Wylie Steel Fabricators, Inc. v. Johnson

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

MARCH 1, 2005 Session

WYLIE STEEL FABRICATORS, INC. v. RUTH E. JOHNSON,

COMMISSIONER OF REVENUE FOR THE STATE OF TENNESSEE

Direct Appeal from the Chancery Court for Davidson County

No. 02-275-I Irvin H. Kilcrease, Judge

No. M2003-02482-COA-R3-CV - Filed April 28, 2005

This appeal involves a sales and use tax assessment issued by the Tennessee Department of Revenue

against a taxpayer engaged in the business of fabricating steel products for use in various structures.

The taxpayer obtained purchase orders from three churches for raw materials to be used in the

fabrication of steel products which were to be incorporated into the churches then under

construction. The taxpayer secured the raw materials, fabricated the steel products, and installed

them in the churches. The taxpayer did not pay sales or use tax on any of the raw materials used in

the fabrication process. The department subsequently audited the taxpayer and assessed a tax

liability for taxes owed on the materials. The taxpayer paid the amount assessed and filed suit in the

chancery court to contest the assessment. Specifically, the taxpayer asserted that it was entitled to

an exemption under section 67-6-209(b) of the Tennessee Code. After both parties filed cross-

motions for summary judgment, the chancery court granted the department’s motion and denied the

taxpayer’s motion. We affirm in part, reverse in part, and remand this case to the trial court for

further proceedings consistent with this opinion.

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

Reversed in Part and Remanded

ALAN E. HIGHERS, J., delivered the opinion of the court, in which W. FRANK CRAWFORD , P.J., W.S.,

and HERSCHEL P. FRANKS, P. J., joined.

Gerald B. Kirksey, Timothy H. Nichols, Brentwood, TN, for Appellant

Paul G. Summers, Attorney General and Reporter, Wyla M. Posey, Assistant Attorney General,

Nashville, TN, for Appellee

OPINION

I.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Wylie Steel Fabricators, Inc. (“Wylie Steel” or “Appellant”) is a Tennessee Corporation

engaged in the business of fabricating steel products for use in various structures. Wylie Steel’s

principal business office is located in Brentwood, Tennessee, and its primary fabrication facility is

located in Springfield, Tennessee. In order to fabricate steel products, Wylie Steel purchases raw

materials from suppliers in Tennessee and other states. Ordinarily, Wylie Steel contracts with the

general contractor at a particular construction project to fabricate and install the steel products to be

used in the construction process. Wylie Steel does not utilize its own employees to install the steel

products it fabricates but, instead, subcontracts with another company to carry out the installation

process. Occasionally, Wylie Steel will sell some of the products it fabricates to other persons or

businesses without installing the items. When Wylie Steel purchases raw materials from its

suppliers, it does not pay sales tax at the time of purchase. Instead, Wylie Steel provides its suppliers

with a resale certificate.

At issue in this case are three church construction projects undertaken in Tennessee for which

Wylie Steel fabricated and installed the necessary steel products.1 For each church project, the

church issued a purchase order to Wylie Steel for the raw materials to be utilized in fabricating the

steel products necessary for each construction project. The purchase orders did not contain a specific

quantity of materials, but they merely expressed an approximate cost of securing such materials.

After securing the raw materials, Wylie Steel contracted with the general contractor for each church

project to fabricate, deliver, and install the fabricated steel products. The amount to be paid to Wylie

Steel under each subcontract represented Wylie Steel’s cost for securing the raw materials and

fabricating them, as well as its overhead and profit.

On its Tennessee sales and use tax return, Wylie Steel claimed, as exempt sales, the cost of

the raw materials it used to fabricate the steel products installed in the churches. In 2000, the

Tennessee Department of Revenue (“Department”) audited Wylie Steel for the period between

December 1, 1996, through December 31, 1999. During the audit, the Department used a “test

period” audit method and examined sample periods which included the three church projects. Wylie

Steel signed an audit procedure agreement expressing its agreement with the audit procedure used,

but it wrote the following at the bottom of the document: “WSF reserves the right to demonstrate

actual volume of certain transaction types occurring during the audit periods selected above.”

The Department identified the three church projects as having taxable sales and/or uses for

which Wylie Steel did not pay taxes. The Department asserted that Wylie Steel could not claim the

1

The three fabrication and installation projects were performed on Faith is the Victory Church located in

Nashville, Tennessee, First Baptist Church located in Franklin, Tennessee, and Cornerstone Church located in Madison,

Tennessee.

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cost of the raw materials for each church as exempt. As a result, the Department issued a sales and

use tax assessment against Wylie Steel in the amount of $201,720.00 for taxes owed and $47,194.62

in interest. Of the $201,720.00 in taxes assessed, $52,158.00 represented unpaid sales tax on

materials purchased by Wylie Steel from out-of-state suppliers or from Tennessee suppliers by

presenting a resale certificate which Wylie Steel later fabricated and installed on non-church

projects. Wylie Steel did not challenge this portion of the assessment. The remainder, $149.562.00,

represented tax allegedly owed by Wylie Steel on the purchase and use of materials it installed for

tax exempt entities. Wylie Steel contested this portion of the assessment.

In March of 2001, Wylie Steel met informally with the Department to discuss the tax

assessment. The Department’s Administrative Hearing Officer subsequently informed Wylie Steel

that the Department correctly assessed the tax liability. On July 27, 2001, Wylie Steel sent a check

to the Department in the amount of $274,980.00 for payment in full of the tax assessment. The

Department received the payment on July 30, 2001, and applied the payment to Wylie Steel’s

account. As of that date, $54,304.73 in interest had accrued on the challenged portion of the

assessment, and $18,468.57 in interest had accrued on the unchallenged portion of the assessment.

Thus, as of July 30, 2001, the total amount due was $274,493.30. Having overpaid by $486.70, the

Department credited Wylie Steel’s account in this amount.

On January 25, 2002, Wylie Steel filed a complaint in the Chancery Court of Davidson

County against the Commissioner of Revenue (“Commissioner”), pursuant to section 67-1-1801 et

seq. of the Tennessee Code,2 to challenge the Department’s tax assessment. Specifically, Wylie Steel

alleged that it was entitled to the tax exemption found in section 67-6-209(b) of the Tennessee Code.

In the alternative, Wylie Steel sought a refund of the tax it paid arguing that, as a result of the audit

method utilized by the Department, it was required to make an overpayment in taxes.

The parties subsequently filed cross-motions for summary judgment. The trial court

conducted a hearing on the motions on September 4, 2003, and entered a Final Judgment on

2

Section 67-1-1801 of the Tennessee Code provides, in relevant part, as follows:

Enumeration of remedies. —

(a)(1) In all cases in which any officer, charged by law with the authority to assess

taxes which are collected or administered by the commissioner of revenue, shall

assess a tax alleged or claimed to be due, if the taxpayer against whom the

assessment is made believes the assessment to be unjust, illegal or incorrect, the

taxpayer’s remedies shall be as follows:

(A) The taxpayer may pay the tax and file a claim for refund thereof and proceed

as provided in this part; or

(B) The taxpayer may file suit against the commissioner in the chancery court in the

appropriate county in this state, challenging all or any portion of the assessment of

such tax including any interest and penalty associated therewith. . . .

Tenn. Code Ann. § 67-1-1801(a)(1) (2003); see also Tenn. Code Ann. § 67-1-1802 (2003) (governing refunds of taxes

paid).

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September 30, 2003, granting the Department’s motion and denying Wylie Steel’s motion. In

entering its judgment in this case, the trial court made the following findings:

Wylie Steel contends that it is entitled to a refund of taxes

paid in the amount of $203,866.73 and that the refund claimed

includes $159,744.55 regarding the taxes assessed on the materials

used to construct the churches involved, and $44,172.18 in an

asserted over-assessment on those materials by the Commissioner of

Revenue. Wylie Steel contends that it is exempt from the sales and

use taxes assessed in this case under Tenn. Code Ann. § 67-6-209(b).

The Commissioner contends that Wylie Steel is not entitled to the

contractor’s use tax exemption stated in Tenn. Code Ann. § 67-6-

209(b) since Wylie Steel either purchased or used all of the materials

at issue in Tennessee, that none of the churches involved purchased

any of the materials at issue, and that Wylie Steel could not, by law,

resell and transfer title to any of those materials to those churches as

tangible personal property since Wylie Steel contracted to install

those materials as a part of realty. The Commissioner also contends

that the Tennessee Code contains an explicit codification of this legal

concept in Tenn. Code Ann. § 67-6-209(c) which clearly states that

any transfer by Wylie Steel of materials that [sic] installs as part of

realty cannot be considered a sale of tangible personal property for

sales and use tax purposes. All of the materials involved in this case

fit in this category.

Upon consideration of the entire record including the

complaint, answer, motions for summary judgment by both parties

and memoranda in support thereof, responses and replies of both

parties, affidavits, material fact statements, and the parties’ joint

stipulations of fact, the Court concludes that the Commissioner of

Revenue properly assessed sales and use tax upon Wylie Steel’s

purchase or use of all the disputed items in this case and that Wylie

Steel does not qualify for any exemption from the tax assessed. The

Court finds that the churches involved did not have title to the

tangible personal property involved prior to its installation as realty.

Wylie Steel purchased all of that property, the materials at issue, and

then later transferred those materials to the churches in the form of

realty by installing them as part of a building. Thus, the materials

were not transferred to the churches as tangible personal property.

Such a transfer cannot, by law, be considered a sale or resale of

tangible personal property since those materials are not transferred as

tangible personal property, but rather as realty. Such a transfer also

cannot, by law, be considered a sale or resale of those materials since

Tenn. Code Ann. § 67-6-209(c) explicitly codifies this principle of

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law and states that any such transfer does not constitute a sale under

Tennessee sales and use tax law. Therefore, Wylie Steel is not

entitled to the exemption it seeks under Tenn. Code Ann. § 67-6-

209(b) since by law it could not sell, and thus transfer title, to the

materials to the churches at issue in the form of tangible personal

property.

....

The Plaintiff is also not entitled to any refund of the amount

that it claims to be an over-assessment by the Commissioner. The

Plaintiff claims that this over-assessment amount exists even if the

Commissioner’s legal arguments regarding Tenn. Code Ann. § 67-6-

209(b) are held to be correct. The Plaintiff is not entitled to a refund

for the claimed over-assessment because Wylie Steel entered into an

audit procedure agreement with the State of Tennessee and it was

under an obligation to bring all of its information with respect to that

audit period forward at that time during the audit. In that agreement,

Wylie Steel agreed to the audit sampling procedure used by the

Commissioner and agreed that the sample periods selected were

representative of all transactions occurring throughout the entire audit

period. Thus, as a matter of law, Wylie Steel could not wait until

litigation and claim that it was over-assessed by asserting that a

different audit method should be used to calculate the amount of tax

due. The Court finds that the audit procedure agreement is a valid

and binding agreement and that Wylie Steel is precluded from

asserting that a different audit method from the one to which it agreed

in the audit procedure agreement should be used to calculate the

amount of the tax due in this case.

Wylie Steel subsequently filed an appeal to this Court. While neither party frames the issues

to be resolved in this case in terms of a review of the trial court’s grant of summary judgment, we

are mindful that our primary task on appeal is to ascertain whether the trial court properly granted

summary judgment to the Appellee in this case. To answer that question, we will need to consider

the following issues, as we perceive them, raised by the Appellant on appeal:

I. Whether the Appellant is entitled to the tax exemption found in section 67-6-209(b) of the

Tennessee Code;

II. Whether section 67-6-209(c) of the Tennessee Code negates the tax exemption in section 67-

6-209(b) of the Tennessee Code; and

III. Whether the Appellant is entitled to illustrate the actual volume of certain types of

transactions to demonstrate that the Appellee’s “test period” audit method resulted in an

over-assessment in tax liability to the Appellant.

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For the reasons set forth more fully herein, we affirm in part, reverse in part, and remand this case

to the trial court with instructions to conduct further proceedings consistent with this opinion.

II.

STANDARD OF REVIEW

In assessing the correctness of the trial court’s grant of summary judgment in this case, we

employ the following standard of review:

“Our review of a trial court's award of summary judgment is

de novo with no presumption of correctness, the trial court's decisions

being purely a question of law.” Scott v. Ashland Healthcare Ctr.,

Inc., 49 S.W.3d 281, 285 (Tenn. 2001) (citing Mooney v. Sneed, 30

S.W.3d 304, 306 (Tenn. 2000)). Summary judgment is appropriate

where there is no genuine issue of material fact relevant to the claim

or defense and where the movant is entitled to judgment as a matter

of law on the undisputed facts. See Tenn. R. Civ. P. 56.03; Bain v.

Wells, 936 S.W.2d 618, 622 (Tenn. 1997); Carvell v. Bottoms, 900

S.W.2d 23, 26 (Tenn. 1995).

BellSouth Adver. & Publ’g Co. v. Johnson, 100 S.W.3d 202, 205 (Tenn. 2003).

In interpreting and applying the pertinent statutory language to the facts in this case, we are

guided by the following principles:

Issues of statutory construction are questions of law that this

Court reviews de novo without any presumption of correctness.

Bryant v. Genco Stamping & Mfg. Co., 33 S.W.3d 761, 765 (Tenn.

2000); Freeman v. Marco Transp. Co., 27 S.W.3d 909, 911 (Tenn.

2000).

Our duty in construing statutes is to ascertain and give effect

to the intention and purpose of the legislature. See Lipscomb v. Doe,

32 S.W.3d 840, 844 (Tenn. 2000); Freeman, 27 S.W.2d at 911.

"'Legislative intent is to be ascertained whenever possible from the

natural and ordinary meaning of the language used, without forced or

subtle construction that would limit or extend the meaning of the

language.'" Lipscomb, 32 S.W.3d at 844 (quoting Hawks v. City of

Westmoreland, 960 S.W.2d 10, 16 (Tenn. 1997)).

When the statutory language is clear and unambiguous, we

must apply its plain meaning in its normal and accepted use, without

a forced interpretation that would limit or expand the statute's

application. See id.; Carson Creek Vacation Resorts, Inc. v. State

Dep't of Revenue, 865 S.W.2d 1, 2 (Tenn. 1993). Where an ambiguity

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exists, we must look to the entire statutory scheme and elsewhere to

ascertain the legislative intent and purpose. State v. Walls, 62 S.W.3d

119, 121 (Tenn. 2001); Freeman, 27 S.W.3d at 911. The statute must

be construed in its entirety, and it should be assumed that the

legislature used each word purposely and that those words convey

some intent and have a meaning and a purpose. Tennessee Growers,

Inc. v. King, 682 S.W.2d 203, 205 (Tenn. 1984). The background,

purpose, and general circumstances under which words are used in a

statute must be considered, and it is improper to take a word or a few

words from its context and, with them isolated, attempt to determine

their meaning. First Nat'l Bank of Memphis v. McCanless, 186 Tenn.

1, 207 S.W.2d 1007, 1009-10 (Tenn. 1948).

In addition to general principles of statutory construction, we

must also consider the rules of construction specifically applicable to

tax statutes. Statutes imposing a tax are to be construed strictly

against the taxing authority. See Covington Pike Toyota, Inc. v.

Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992). However, statutes

granting exemptions from taxation are construed strictly against the

taxpayer. Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196, 198

(Tenn. 1994); Covington Pike Toyota, 829 S.W.2d at 135.

Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 506–07 (Tenn. 2004).

III.

LAW AND ANALYSIS

A.

Sales and Use Tax Assessed

The Tennessee Retailers’ Sales Tax Act (“the Act”), codified at section 67-6-101 et seq. of

the Tennessee Code, governs the imposition of sales and use taxes in this state. The Act provides,

in relevant part, as follows:

Taxable privilege declared. — It is declared to be the legislative

intent that every person is exercising a taxable privilege who:

(1) Engages in the business of selling tangible personal property at

retail in this state;

(2) Uses or consumes in this state any item or article of tangible

personal property as defined in this chapter, irrespective of the

ownership thereof or any tax immunity which may be enjoyed by the

owner thereof. . . .

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Tenn. Code Ann. § 67-6-201 (2003). “‘Tangible personal property’ means and includes personal

property, which may be seen, weighed, measured, felt, or touched, or is in any other manner

perceptible to the senses. . . .” Tenn. Code Ann. § 67-6-102(a)(31) (2003). “The commissioner3

shall administer and enforce the assessment and collection of the taxes and penalties imposed by this

chapter.” Tenn. Code Ann. § 67-6-401 (2003). “The commissioner has the power to make and

publish reasonable rules and regulations not inconsistent with this chapter or the other laws, or the

constitution of this state or the United States, for the enforcement of the provisions of this chapter

and the collection of revenues hereunder.” Tenn. Code Ann. § 67-6-402(a) (2003).

The Act imposes a sales tax on the sale of tangible personal property in this state, providing:

For the exercise of the privilege of engaging in the business of selling

tangible personal property at retail in this state, a tax is levied on the

sales price of each item or article of tangible personal property when

sold at retail in this state; the tax is to be computed on gross sales for

the purpose of remitting the amount of tax due the state and is to

include each and every retail sale.

Tenn. Code Ann. § 67-6-202(a) (2003); see also Colemill Enters., Inc. v. Huddleston, 967 S.W.2d

753, 756 (Tenn. 1998). The Act defines a “retail sale,” in relevant part, as follows:

“Retail 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. . . . Any sales for

resale must, however, be in strict compliance with rules and

regulations promulgated by the commissioner. . . .

Tenn. Code Ann. § 67-6-102(a)(25)(A) (2003) (emphasis added). The Act defines a “sale” as

follows:

“Sale” means any transfer of title or possession, or both, exchange,

barter, lease or rental, conditional, or otherwise, in any manner or by

any means whatsoever of tangible personal property for a

consideration, and includes the fabrication of tangible personal

property for consumers who furnish, either directly or indirectly, the

materials used in fabrication work, and the furnishing, repairing or

serving for a consideration of any tangible personal property

consumed on the premises of the person furnishing, preparing or

serving such tangible personal property[.]

3

“‘Commissioner’ means and includes the commissioner of revenue or the commissioner’s duly authorized

assistants[.]” Tenn. Code Ann. § 67-6-102(a)(3) (2003).

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Tenn. Code Ann. § 67-6-102(a)(27)(A) (2003).

Thus, the Act excludes from the definition of retail sale a sale made to a taxpayer for resale.

Sec. Fire Prot. Co., Inc. v. Huddleston, 138 S.W.3d 829, 837 (Tenn. Ct. App. 2003). However, sales

for resale must strictly comply with the rules and regulations established by the Commissioner.

Tenn. Code Ann. § 67-6-102(a)(25)(A) (2003). Under the rules promulgated by the Department, it

is permissible for a contractor-dealer to avoid paying tax at the time of purchasing materials by

providing the supplier a resale certificate. The rule, commonly referred to as “Rule 8,” provides:

(1) Contractors and sub-contractors engaged in the business of

erecting, building or otherwise improving, altering and

repairing real property of others, and also engaged in the

business of selling building materials and supplies to other

contractors, consumers, and users, and who may not be able

to segregate that portion of the materials and supplies that

they will use or consume in the fulfillment of their contracts

from that portion of the materials and supplies that they will

sell at retail, may give a resale certificate to the seller of the

materials and supplies.

(2) Contractor-dealers making sales of tangible personal property

shall report all sales made, and all withdrawals from inventory

for use as a contractor each month, and pay any applicable

Sales or Use Tax due. Any withdrawal from inventory for use

as a contractor shall be reported and the tax due thereon shall

be paid with the return for the location of the inventory,

regardless of the place of use, either in or out of the state.

(3) Suppliers making sales of materials and supplies to

contractor-dealers and delivering such materials and supplies

to a job site for use, or tagging or marking particular materials

and supplies for a particular job being performed by the

contractor-dealer, shall collect the applicable Sales or Use

Tax on those sales.

Tenn. Comp. R. & Regs. 1320-5-1-.08 (2000). Rule 8 permits a contractor-dealer to purchase

materials under a certificate of resale when it cannot know, at the time of purchasing those materials,

whether it will resell the materials or use them in the performance of a contract.4 See Sec. Fire Prot.

Co., 138 S.W.3d at 838–39. Therefore, had Wylie Steel not presented a resale certificate when it

purchased the raw materials in Tennessee it subsequently incorporated into the steel products for the

4

During the proceedings below, the Department did not take a position regarding whether W ylie Steel qualified

as a contractor-dealer under Rule 8. W ylie Steel contends that it is a contractor-dealer coming within the purview of Rule

8. In any event, we do not need to decide this issue in order to resolve the other issues presented for review on appeal.

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churches, it would have been required to pay sales tax at the time of purchasing those materials. See

id. at 838 (citing Nasco, Inc. v. Jackson, 748 S.W.2d 193, 195 (Tenn. 1998)); see also Tenn. Comp.

R. & Regs. 1320-5-1-.68(2) (2000) (“All sales for resale which are not supported by resale

certificates properly executed shall be deemed retail sales, and the dealer held liable for the tax. . .

.”).

The Act also imposes a use tax on the use of tangible personal property in this state,

providing:

A tax is levied at the rate of the tax levied on the sale of tangible

personal property at retail by the provisions of § 67-6-202 of the cost

price of each item or article of tangible personal property when the

same is not sold but is used, consumed, distributed, or stored for use

or consumption in this state; provided, that there shall be no

duplication of the tax.

Tenn. Code Ann. § 67-6-203(a) (2003); see also BellSouth Adver. & Publ’g Co. v. Johnson, 100

S.W.3d 202, 205 (Tenn. 2003). “‘Use tax’ includes the ‘use,’ ‘consumption,’ ‘distribution,’ and

‘storage’” of tangible personal property. Tenn. Code Ann. § 67-6-102(a)(34) (2003). The legislature

has defined “use” as follows:

“Use” means and includes the exercise of any right or power over

tangible personal property incident to the ownership thereof, 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(a)(33(A) (2003).

The primary function of the use tax is to prevent the evasion of sales tax under the Act by a

person purchasing tangible personal property outside of Tennessee for use within this state. Young

Sales Corp. v. Benson, 450 S.W.2d 574, 576 (Tenn. 1970); Sec. Fire Prot. Co., 138 S.W.3d at 841.

The legislature intended the use tax to operate as a complement, not supplement, to the sales tax.

Young Sales Corp., 450 S.W.2d at 576. We have previously described the interplay between the

sales and use taxes, stating:

[T]he use tax levies a tax on property purchased out of

Tennessee but used in this state where such property would have been

subject to sales tax had it been purchased in Tennessee. Young Sales,

450 S.W.2d at 576. . . . As a result, taxpayers who import property for

use in Tennessee pay the same amount in taxes as they would have

paid had they purchased the property in Tennessee. The sales and use

taxes, therefore, complement each other to impose a uniform amount

of tax on property purchased in Tennessee and property purchased

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out-of-state but used in Tennessee. Id. The use tax thereby puts

Tennessee vendors on parity with out-of-state vendors who sell

property for use in this state. Id.

Sec. Fire Prot. Co., 138 S.W.3d at 841; see also BellSouth Adver. & Publ’g Co., 100 S.W.3d at 206.

It is undisputed that Wylie Steel did not pay sales or use taxes on the purchase or use of the

raw materials used to fabricate the steel products installed in the three churches at issue. In this case,

we are called upon primarily to interpret and apply a specific provision of the Act which provides

as follows:

(b) Where a contractor or subcontractor defined in this

chapter as a dealer uses tangible personal property in the

performance of the contract, or to fulfill contract or subcontract

obligations, whether the title to such property be in the contractor,

subcontractor, contractee, subcontractee, or any other person, or

whether the title holder of such property would be subject to pay the

sales or use tax, except where the title holder is a church, private

nonprofit college or university and the tangible personal property is

for church, private nonprofit college or university construction, such

contractor or subcontractor shall pay a tax at the rate prescribed by §

67-6-203 measured by the purchase price of such property, unless

such property has been previously subjected to a sales or use tax, and

the tax due thereon has been paid. The exemption provided for in this

subsection (b) for private nonprofit colleges or universities shall

apply only to the state portion of the sales tax. The sales or use tax

levied by this chapter shall not apply to carpet installed for a church

when the church is exempt from sales or use taxes under § 67-6-322.

(c) The tax imposed by this section shall have no application

where the contractor or subcontractor, and the purpose for which such

tangible personal property is used, would be exempt from the sales or

use tax under any other provision of this chapter. However, the

transfer of tangible personal property by a contractor who contracts

for the installation of such tangible personal property as an

improvement to realty does not constitute a sale, except as provided

in § 67-6-102(a)(9), and the contractor shall not be permitted on this

basis to obtain the benefit of any exemptions or reduced tax rates

available to manufacturers under § 67-6-206 or § 67-6-102(a)(25)(E).

Each location of a taxpayer will be considered separately in

determining whether the taxpayer qualifies or is disqualified as a

manufacturer at that location.

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Tenn. Code Ann. § 67-6-209 (2003).

On appeal, Wylie Steel contends that its transfer of the raw materials to the individual

churches in this case falls within the definition of a “sale” under section 67-6-102(a)(27)(A) of the

Tennessee Code. In turn, it argues that it is exempt from paying sales tax “upon tangible personal

property or taxable services sold, given, or donated to any . . . church, temple, synagogue or

mosque[.]” Tenn. Code Ann. § 67-6-322(a)(1) (2003). Regarding the use taxes assessed by the

Department, Wylie Steel asserts that it qualifies for the exemption in section 67-6-209(b) of the

Tennessee Code. In essence, Wylie Steel takes the position that, pursuant to the purchase orders

issued by each church, the churches became title holders to the raw materials subsequently used by

Wylie Steel in fabricating the steel products it later installed in each church. Wylie Steel seeks to

differentiate between the initial purchase of the raw materials and the subsequent contract entered

into between Wylie Steel and the general contractors at each project for the fabrication and

installation of the steel products.

The Commissioner contends that Wylie Steel does not qualify for the exemptions it seeks

because the churches never became a “title holder” of the raw materials used in the fabrication of

the steel products. The Commissioner argues that the churches could only obtain title to the raw

materials in two ways: (1) purchase the materials directly from the supplier themselves, or (2)

purchase those materials from Wylie Steel through a resale. As for the first manner of gaining title,

the Commissioner argues that the undisputed facts show that Wylie Steel, not the churches, initially

purchased the raw materials. Regarding the second method of gaining title, the Commissioner

argues that section 67-6-209(c) of the Tennessee Code expressly provides that Wylie Steel’s

purchase and subsequent installation of the steel products as improvements to realty cannot

constitute a sale, thereby making the churches title holders.

In order for Wylie Steel to avail itself of the exemption set forth in section 67-6-209(b) of

the Tennessee Code and avoid paying the taxes assessed by the Department, we must necessarily

determine whether the respective churches were “title holders” of the raw materials used by Wylie

Steel to fabricate the steel incorporated into the structures. The legislature has not defined the term

“title holder” for purposes of the tax statute at issue in this case. In ascertaining when title to

tangible personal property is transferred from a seller to a buyer for purposes of Tennessee’s tax

statutes, the courts of this state look to the provisions of the Uniform Commercial Code as adopted

by the legislature. Eusco, Inc. v. Huddleston, 835 S.W.2d 576, 579 (Tenn. 1992); see also Sec. Fire

Prot. Co., Inc. v. Huddleston, 138 S.W.3d 829, 834 (Tenn. Ct. App. 2003). The UCC provides that

“[u]nless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller

completes performance with reference to the physical delivery of the goods. . . .” Tenn. Code Ann.

§ 47-2-401(2) (2003) (emphasis added). “Unless provided otherwise, by contract, materials furnished

by a subcontractor generally remain his property until they are affixed to the land of the owner or are

delivered to, and accepted by, the owner as his property.” Vinsant Plumbing & Heating Co., Inc. v.

Rudder Constr. Co., Inc., 486 S.W.2d 540, 543 (Tenn. Ct. App. 1971) (citations omitted); see also

Sec. Fire Prot. Co., 138 S.W.3d at 835.

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In Townsend Electric Company v. Evans, 246 S.W.2d 967 (Tenn. 1952), an electrical dealer

and contractor paid a sales and use tax assessment under protest and sued for a refund. Townsend

Elec. Co., 246 S.W.2d at 967. The electrical contractor purchased supplies he used in the

construction of electric transmission lines in performing his contract. Id. Our supreme court, citing

the decisions in cases from our sister states with approval, stated:

The complainant in its capacity as an electrical contractor is

not a seller of the tangible personal property incorporated into the

contract, but is a user of such property. . . . “The complainant, by its

undertaking, agreed to construct for a stated sum a completed system

for transmitting electric power. In so doing it was not in the business

of selling to the contractees items of tangible personal property as

such. In other words, it is not engaged in the business of buying and

selling to said contractees, but in so far as they were concerned, it

was engaged in the business of buying materials and equipment

which it used in the assembling of an electrical project, for delivery

to said contractees as a completed unit.”

“When a contractor fabricates his materials for the

contractee, and the completed structure is erected on the owner’s

land, it is as much real property as the land itself. The constituent

elements of tangible personal property have been destroyed by their

incorporation into the completed structure. And such a contractor,

therefore, is not making a sale of tangible personalty to his

contractee.”

“A contractor who buys building material is not one who buys

and sells — a trader. He is not a ‘dealer,’ or one who habitually and

constantly, as a business, deals in and sells any given commodity. He

does not sell lime and cement and nails and lumber.

“His undertaking is to deliver to his obligee some work or

edifice or structure, the construction of which requires the application

of skill and labor to these materials so that, when he finishes his task,

the materials purchased are no longer to be distinguished, but

something different has been wrought from their use and union. The

contractor has not resold but has consumed the materials. Sales to

contractors are sales to consumers * * *.”

Id. at 969–70 (citations omitted) (emphasis added); see also Pidgeon-Thomas Iron Co. v. Garner,

495 S.W.2d 826, 832 (Tenn. 1973) (ruling that the taxpayer, a fabricator of steel products, was not

a seller at retail of the tangible personal property it used to fabricate the steel products it incorporated

into a structure); Tenn. Blacktop, Inc. v. Benson, 494 S.W.2d 760, 765 (Tenn. 1973) (noting that a

contractor who installs fixtures in a building is not a seller of the tangible personal property used in

performing the contract but a user of that personal property); S.M. Lawrence Co. v. MacFarland, 355

S.W.2d 100, 104 (Tenn. 1962) (holding that the contracts at issue called for completed air-

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conditioning systems, therefore, the taxpayer was a user, not a seller, of the materials used in

performing the contract); John W. McDougall Co., Inc. v. Atkins, 301 S.W.2d 335, 335 (Tenn. 1957)

(“[A] contractor who erects buildings or installs fixtures therein is not ‘a seller of the tangible

personal property incorporated into the contract, but is a user of such property’.”).

In the instant case, Wylie Steel has not cited to any provision in the three subcontracts it

entered into with the general contractors for each church expressly providing for the transfer of title

to the general contractor or church of the raw materials purchased by Wylie Steel for use in

fabricating the steel products. Our own independent review of each sub-contract reveals no

provision specifically addressing when title to the raw materials passed from Wylie Steel to the

churches. To the contrary, each subcontract states that Wylie Steel will furnish all materials and

labor necessary to perform its obligations under the contract. Wylie Steel seeks to demonstrate that

it resold the materials to the individual churches, thereby making the churches the “title holders” of

the raw materials, by relying on the purchase orders issued by the churches. However, the individual

purchase orders contained only “estimates” for the cost of the raw materials, they did not list any

quantities of raw materials to be purchased, and they do not state the circumstances by which the

churches will accept delivery of the raw materials. While the record does demonstrate that Wylie

Steel invoiced the churches for the raw materials after purchasing them, Wylie Steel retained control

of the materials in order to use them in fabricating the necessary steel products. It is undisputed that,

shortly after receiving these purchase orders, Wylie Steel subcontracted with the general contractor

at each site for the fabrication, delivery, and installation of its fabricated steel products. It is also

undisputed that the amount to be paid Wylie Steel under each subcontract included the cost incurred

by Wylie Steel for raw materials and fabrication, as well as its overhead and profit.

There is no indication in the record before this Court that the churches ever accepted delivery

of the raw materials prior to their use in fabricating the steel to be used in the construction process.

The record reveals that, contrary to the position taken by Wylie Steel, the churches were not entering

into two distinct transactions with Wylie Steel — one for raw materials and one for fabrication of

the steel needed in the construction process. To the contrary, the churches sought a completed

structure which would incorporate the steel fabricated and installed by Wylie Steel as one of the

subcontractors on each project. After Wylie Steel performed its contract and installed the steel

products it fabricated into the churches, the steel products became real property. Accordingly, Wylie

Steel could not have resold the raw materials to the churches at this point either. See Tenn. Code

Ann. § 67-6-102(a)(27)(A) (2003) (defining “sale” as the transfer of tangible personal property).

The position taken by our supreme court in the aforementioned cases is also incorporated into

the following rule adopted by the Commissioner, which provides:

Contractors engaged in constructing or improving real property,

whether on a lump sum or cost-plus basis, are purchasers and

consumers of the materials used by them, and are required to pay the

Sales and Use Tax on such materials or equipment purchased or

imported into this State for use in connection with their contracts.

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Tenn. Comp. R. & Regs. 1320-5-1-.07(1) (2000) (emphasis added). Furthermore, in section 67-6-

209(c) of the Tennessee Code, the legislature expressly provided, in relevant part, as follows:

However, the transfer of tangible personal property by a contractor

who contracts for the installation of such tangible personal property

as an improvement to realty does not constitute a sale, except as

provided in § 67-6-102(a)(9), and the contractor shall not be

permitted on this basis to obtain the benefit of any exemptions or

reduced tax rates available to manufacturers under § 67-6-206 or §

67-6-102(a)(25)(E).

Tenn. Code Ann. § 67-6-209(c) (2003) (emphasis added). The statutory language is not ambiguous,

and none of the exceptions or exemptions referenced in the statute apply in this case.5 Therefore,

based upon the undisputed facts in this case, Wylie Steel, as a matter of law, did not sell the raw

materials to the churches but, instead, used them in the performance of its contracts. Accordingly,

we affirm the trial court’s grant of summary judgment to the Commissioner on this issue.

B.

The Audit Procedure Agreement

The Audit Procedure Agreement entered into between the parties contains the following

provision below the signature of Wylie Steel’s representative:

I concur with the Tennessee Department of Revenue Tax Auditor for

the procedures to be used in the audit. I believe that the transactions

included in the period(s) selected are representative of all transactions

occurring during the audit period from 12-1-96 to 12-31-99.

Wylie Steel’s representative also marked this section with an asterisk and wrote the following at the

bottom of the page: “WSF reserves the right to demonstrate actual volume of certain transaction

types occurring during the audit periods selected above.”

On appeal, Wylie Steel contends that the trial court erred in refusing to allow it to illustrate

the actual volume of certain types of transactions in order to show that the Department’s “test

period” audit method resulted in an over-assessment of tax liability. In asserting that it reserved the

5

W ylie Steel argues that the legislature enacted section 67-6-209(c) of the T ennessee Code to limit a

contractor’s right to qualify for a manufacturer’s exemption. W ylie Steel devoted a significant portion of its brief and

oral argument to the legislative history of the statute and policy arguments in an attempt to bolster its position on this

issue. W hen dealing with statutory language, however, we must “examine the language of the statute and, if the language

is unambiguous, apply the ordinary and plain meaning.” Galloway v. Liberty Mut. Ins. Co., 137 S.W .3d 568, 570 (Tenn.

2004) (citing Parks v. Tenn. Mun. League Risk Mgmt. Pool, 974 S.W .2d 677, 679 (Tenn. 1998)). Only when a statute

is ambiguous do we “examine the entire statutory scheme and the legislative history to ascertain and give effect to the

legislative intent.” Id.; see also Eastman Chem. Co. v. Johnson, 151 S.W .3d 503, 507 (Tenn. 2004).

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right to do so in the Audit Procedure Agreement, Wylie Steel argues that the trial court’s grant of

summary judgment on this issue stands in direct contravention of the remedies permitted a taxpayer

under section 67-1-1801 of the Tennessee Code. Conversely, the Department argues that Wylie

Steel signed the Audit Procedure Agreement which specified the periods to be used under the sample

audit method. The Department contends that, since Wylie Steel did not come forward with new

information during the audit period, it is foreclosed from doing so after the audit was concluded and

the tax liability assessed. The Department, however, cites to no authority for this proposition, nor

do we find citation to any authority to support its position in its response to Wylie Steel’s motion for

summary judgment.

The legislature has provided that, when a taxpayer is assessed a tax liability by the

Department which the taxpayer believes “to be unjust, illegal or incorrect,” then the taxpayer may

file suit “challenging all or any portion of the assessment of such tax including any interest and

penalty associated therewith.” Tenn. Code Ann. § 67-1-1801 (a)(1)(B) (2003). When a taxpayer

challenges a tax assessment issued by the Department, the court must presume the assessment to be

correct. Stratton v. Jackson, 707 S.W.2d 865, 867 (Tenn. 1986). In evaluating a taxpayer’s

challenge to the assessment issued by the Department, our supreme court has provided the courts of

this state with the following guidance:

The burden of proof is upon the taxpayer to prove that the

assessment made is incorrect and to prove its right to recovery by

clear and convincing evidence. . . .

....

This rule clearly places the burden upon the taxpayer to

disprove the result of the assessment made by the Department of

Revenue.

....

Vague allegations by the taxpayer to the effect that the

Department’s method of ascertaining the taxes due from him was

incorrect are not sufficient to carry the taxpayer’s burden. He must

show by a preponderance of evidence that he not only has overpaid

his taxes, but, also, the amount of such overpayment.

....

We hold that the taxpayer in this case has failed to carry its

burden of proof. It has failed to produce an audit, actual books and

records, or summaries thereof, or other evidence to establish that it

owes less taxes than the amount assessed by the Department of

Revenue. The taxpayer has done no more than to make allegations to

the effect that the State’s audit method was incorrect, inapplicable or

constitutes only an estimate; this is wholly insufficient to support a

judgment in favor of the taxpayer.

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Edmondson Mgmt. Serv., Inc. v. Woods, 603 S.W.2d 716, 717–18 (Tenn. 1980) (citation omitted).

In this case, Wylie Steel presented sufficient evidence to raise a factual issue as to whether

the Department over-assessed its tax liability. In the trial court below, Wylie Steel asserted that the

Department over-assessed its tax liability by $44,172.18. Thus, it asserted the amount of

overpayment. In addition, Wylie Steel submitted the deposition testimony and affidavits of Walter

E. Porter, Jr. (“Mr. Porter”), Wylie Steel’s treasurer. In his deposition, Mr. Porter explains how he

believes the Department over-assessed Wylie Steel’s tax obligation. Furthermore, attached to Mr.

Porter’s deposition are accounting and financial documents which allegedly prove this over-

calculation. Unlike the taxpayer in Edmondson Management Service, Inc., 603 S.W.2d at 718,

Wylie Steel has done more than make a perfunctory allegation that the Department has miscalculated

its tax obligation.6 Accordingly, the trial court erred in holding that Wylie Steel was precluded from

presenting evidence of an over-assessment at trial because it did not present such evidence during

the audit. Therefore, we reverse the trial court’s decision to grant summary judgment to the

Department on this issue. On remand, the trial court is instructed to determine whether the

Department has over-assessed Wylie Steel’s tax liability in accordance with section 67-1-1801 et

seq. of the Tennessee Code.

C.

Attorney’s Fees

Both parties have asked this Court to award them their respective attorney’s fees and

litigation expenses incurred in this case pursuant to section 67-1-1803 of the Tennessee Code.

Tennessee follows the American Rule which provides that, absent a statute or agreement to the

contrary, each litigant is responsible for paying its own attorney’s fees and litigation expenses. State

v. Brown & Williamson Tobacco Corp., 18 S.W.3d 186, 194 (Tenn. 2000). Section 67-1-1803(d)

of the Tennessee Code provides as follows: “The court shall award to the prevailing party reasonable

attorney’s fees and expenses of litigation up to twenty percent (20%) of the amount assessed or

denied, including interest after payment.” Tenn. Code Ann. § 67-1-1803(d) (2003) (emphasis

added). Since we find it necessary to remand this case to the trial court for a determination as to

whether the amount assessed by the Department is correct, we cannot properly assess such fees and

expenses at this stage of the proceedings. Accordingly, we leave the application of section 67-1-

1803(d) of the Tennessee Code to the trial court after it determines the proper amount of tax to be

assessed in this cause.

6

The Commissioner noted that W ylie Steel has not conducted its own independent audit and presented those

results to the trial court. The Commissioner also directs our attention to the fact that Mr. Porter’s testimony simply

expresses the results of his recalculation of the three church projects which were part of the sample period used by the

Department. W hile W ylie Steel has not presented proof of the actual volume of certain transactions for the audit period,

it has presented sufficient evidence to create a disputed issue of fact regarding the correctness of the amount assessed

by the Department. See Tenn. Code Ann. § 67-1-1801(a)(1) (2003).

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IV.

CONCLUSION

For the aforementioned reasons, we affirm in part and reverse in part the decision of the trial

court in granting summary judgment to the Appellant. This case is remanded to the trial court with

instructions to conduct further proceedings consistent with this opinion. Costs of this appeal are to

be shared equally between the Appellant, Wylie Steel Fabricators, Inc. and its surety, and the

Appellee, Ruth E. Johnson, Commissioner of Revenue for the State of Tennessee, for which

execution may issue if necessary.7

___________________________________

ALAN E. HIGHERS, JUDGE

7

“ Except as otherwise provided by statute or these rules, . . . if a judgment is affirmed or reversed in part . .

. costs shall be allowed only as ordered by the appellate court.” Tenn. R. App. P. 40(a) (2004). “In cases involving the

state of Tennessee, its officers, or agencies, costs shall be awarded in accordance with the provisions of subdivision (a)

of this rule.” Tenn. R. App. P. 40(b) (2004).

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