Magnavox Consumer Electronics v. King

• Decision Date: 24 February 1986
• Citation: 707 S.W.2d 504
• Parties: MAGNAVOX CONSUMER ELECTRONICS, Plaintiff-Appellee, v. John K. KING, Commissioner of Revenue for the State of Tennessee, et al., Defendants-Appellants.
• Court: Tennessee Supreme Court

Page 504

707 S.W.2d 504

MAGNAVOX CONSUMER ELECTRONICS, Plaintiff-Appellee, v. John K. KING, Commissioner of Revenue for the State of Tennessee, et al., Defendants-Appellants.

Supreme Court of Tennessee,

at Knoxville.

Feb. 24, 1986.

Michael W. Catalano, Asst. Atty. Gen., Nashville, (W.J. Michael Cody, Atty. Gen. and Reporter, of counsel), for defendants-appellants.

G.P. Gaby, Milligan, Coleman, Fletcher, Gaby, Kilday & Woods, Greeneville, for plaintiff-appellee.

OPINION

HERSCHEL P. FRANKS, Special Justice.

The principal issue presented by this appeal is whether payments made by plaintiff-lessee pursuant to a vehicle lease entered between plaintiff and the lessor in the State of Indiana are subject to use tax pursuant to T.C.A., § 67-6-210. ¹

On August 8, 1969, plaintiff entered an agreement with Fort Wayne Leasing Company, an Indiana corporation, leasing a fleet of trucks. The lease was executed in Indiana and plaintiff took possession of the trucks in that state. The agreement provided plaintiff would pay a fixed rental for each truck plus a fixed rate per mile for the mileage the trucks were operated by the lessee. The lessor, under the terms of the lease, was required to furnish all fuel for the operation of the trucks. The trucks were based in Greeneville, Tennessee and bore the Magnavox logo and were utilized to transport plaintiff's products throughout the United States. The parties stipulated that the trucks were actually operated in states other than the State of Tennessee 82.7 per cent of the time.

Following an audit for the period of June 1, 1976 through May 31, 1978, the Department of Revenue assessed a tax deficiency against the plaintiff of $128,913.11 plus $32,229.51 in penalties and $13,484.06 in interest, for a total of $174,626.68. ² The amount was paid under protest and the instant suit was filed to recover the payment of taxes.

The trial court determined the payments under the lease were subject to the use tax but reduced the amount of tax owing since 34 per cent of the payments represented fuel consumption and T.C.A., § 67-6-329 exempts fuel from the use tax. ³

Plaintiff contends no part of the lease payments is subject to use tax and bases its argument primarily on T.C.A., § 67-6-201, ⁴ which it insists limits taxation of leases to those entered within this state. While T.C.A., §§ 67-6-201 and 67-6-204 ⁵, read together, evidence the legislature's intent to tax proceeds of leases entered or executed within this state, and since the leases involved were executed in Indiana, these sections are not controlling.

The commissioner, however, imposed the tax deficiency on the authority of T.C.A., § 67-6-210. This section sets forth three elements necessary to the imposition of the use tax: (1) an "importation" of "tangible personal property", (2) by a dealer and (3) use of the property. The leasing of the trucks and bringing them into this state constituted an importation from another state. Moreover, plaintiff is a "dealer" under this section, since T.C.A., § 67-6-102(4)(F) expressly defines a "dealer" as every person who "[i]s the lessee or renter of tangible personal property ... and who pays to the owner of such property a consideration for the use or possession of such property without acquiring title thereto...." The issue thus becomes whether the plaintiff "used" the property within the meaning of T.C.A., § 67-6-210(a).

T.C.A., § 67-6-102(18) defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof...."

Tennessee's statutory taxation scheme indicates a legislative intent to impose the use tax on lessees, including those who lease property outside of this state for use in Tennessee. T.C.A., § 67-6-201 declares as a "taxable privilege" the use or consumption "in this state [of] any item of tangible personal property as defined in this chapter ..." and "sale" is defined as "any transfer of title or possession ... lease or rental". T.C.A., § 67-6-102(14)(A).

As this court observed in Woods v. M.J. Kelley Co., 592 S.W.2d 567 (Tenn.1980), "[t]he taxable privilege of use extends to the 'utilization of property for profit-making purposes.' " Id., at 571. The statutory definition of "use" provides, however, that only those uses "incident to the ownership" of the tangible personalty will be taxable. In construing substantially the same language, the Rhode Island Supreme Court in Great Lakes Dredge and Dock Co. v. Norberg, 117 R.I. 600, 369 A.2d 1101 (1977), said the phrase "does not require total or even substantial control; the exercise of any 'right or power' over tangible property constitutes a taxable 'use' of that property." 369 A.2d at 1104. But cf. Chrysler Corp. v. City of New Orleans, 238 La. 123, 114 So.2d 579 (1959) ("The rights of use and possession which Chrysler had were derived from its contract of lease ... and were not incident to ownership....") 114 So.2d 586.

In the instant case, the trucks were based and serviced at Greeneville, Tennessee and operated by plaintiff's employees. The lease agreement provides "customer shall have the right to operate and control said vehicles in such manner as though ownership and title in said vehicles was vested exclusively with said customer." Plaintiff exercised rights in the leased vehicles normally "incident to ownership" save the acquisition of title. Plaintiff's use of the trucks under the lease falls within the ambit of T.C.A., § 67-6-210.

The commissioner contends the "entire lease payment is subject to the use tax", and the trial court improperly ordered a refund of that portion of the use tax attributable to the cost of fuel for the operation of the trucks.

The lease agreement provides the owner of the trucks pays the fuel cost but plaintiff argues an estimated 34 per cent of the total lease charges per mile represents fuel costs and under the "exemptions" section of the sale and use tax statutes, the use or consumption of "motor vehicle fuel" "upon which a privilege tax per gallon is paid, and not refunded," is exempt from the sales or use tax. T.C.A., § 67-6-329(1).

T.C.A., § 67-6-210 states, for purposes of use and sales tax, the use of imported tangible personal property "shall ... be equivalent to a sale at retail, and the tax shall thereupon immediately levy...." In Central Transport Co. v. Atkins, 202 Tenn. 512, 305 S.W.2d 940 (1957), involving a similarly structured lease where the sales rather than the use tax was held applicable, the court stated the agreed rental price constituted the base for tax purposes. In Saverio v. Carson, 186 Tenn. 166, 208 S.W.2d 1018 (1948), this court, applying the sales tax to the gross rental, held the tax must be paid on the final rental price and any attempted separation of charge for services included in the gross rental price would result in confusion in administration of the tax Act. Those cases are relevant and applicable to the issue since T.C.A., § 67-6-210 equates "use" with "sale at retail". Moreover, there is no double taxation since the gas tax was paid by the lessor who, under the...