactio

ns whereby Colemil

l Enterprises, In

c. substantially modified airplane

s for out-of-stat

e customers.

For multiple reasons hereinafter described, we conclude that neither of the identified transa

ctions on which the

assessment was ba

sed is subject to sa

les taxes on (i) sales of tangible personal property pursuant to Tenn. Code Ann. § 67-6-202 or (ii) the installing of tangible personal property under Tenn. Code Ann. §§ 67-6-102(23)(F)(vi) and 67-6-205. Based on this determination, we find it unnecessary to address the other issues presented in the respective applications. The judgment of the Court of Appeals and that of the trial court are reversed, and the plaintiff’s suit challenging the assessment of sales taxes is upheld. The plaintiff is entitled to summary judgment, and to reasonable attorney’s fees and expenses of litigation pursuant to Tenn. Code Ann. § 67-1-1803(d).

BACKGROUND

Colemill Enterprise

s, Inc., which co

nducts its business a

t Cornelia Fort Airp

ark in Nashville, has challenged an assessment of sales taxes that the Department of Revenue made for the audit period January 1991 through March 1994. The assessment, which was made on July 25, 1994, was for $17,122 in sales taxes, which amount included local option taxes. The assessment additionally included interest that had accrued through the date of the assessment.

Ernest W. Colbert, who is the President of Colemill Enterprises, Inc., submitted an affidavit acco

mpanying the plaint

iff’s motion for su

mmary judgment. The

statements3

contained in that affidavit are uncontroverted for the most part, except inasmuch as they include the characterization of Colemill Enterprises, Inc.’s activities as “manufacturing.” The Department of Revenue contends that the taxpayer’s activities in question did not constitute “manufacturing.” As explained later in this opinion, a determination whether the taxpayer was engaged in manufacturing is not necessary for our disposition of this case. The facts as set forth in Mr. Colbert’s affidavit included the following:

“2. The July 25, 1994, sales tax assessment in the amount of $20, 714, challenged in this action, is an assessment for taxes on work which Colem

ill is engaged whic

h is commonly referred to as the aircraft ‘conversion’ business. A portion of the assessment inc

ludes sales tax am

ounts for ‘conve

rsions’ produced or manufactured by Colemill for export out of the state of Tennesse

e. The assessmen

t also includes amo

unts for a ‘conversion’ sold to an out-of-state customer exempt from sales tax in it

s home state, as we

ll as amounts allege

dly owed on a ‘conversion’ sale to an out-of-state customer acquiring it under a blanket certificate of resale. Finally, the assessment includes local option sales tax under Tenn. Code Ann. § § 67-6-701 et. seq. on articles of tangible personal property produc

ed or manufactur

ed by Colemill in this st

ate for export and on

separate compon

ents of ‘convers

ions’ manufactured a

nd sold by Colemill. It

is in these respec

ts that the assessmen

t has been challe

nged by Colemill in thi

s action. 3. Aircraft are manufactured under ‘type certificates’ issued by the Federal Avi

ation Administratio

n under 14 C.F.R. Section 2141. The Fe

deral Aviation Ad

ministration also issues ‘supplemen

tal type certific

ates’ under 14 C.F.R. Sections 21.111 et

. seq ., under which the holder of the ‘supplemental type certificates’ is authorized to alter the aircraft covered by the certificates by introducing a major change in the type of design. A ‘supplemental type certificate’ consists of the approval by the Federal Aviation Administration of a change in the type design of the aircraft together with the type certificate previously issued for aircraft. 14 C.F.R. Section 21.117. The holder of a ‘supplemental typ

e certificate’ for aircraft is authorized to obtain new airworthiness certificates for the aircraft produced or manufactured under the certificate. 4. For its aircraft ‘conversions,’ Colemill introduces major changes in the aircraft that include changes in engine, propellers, wings and other fundamental parts of the aircraft. These major changes alter the essential characteristics of the aircraft, so that the aircraft after ‘conversion’ leaves4 Colemill’s facility with a new type designation, new performance characteristics, a new Pilot’s Operating Hankbook and a new Federal Aviation Administration Approved Flight Manual Supplement. These major changes are performed strictly in accordance with supplemental type certificates issues to Colemill by the Federal Aviation Administration for

the particular a

ircraft ‘conve

rsions’ ‘Colemill is thereby authorized to manufacture . . . 5. The work performed by Colemill under the supplemental type certificates issued to it by the Federal Aviation Administration is not repair work. The work does not involve correcting any p

roblem, defect o

r malfunction. The

work is not necessary to preserve or restore the aircraft to its original condition. In fact, the condition of the aircraft after the work is performed is substantially different from the aircraft’s original condition

, such that the air

craft leaves th

e facility with a new type designation and new performance characteristics. The work is not performed to correct disrepair by wear, use, wastage, injury, decay, destruction, or dilapidation. The p

urpose of the wor

k is to change entir

ely and dramatically

improve the perf

ormance and saf

ety characteristics of aircraft, not to repair any part of the aircraft. In ma

ny instances, the w

ork performed by

Colemill under its supplemental type certificate is more expensive than the air frame upon which the work is performed.

. . . 7. Colemill does not make separate charges to its customers for installation se

rvices when a ‘c

onversion’ is manufactured. Instead, Colemill charges a single price for the ‘conversion,’ which includes all of the ingredients that go into the manufacture of the finished product. The ‘conversion’ Colemill is authorized by law to perform under the supplemental type certificates issued by the Federal Aviation Administration is a finished product. Colemill’s supplemental type certificates authorize it to perform all of the work that comprises that finished product, and do not authorize it to mix a

nd match separat

e components in whatever fashion it sees fit. 8. Attached as Exhibit 3 hereto is a copy of a ‘blanket certificate of resale’ evidencing the purchase of a conversion for resale by Be

ssemer Plywood Corp

oration, an out-of

-state purchaser, for which sales tax has been included in the assessment issued by the Tennessee Department of Revenue that is at issue in this

case. Also attac

hed as Exhibit 4 is a purchase order

for a conversion

purchase issued

to Colemill by Filtrex, Inc., a New Jersey corporation exempt from sales tax in the state of New Jersey. Sales tax for this conversion purchased by a ta

x-exempt organiz

ation is also include

d in the assessment that is at issue in this case.”5 The “blanket certificate of resale” that was attached to Mr. Colbert’s affidavit was issued by Bessemer Plywood Corporation. It indicates, “the merchandise purchased (from Colemill Enterprises, Inc.) . . . . is purchased for . . . a component part of an article to be produced for sale by manufacturing, assembling, processing, or refining.”

The purchase or

der from Filtrex, I

nc. that was attac

hed to Mr. Colbert’ s affidavit indicates that Filtrex, Inc. is a tax exempt organization. This purchase order also states that the delivery to Filtr

ex, Inc. by Colemil

l Enterprises, In

c. was “F.O.B. De

stination” in Wayne, New Jersey.

From the Department of Revenue’s answer to the taxpayer’s application for permission to appeal, it appears that the only transactions at issue in the challenged assessment were the conversion work performed by the taxpayer for Bessemer Plywood Corporation, which involved a purchase for resale, and the conversion work performed for Filtrex, Inc., whi

ch was a sale to a

tax exempt organi

zation and with re

spect to which title to tangible personal property was transferred by the taxpayer outside the State of
Tennessee.

Both parties moved for summary judgment. The trial court granted the summary judgment motion of the Department of Revenue and denied that of the taxpayer. In addition to ruling in favor of the Department of Revenue on all substantive issues presented, the tr

ial court ruled tha

t the Department i

s entitled to an awa

rd of reasonable attorney’s fees and litigation expenses under Tenn. Code Ann. § 67-1-1803(d).

Colemill Enterprises, Inc. appealed the trial court’s decision to the Court of Appeals. The Court of Appeals agreed with the trial court on all of the substantive issues presented, including the determination that the transactions at issue were subject to sales6

taxes on “installation services” under Tenn. Code Ann. § 67-6-102(23)(F)(vi). The Court of Appeals, however, ruled that, “this is a not a proper case for the award of (attorne y’s fees and litigation expenses).”

As indicated, both parties filed applications for permission to appeal, and this Court granted both appl

ications.

ANALYSIS

The list of the types of transactions that are taxable under the Retailers’ Sales Tax Act, Tenn. Code Ann. § § 67-6-101, et

. seq ., is contained in Tenn. Code Ann. § 67-6-201. That statute includes the following:

It is declared to b

e the legislative i

ntent that every p

erson is exercising a taxable privilege who: (1) Engages in the

business of selling

tangible personal property at retail in this state;

. . . (4) Rents or furnishes any of the things or services taxable under this chapter.

The section of the Retailers’ Sales Tax Act that imposes sales taxes on sales of tangible personal property is §67-6-202. That statute includes the following:

(a) For the exercise of the privilege of engaging in the business of selling

tangible persona

l property at reta

il in this state , a tax is levied at the rate of six percent (6%) of the sales price of each item or article of tangible personal property when sol

d at retail in this state ; . . . (emphasis added).

Services are taxable under Tenn. Code Ann. § 67-6-205, which includes the7

following:

(a) There is levied a tax at the rate of six percent (6%) of the

gross charge for all services taxable under this chapter.

The list of the kinds of services that are taxable under the Retailers’ Sales Tax Act is contained in Tenn. Code Ann. § 67-6-102(23)(F). That statute includes the following:

(F) “Retail sale,” “sale at retail” and “retail sales price” include the follow

ing services:

. . . (vi) The installing of tangible personal property which remains tangible personal property after installation where a charge is made for such installationwhether or not such installation is made

as an incident to th

e sale thereof and whe

ther or not any tan

gible personal property is transferred in conjunction with such installati

on service. (emp

hasis added).

The definitional p

rovision containe

d in Tenn. Code Ann.

§ 67-6-102(23)(

A) sets forth an excepti

on to the imposition of

sales taxes on ser

vices, as well as a

n exception to the imposition of sales taxes on sales of tangible personal property. That definitional provision includes the following:

(23)(A) “Retai

l sales” or “sale

at retail” means

a taxable sale of tangible personal property or specifically taxable services to a consumer or to any person for any purpose other than for resale . (emphasis added).

Tenn. Code Ann. § 67-6-313(a) provides an exception to the imposition of sales taxes for certain transactions involved in interstate commerce. That provision is as follows:8 (a) It is not the intention of this chapter to levy a tax upon articles of tangi

ble personal prop

erty imported into t

his state or produced or

manufactured in

this state for expo

rt. (emphasis added).

Tenn. Code Ann. § 67-6-322 provides an exemption from the imposition of sales taxes for transactions in which the customer is a type of organization that is exempt from federal income taxation under §501(c) of the Internal Revenue code. That statute states that, “There is exempt from the provisions of this chapter any sales or use tax upon tangible personal property or taxable services sold, given, or donated to any (tax-exempt organization of the type exempt from federal income taxation under §501(c ) of the Internal Revenue Code.)”

Virtually all of the foregoing statutes were dealt with by this Court in an opinion authored by Chief Justice Anderson in Eusco, Inc. v. Huddleston , 835 S.W.2d 576 (Tenn. 1992). The facts of that case were quite similar to those involved in this case. The taxpayer in Eusco sold tangible pers onal property an

d provided servic

es to out-of-state customers and charged a lump sum price therefor. We held that the compensation received by Eusco, Inc. from the out-of-state customers was not subject to taxation under the Retailers’ Sales Tax Act. We described the facts in Eusco as follows:

The taxpayer, E

usco, Inc., is a Te

nnessee corpor

ation with its principal place of business in White House, Tennessee. At its White House facility, truck bodies and related components are c

onstructed for e

lectric and tele

phone utility trucks. In the course of building the truck bodies, Eusco uses components it fabricates as well as components made by other manufactu

rers. Generally, the trucks are built and sold by using one of two different methods. In some cases, a bare truck cab and chassis is purchased directly from the manufacturer, such as General Motors or Ford, on which Eusco then builds and attaches the truck body and related components. Once the process is complete, the entire utility truck is sold to a telephone or electric company.9 In other cases, a bid is made upon a specified contract with a utility company. When Eusco is the successful bidder, the utility company purchases a bare truck cab and chassis from a manufacturer and causes it to be delivered by common carrier to the White House facility. Under the contract, a truck body and related components are then fabricated and attached according to the purchaser’s specifications, and the completed truck is delivered to the utility company’s place of business. This kind of transaction is referred to as a “drop shipment” sale. On October 3, 1989, after being audited by the Tennessee Department of Revenue for the period of December 1985 through June 1989, Eusco was assessed a deficiency in sales taxes and interest of $202,182. The assessment at issue here is sales taxes and interest of $78,337 upon nine “drop shipment” sales to o

ut-of-state cust

omers. The Commissioner taxed the “drop shipment” sales on the basis of Tenn. Code Ann. § § 67-6-201(1)(1983 & 1989) and 67-6-202(1983 & 19 89), which levy a t ax upon “the busine

ss of selling tangible personal property at retail in this state.” In addition, the Commissioner taxed the “drop shipment” sales on the basis of Tenn.Code Ann.§§67-6-102(13)(F)(vi)(1983) and 67-6-102(22)(F)(vi)(1989) [now §67-6-102(23)(F)(vi)], which provide that taxable retail sales shall include “[t]he installing of tangib

le personal prope

rty . . . where a c

harge is made for such installation.”

835 S.W.2d at 577-78.

We concluded in Euscothat the transactions involved were not taxable as sales of tangible personal property, because the sales did not occur within the State of Tennessee. In this regard, w

e provided the fo

llowing analysis:

The first issue we

address is whethe

r the plaintiff’s

sales to out-of-state cu

stomers were tax

able as retail sa

les “in this state” under Tenn. Code Ann. § 67-6-201(1)(1983 & 1989) and § 67-6-202(1983 & 1989). “The e lements necessa

ry to constitute a sale are (1) transfer of title or possession, or both of (2) tangible personal property, for a (3) consideration.” Hearthstone, Inc. v. Moyers , 809 S.W.2d 888, 890 (Tenn. 1991)(quoting Volunteer Val-Pak v. Celauro , 767 S.W.2d 635, 636 (Tenn. 1989)). See also Tenn. Code Ann.§§67-6-102(23)(A)(1989) and 67-6- 102(14)(A)(1983). Since it is clear that there was a transfer10 of tangible perso

nal property for

a consideration,

we must determine whether the nine “drop shipment” sales involved a transfer of title

or possession to the

utility companies in Tennessee so as t

o make them taxabl

e retail sales “i

n this state.”
For Tennessee sa

les tax purposes, t

he place where

title to tangible persona

l property is trans

ferred to the buy

er is determined under the applicable provisions of the Uniform Commercial Code. . . . All of the “drop shipment” sales at issue in this case were F.O.B. to the utility companies’ places of business, and there were no other ag

greements betwe

en Eusco and the u

tility companies as to when or where title to the truck bodies passed. Title to the truck bodies therefore passed to the utility companies when Eusco completed its performance by delivering the tru

cks out-of-state

to their places of

business.

. . . We conclude that title and possession of the truck bodies was transferred outside the State of Tennessee when Eusco employees delive

red the trucks to t

he utility companie

s’ places of business in accordance with the F.O.B. delivery terms of the contracts. Since Eusco’s sales and deliveries of the truck bodies to out-of-state utility companies did not involve transfers of title or possession of tangible personal property in Tenne

ssee, we hold that

the “drop shipment

” sales were not taxable sales at retail “in this state.”

835 S.W.2d at 579-80.

We also concluded in Euscothat the transactions with out-of-state customers were not taxable as “in

stallation servic

es” under Tenn.

Code Ann. § 67-6-1 02(23)(F)(vi). I n this regard, we obse

rved as follows:

While it is true that a substantial part of Eusco’s costs were for purchasing and installing the hydraulic booms, Eusco made no separate

charge for insta

llation services a

s is required for the application of Tenn. Code Ann. § 67-6- 102(22)(F)(vi)

[now 67-6-102(23)(F)(vi)]. In each of the sales, the contra

ct provided for on

e price which co

vered all personal property and labor involved in building and attaching the tru

ck body, including a

ll component parts

. (emphasis added).11

835 S.W.2d at 581.

This Court further stated in Eusco as follows:

The Retailers’ Sales Tax Act defines “retail sales” or “sale at retail” as “a taxable sale of tangible personal property or specifically taxable services to a consumer or to any person for any purpose other than for re sale .” Tenn. Code Ann. § 67-6-102(13)(A)(1983); Tenn. Code Ann. § 67-6- 102(22)(A)(198

9) [ now § 67-6-10

2(23)(A)] (emp

hasis added). Items sold for resale, therefore, are exempt from the definition of ordinary retail sales . . .”

835 S.W.2d at 582.

We also determined in Eusco that the exemption from taxation for

interstate commerce contained in Tenn. Code Ann. § 67-6-313(a) applied. This determination was predicated on our finding that the taxpayer in that case was a “manufacturer.” Howe ver, a taxpayer’s being a “manufacturer” is not a prerequisite for the application of Tenn. Code Ann. § 67-6-313(a). This statute applies, when the export requirement is met, to items of tangible personal property that are (i) imported into this state, (ii) produced in this state, or (iii) manufactured in this state. There is no requirement that the taxpayer involved be a “manufacturer.”

In Eusco , this Court rejected the Department of Revenue’s contention that LeTourneau Sales & Services, Inc. v. Olsen , 691 S.W.2d 531 (Tenn. 1985), applied. The latter case involved Tenn. Code Ann. § 67-6-102(23)(F)(iv), which includes within the definition of “retail sale,” “sale at retail,” and “retail sales price” “(iv) the pe rforming for a consideration of any repair services with respect to any kind of tangible personal property.” The Department of Revenue makes a similar argument in this case. Based on the uncontradicted affidavit of Ernest W. Colbert (that Colemill Enterprises, Inc.’s services do12

“not involve correcting any problem, defect, or malfunction”), Tenn. Code Ann. § 67-6- 102(23)(F)(iv) has no more applicability in this case than it did in Eusco

.

Based on the provis

ions of the Retaile

rs’ Sales Tax Act

quoted above and

on this Court’s analysis in Eusco , we conclude that the sale of tangible personal property by Colemill Enterprise

s, Inc. to Besseme

r Plywood Corporat

ion was not taxable

because it was a sale for re

sale. If such sal

e was F.O.B. to an ou

t-of-state desti

nation (as was the

sale to Filtrex, Inc.), then the sale to Bessemer Plywood Corporation was not subject to taxation as a sale of tangible personal property for the additional reasons (i) that it occurred outside the State of Tenne

ssee and (ii) tha

t the interstate c

ommerce exemptio

n applies. Colemill Enterprises, Inc.’s transaction with Bessemer Plywood Corporation was not taxable as “installation ser

vices” because

(i) no separate

charge was made

for installation se

rvices, and (ii) it was a sale for resale. If the transaction was F.O.B. to an out-of-state designation, then the transac

tion was not taxable

“installation ser

vices” for the a

dditional reasons

(i) that it occurred outside the state of Tennessee and (ii) that the interstate commerce exemption applies

.

Based on the same a

nalysis, the taxpa

yer’s sale of ta

ngible personal pr

operty to Filtrex, Inc. was not a taxable sale of tangible personal property because (i) it occurred outside the state of Tennessee, and (ii) the interstate commerce exemption applies. Such sale to Filtrex, Inc. may be exempt from taxation for the additional reason that Filtrex, Inc. qualifies as a tax

exempt entity unde

r Tenn. Code Ann. §

67-6-322. The tra

nsaction with Filtrex, Inc. was not taxable “ installation services” because (i) no separate charge wa s made for the installation services and (ii) the interstate commerce exemption applies. The exemption for tax exempt organizations may also apply with respect to the installation services issue.13 CONCLUSION

We conclude that neither the transaction with Bessemer Plywood Corporation nor the transaction with Filtrex, Inc. involved a taxable sale of tangible personal property or taxable installat

ion services. Ha

ving reached this

conclusion, we fi

nd it unnecessary

to address the other

issues presented

in the respective

applications. This

case is remande

d to the trial court for entry of summary judgment in favor of Colemill Enterprises, Inc. and the awarding of reasonable attorney’s fees and expenses of litigation, which are mandatory under Tenn. Code Ann. § 67-1-1803(d). See Carson Creek Vacation Resorts v. Department of Revenue

865 S.W.2d 1, 2 (Tenn. 1993).

____________________________________ Frank F. Drowota, III, Justice Concur: Anderson, C. J. Birch and Holder,

J. Reid, J. - Not participating.