Eastman Chemical Co. v. Johnson

• Decision Date: 24 November 2004
• Docket Number: No. M2002-02114-SC-R11-CV,M2002-02114-SC-R11-CV
• Citation: 151 S.W.3d 503
• Parties: EASTMAN CHEMICAL COMPANY v. Ruth E. JOHNSON, Commissioner of Revenue, State of Tennessee.
• Court: Tennessee Supreme Court

151 S.W.3d 503

EASTMAN CHEMICAL COMPANY v. Ruth E. JOHNSON, Commissioner of Revenue, State of Tennessee.

No. M2002-02114-SC-R11-CV

Supreme Court of Tennessee, at Nashville.

October 7, 2004 Session.

November 24, 2004.

Brett R. Carter, Charles A. Trost and Michael G. Stewart, Nashville, Tennessee, for the appellant, Eastman Chemical Company.

Paul G. Summers, Attorney General and Reporter; Joseph F. Whalen, Associate Solicitor General; and Charles L. Lewis, Deputy Attorney General, for the appellee, Ruth E. Johnson, Commissioner of Revenue, State of Tennessee.

Jay Stapp, Nashville, Tennessee, for the Amicus Curiae, Bridgestone/Firestone North American Tire, LLC.

M. Kimberly Stagg, Smyrna, Tennessee, for the Amicus Curiae, Nissan North America, Inc.

Carl E. Hartley and John M. Phillips, Chattanooga, Tennessee, and Sandi L. Pack, Nashville, Tennessee, for the Amicus Curiae, Tennessee Chamber of Commerce & Industry.

OPINION

WILLIAM M. BARKER, J., delivered the opinion of the court, in which FRANK F. DROWOTA, III, C.J., and E. RILEY ANDERSON and JANICE M. HOLDER, JJ., and ALLEN WALLACE, Sr.J., joined.

The sole issue in this case is whether certain chemical catalysts used by Eastman Chemical Company fall within the industrial machinery exemption to the Tennessee sales and use tax statute, Tennessee Code Annotated sections 67-6-101 et seq. (2003). The trial court granted summary judgment in favor of the taxpayer. The Court of Appeals reversed, dismissing the taxpayer's complaint seeking refunds for 1995, 1996 and 1997 based on the Court of Appeals' determination that the chemical catalysts used by the taxpayer did not come within the definition of "industrial machinery" in Tennessee Code Annotated section 67-6-102(13)(A) (1998). We reverse the Court of Appeals and reinstate the decision of the trial court granting summary judgment in favor of the taxpayer.

FACTUAL BACKGROUND

Eastman Chemical Company ("Eastman") is a Delaware corporation with its principal place of business in Kingsport, Tennessee. It manufactures various types of chemicals and plastics. Eastman regularly uses three types of catalysts¹ in its manufacturing processes — "fixed-bed" catalysts,² "batch" catalysts,³ and cobalt hydrate.⁴ The catalysts used by Eastman are essential to the production of Eastman's chemical products, and the vertical tubes, reaction chambers, vessels and other items of equipment used by Eastman in the production process are specifically designed to work in conjunction with the catalysts.

From January 1995 through December 1997, Eastman paid the State of Tennessee $1,254,976.48 in use tax for the various catalysts used during that period. On January 1, 1998, Eastman ceased paying use tax on the catalysts used in its manufacturing processes because it decided that they were exempt from taxation either as industrial materials or as industrial machinery. On December 29, 1998, Eastman filed a claim with the Tennessee Department of Revenue ("Department") seeking a refund for the tax years of 1995, 1996 and 1997, asserting that it erroneously paid use tax on the catalysts. The Department denied Eastman's claimed exemptions.

Eastman filed a complaint in Chancery Court against the Commissioner of Revenue, pursuant to Tennessee Code Annotated section 67-1-1802(c)(1) (2003), seeking a refund of $1,254,976.48 for tax years 1995, 1996 and 1997. Eastman alleged that the catalysts were exempt from the use tax as industrial machinery, as defined in Tennessee Code Annotated section 67-6-102(13)(A) (1998).⁵ Eastman amended its complaint to allege in the alternative that the cobalt hydrate catalysts were exempt as industrial materials.⁶

Eastman filed a motion for summary judgment, which was granted by the trial court on June 29, 2002. The trial court relied upon AFG Indus. Inc. v. Cardwell, 835 S.W.2d 583 (Tenn.1992), to determine that the catalysts used by Eastman were industrial machinery as defined by the statute and therefore exempt from use tax. The Commissioner appealed.

The Court of Appeals reversed the trial court and dismissed Eastman's entire complaint against the Department.⁷ The Court of Appeals found that the exemption for industrial machinery in Tennessee Code Annotated section 67-6-102(13)(A) (1998) cannot be extended to include the catalysts Eastman uses in its manufacturing process.

ANALYSIS

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.3d 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 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 (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.

The Exemption of Eastman's Catalysts Under Tennessee Code Annotated section 67-6-102(13)(A) (1998).

Pursuant to Tennessee Code Annotated section 67-6-206(a) (2003), industrial machinery is exempt from sales and use taxes. Prior to 1984, industrial machinery was defined as:

Machinery, including repair parts and any necessary repair or taxable installation labor therefor, which is directly and primarily utilized in fabricating or processing tangible personal property for resale ... where the use of such machinery or equipment is by one who engages in such fabrication or processing as his principal business either within or without this state.

Tenn.Code Ann. § 67-6-102(8) (1983). An amendment in 1984 expanded the definition of industrial machinery to read:

Machinery, apparatus and equipment with all associated parts, appurtenances and accessories, including hydraulic fluids, lubricating oils, and greases necessary for operation and maintenance, repair parts and any necessary repair or taxable installation labor therefor, which is necessary to, and primarily for, the fabrication or processing of tangible personal property for resale and consumption off the premises, ... where the use of such machinery, equipment or facilities is by one who engages in such fabrication or processing as one's principal business....

Tenn.Code Ann. § 67-6-102(13) (1998).

There is no dispute that the catalysts are necessary to and primarily for the fabrication or processing of tangible personal property for resale or consumption and that Eastman is a manufacturer. The only issue in dispute is whether the catalysts used by Eastman are "[m]achinery, apparatus and equipment with all associated parts, appurtenances and accessories." Tenn.Code Ann. § 67-6-102(13)(A) (1998).

In AFG Indus. Inc. v. Cardwell, 835 S.W.2d 583 (Tenn.1992), we were asked to interpret the definition of "industrial machinery" as amended in 1984. At issue in AFG Indus. were tin ingots purchased by the taxpayer for use in a molten tin bath as part of its glass production. During the manufacturing process, molten glass was floated on the molten tin bath, which acted as a conveying mechanism and a surface on which the glass was shaped. 835 S.W.2d at 584. The lower courts relied upon our decision in Tibbals Flooring Co. v. Olsen, 698 S.W.2d 60 (Tenn.1985) ("Tibbals I"), in holding that the tin purchased for this process did not qualify for the industrial machinery exemption. AFG Indus., 835 S.W.2d at 585. On appeal, we reversed, explaining that the lower court's reliance on Tibbals I failed to account for the new language added in 1984 to the industrial machinery definition. Id. We explained:

In Tibbals, this Court looked to ordinary dictionary definitions of machinery and equipment and compared the predominate characteristics of the items in issue to such definitions....

The Tibbals analysis is appropriate in this case, but, as previously indicated, the statutory definition of industrial machinery has been expanded since the tax year involved in Tibbals to include "apparatus, and equipment with all associated parts, appurtenances, and accessories." We hold that the tin comes within this expanded definition.

Id. (Emphasis added.)

In...