LeTourneau Sales & Service, Inc. v. Olsen

Decision Date28 May 1985
Citation691 S.W.2d 531
PartiesLeTOURNEAU SALES & SERVICE, INC., Plaintiff-Appellee, v. Martha OLSEN, Commissioner of Revenue, State of Tennessee, Defendant-Appellant.
CourtTennessee Supreme Court

J. Robert Walker, Asst. Atty. Gen., Nashville, for defendant-appellant; W.J. Michael Cody Atty. Gen. & Reporter, Nashville, of counsel.

Charles M. Crump, Memphis, for plaintiff-appellee; Apperson, Crump, Duzane & Maxwell, Memphis, of counsel.

OPINION

DROWOTA, Justice.

In this case the Plaintiff sought recovery from the Defendant Commissioner of Revenue of sales taxes paid under protest. The chancellor granted the relief requested and the Defendant has appealed to this Court. At issue is whether the Plaintiff is involved in a taxable "repair" service under the sales and use tax law, T.C.A. Secs. 67-6-101 et seq., and whether the tax sought to be imposed is in violation of the Commerce Clause of the United States Constitution and T.C.A. Sec. 67-6-313 as an unconstitutional burden upon interstate commerce.

LeTourneau Sales and Service, Inc., is a Tennessee corporation involved in purchasing, selling, manufacturing and servicing heavy equipment, primarily equipment manufactured by Marathon LeTourneau Corporation, a Texas corporation. The vast majority of Plaintiff's business is with customers located outside of Tennessee. Plaintiff maintains a plant in Memphis, Tennessee where the major service work for customers in the eastern United States is undertaken. Marathon LeTourneau provided technical and financial support during the construction of the Memphis facility, which was financed primarily through industrial revenue bonds.

Because of the size of the equipment involved, usually only the damaged component, typically a gear motor, will actually be sent to the Plaintiff in Memphis. During the relevant period of this lawsuit, most of the items sent to Memphis were delivered by common carrier. Occasionally out-of-state customers will deliver and pick up the equipment themselves in Memphis. If the motor cannot be repaired on site by one of the service technicians in the field, the equipment is brought to Memphis where the customer has the option of trading in the inoperable motor for a new motor manufactured by Marathon LeTourneau, purchasing a rebuilt motor from Plaintiff's inventory in Memphis, or the customer may have his own motor rebuilt in Memphis and returned to him. It is this last alternative that furnishes the basis for the dispute in this lawsuit. The Commissioner of Revenue does not contend that the initial sale of new or rebuilt motors to customers outside of Tennessee should be subject to the sales tax. However, she does contend that sales tax should be paid on the price of rebuilding equipment that is sent to Memphis for repair and then shipped back to the same customer outside of Tennessee. Prior to May 7, 1982, the Commissioner did not consider this type of transaction to be taxable, but on May 7, 1982, the Director of the Sales and Use Tax Division notified repair service dealers that the Department of Revenue now considered such a transaction to be taxable. The notice indicated that these repair transactions would be taxable "regardless of how it enters or leaves the State."

The Commissioner's position is buttressed by T.C.A. Sec. 67-6-102(13)(F)(iv) which provides that a taxable "sale at retail" shall include "any repair services with respect to any kind of tangible personal property" performed for a consideration. She argues that because the objective of LeTourneau is to restore the customer's own equipment back to an operable condition, that this transaction is a taxable repair service under T.C.A. Sec. 67-6-102(13)(F)(iv). State Sales and Use Tax Rule No. 1320-5-1-.54 (hereinafter Rule 54) provides that "[a]ll charges for repair services and repairs of any kind of tangible personal property ... including all parts and/or labor" are subject to the sales tax. Rule 54 further provides that "repair services" and "repairs" include "work done to preserve or restore [the equipment] to or near the original condition...."

To avoid what seems to be the clear intent of Rule 54 and Sec. 67-6-102(13)(F)(iv) Plaintiff contends that it is involved in the "rebuilding" or "remanufacturing" of customer's equipment, and therefore these transactions are not taxable as "repair services." It is Plaintiff's position that manufacturing and rebuilding are distinctly different from repairing. This argument is based on Plaintiff's contention that the customer receives equipment that is very different from that which he originally sent to LeTourneau. Plaintiff maintains that the new "rebuilt" motor is superior to a new motor previously manufactured because of the advanced technology incorporated into the rebuilding process. Plaintiff also issues a new one-year warranty on the rebuilt motors, whereas Marathon LeTourneau issues only a six-month or 1,500 hour warranty on its new motors. Each motor is adapted to current specifications and each motor is one hundred percent inspected, whereas new motors are only inspected at random.

In accepting Plaintiff's contention that it "rebuilt" or "remanufactured" rather than "repaired" motors, the chancellor relied on four federal cases that arose under the former federal excise tax. United States v. J. Leslie Morris Co., Inc., 124 F.2d 371 (9th Cir.1941); United States v. Armature Exchange, Inc., 116 F.2d 969 (9th Cir.), cert. denied, 313 U.S. 573, 61 S.Ct. 960, 85 L.Ed. 1531 (1941); Clawson & Bals, Inc. v. Harrison, 108 F.2d 991 (7th Cir.1939), cert. denied, 309 U.S. 685, 60 S.Ct. 808, 84 L.Ed. 1028 (1940); Broad Motors Co. v. Smith, 86 F.Supp. 4 (E.D.Penn.1949). None of these cases involved a sales tax resembling that at issue in the present case and therefore are not dispositive of the repair versus rebuild issue.

We have no doubt that the motor that the customer receives from Plaintiff is very different from the product the customer tenders in the beginning. It is undoubtedly an improved product which carries a more extensive warranty. However, we find these differences to be of no consequence as far as the tax on repair services is concerned. There is no indication of any "degrees" of repair in T.C.A. Sec. 67-6-102(13)(F)(iv) or in any of the rules interpreting that section. The tax on repair services is not limited to minor repairs but includes "any repair service with respect to any kind of tangible personal property." The extent to which customers' motors are repaired is not a relevant consideration. The chancellor accordingly erred in holding that a remanufactured or rebuilt unit that carries a new warranty is exempt from the sales and use tax. This Court refuses to judicially create such an exemption into the sales and use tax. While the chancellor was correct in saying that doubts in the construction of the tax statutes must be resolved in favor of the taxpayer, the case at bar involves a claimed exemption from tax. Exemptions will be construed against the taxpayer and must positively appear and will not be implied. Weaver v. Woods, 594 S.W.2d 693 (Tenn.1980); Morton Pharmaceuticals, Inc. v. MacFarland, 212 Tenn. 168, 368 S.W.2d 756 (1963).

The second issue in this litigation is whether the taxation of repair services on equipment brought into Tennessee for repair and then shipped out of Tennessee after the repairs are completed is an unconstitutional burden upon interstate commerce in violation of Article 1, Sec. 8, cl. 3 of the United States Constitution (the commerce clause) and T.C.A. Sec. 67-6-313.

As the chancellor correctly noted, the sole purpose of T.C.A. Sec. 67-6-313 is to confine the sales and use tax to those subjects which a state is permitted to tax under the commerce clause of the United States Constitution. Vector Co., Inc. v. Benson, 491 S.W.2d 612 (Tenn.1973); Texas Gas Transmission Corp. v. Benson, 223 Tenn. 279, 444 S.W.2d 137 (1969); see also T.C.A. Sec. 67-6-211.

It is well-settled that a state tax on interstate commerce is not per se unconstitutional and the taxpayer bears the burden of proving his immunity from the tax under the commerce clause. General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964); Norton Co. v. Department of Revenue of Illinois 340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517 (1951). The United States Supreme Court has recognized that states have a legitimate interest in the compensatory taxation of interstate commerce: "It was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of state tax burdens even though it increases the costs of doing business. 'Even interstate commerce must pay its own way.' " Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254, 58 S.Ct. 546, 548, 82 L.Ed. 823, 827 (1938) (citations omitted). In determining whether a state tax violates the commerce clause, the United States Supreme Court has suggested that the following are factors to be considered: (1) whether the taxed activity has a sufficient nexus with the taxing state; (2) whether the tax discriminates against interstate commerce; (3) whether the tax is fairly apportioned; and (4) whether the tax is related to services rendered by the taxing state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326, reh. denied, 430 U.S. 976, 97 S.Ct. 1669, 42 L.Ed.2d 371 (1977). In sum, we must look to the relationship between the taxing state and the activity sought to be taxed and the consequences of the tax on interstate commerce. In the case of a sales tax, a state may require the payment of a tax on sales made to out-of-state customers if the sale itself is sufficiently connected with the taxing state. McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33, 60 S.Ct. 388, 84 L.Ed. 565 (1940).

In the case at bar, Plaintiff argues that the transaction is not complete until the product is delivered to the...

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