Morton Pharmaceuticals, Inc. v. MacFarland

• Decision Date: 04 June 1963
• Citation: Morton Pharmaceuticals, Inc. v. MacFarland, 212 Tenn. 168, 368 S.W.2d 756, 16 McCanless 168 (Tenn. 1963)
• Parties: , 212 Tenn. 168 MORTON PHARMACEUTICALS, INC., Appellee, v. Alfred T. MacFARLAND, Commissioner, etc., Appellant.
• Court: Tennessee Supreme Court

Page 756

368 S.W.2d 756

16 McCanless 168, 212 Tenn. 168

MORTON PHARMACEUTICALS, INC., Appellee, v.Alfred T. MacFARLAND, Commissioner, etc., Appellant.

Supreme Court of Tennessee.

June 4, 1963.

George F. McCanless, Atty. Gen., Milton P. Rice, Walker T. Tipton, Asst. Attys.Gen., Nashville, for appellant.

H. A. McBride and Thomas F. Johnston, Memphis, Armstrong, McCadden, Allen, Braden & Goodman, Memphis, of counsel, for appellee.

BURNETT, Chief Justice.

This suit was originally filed by the appellee to recover use taxes paid under protest.The Chancellor determined the matter in favor of the taxpayer and against the Commissioner, who has seasonably appealed to this Court.

The appellee is a drug manufacturer and wholesaler in Memphis, Tennessee, and in conducting this business it purchases from various suppliers large quantities of nondrug items which it distributes among its physician, clinic and hospital customers in conjunction with its sales of pharmaceuticals, and these customers of the appellee have the choice of purchasing parmaceuticals from either of two price lists.One of these, designated as the 'Morton Pharmaceutical' list affords the purchasers of the right to receive or accumulate credits towards various 'gifts' or 'premiums' described in a catalog distributed by appellee.The other list, known as the 'Modern Medicine' price list, extends to its purchasers no such rights.The prices of the same medicines in the respective catalogs are very much larger in the pharmaceutical catalog than in the 'Modern Medicine' catalog.The physicians and hospitals purchasing from the Morton Pharmaceutical price list have the choice of non-pharmaceutical articles from this catalog and receive from appellee invoices for the pharmaceuticals alone.On these invoices no specific statement of any consideration for the non-pharmaceutical items is given to the customer.The cost of such non-pharmaceutical merchandise to the appellee is reflected in its profit and loss statement as a selling expense.

The Commissioner takes the position that the 'gift' or 'premium' merchandise acquired by the appellee was tangible personal property purchased for its own use, and accordingly asserted against the appellee a use tax deficiency aggregating approximately $30,000.00, covering the years 1955 to 1959, inclusive.This amount was paid by the appellee under protest and the present suit filed for its recovery.

The Chancellor in a rather well reasoned opinion, among other things, held:

'Regardless of what anything may be called it remains what it is.It is indisputable that regardless of the ads, 'Gifts for you' and 'Free of Extra Charge', they were not gifts nor were they free.The merchandise was bought and paid for by the doctors and the sales tax was paid on the entire sale even though it (the sales tax) was charged to the medicine.So it can be rightly said that the form of these transactions is a 'gift' but the real substance is a sale.If the taxpayer was attempting to avoid or evade a tax by 'form' I am sure the State would take the position of looking through the form to reach the substance--and the tax.'

Appropriate errors have been assigned by the Commissioner.The Commissioner says:

'This case really comes down to the question of what is the best evidence of complainant's statute respecting the non-drug merchandise it dispenses, the documentary evidence in the record reflecting same, or its own contentions and verbal representations made after the fact.'

Thus the errors assigned largely hinge around this statement of the Commissioner.In other words, these errors contend that these non-pharmaceutical items within the meaning of the sales and use tax statute(§ 67-3002 et seq., T.C.A.) were actually acquired by the appellee for its own use in promoting its sales of its pharmaceuticals and were really gifts to the purchasers of these pharmaceuticals rather than sales to them.The contention is, too, that under Sales Tax Regulation 49, the appellee was the beneficial user of such tangible personal property and accordingly was liable for the use tax with respect to the cost price thereof.Contrary to the contention of the Commissioner the appellee takes the position and the record shows that it received a gross profit of from twenty-three (23%) per cent to thirty (30%) per cent on its bulk transfers of drugs and personal merchandise to its customers, which included a mark-up of profit in excess of the cost on the transfers of items of personal merchandise.The record shows that a sales tax was paid by appellee on the entire bulk transfer of personal merchandise and drugs.The record also shows that the Internal Revenue Service has determined that such transfers of personal merchandise by appellee were sales at retail.Of course, this fact is not controlling or conclusive on us, but it is a persuasive action by another and separate tax collecting authority.

Under these separate catalogs, which the appellee furnishes its customers, the customer can buy from one catalog at the standard price, but if he buys from the other catalog the catalog plainly shows the mark-up on these drugs to cover the cost of this premium merchandise plus a profit.

The Commissioner's argument is that the charter of the appellee authorizes it to engage in the manufacture and distribution of drugs and things of that kind, toiletries, etc., but it does not authorize the appellee to engage in the sale of furniture, jewelry, clothing, sporting goods, and things of that kind, and that in keeping its records with reference to the sales made under the Morton Pharmaceutical catalog its own bookkeeping failed, because the bookkeeping system of the appellee showed the cost of these non-drug items, which had been acquired by it for distribution to its customers, as a selling expense.Thus it is very forcibly argued that the Court accept these things, the way the company carried this on its books, rather than the evidence offered in court as to the fact that these were really charged for and a profit made on them above the cost.The Chancellor took the position since it had been shown that they were charged for and that a profit was made on them by the pharmaceutical company, and, since the customer knew, having the two catalogs, that he was actually paying for these things even though they weren't billed, it was a sale for a consideration and consequently was not a gift, and since...