Nashville Clubhouse Inn v. Chancery, 98-00898

• Decision Date: 16 March 2000
• Docket Number: 98-00898
• Citation: Nashville Clubhouse Inn v. Chancery, 27 S.W.3d 542 (Tenn. App. 2000)
• Parties: NASHVILLE CLUBHOUSE INN,CLUBHOUSE INN OF KNOXVILLE and CLUBHOUSE INN AND CONFERENCE CENTER,Plaintiffs/Appellees, v. Davidson Chancery, RUTH E. JOHNSON, Commissioner of Revenue, State of Tennessee, Defendant/Appellant. AppealCOURT OF APPEALS OF TENNESSEE Filed
• Court: Tennessee Court of Appeals

NASHVILLE CLUBHOUSE INN,CLUBHOUSE INN OF KNOXVILLE and CLUBHOUSE INN AND CONFERENCE CENTER,Plaintiffs/Appellees v Davidson Chancery, RUTH E. JOHNSON, Commissioner of Revenue, State of Tennessee, Defendant/Appellant

Appeal No. M1998-00898-COA-R3

COURT OF APPEALS OF TENNESSEE

Filed March 16, 2000

APPEAL FROM THE DAVIDSON COUNTY CHANCERY COURT AT NASHVILLE, TENNESSEE No. 96-2143-II -CV

THE HONORABLE CAROL L. MCCOY, CHANCELLOR

AFFIRMED AND REMANDED

WILLIAM F. LONG, JR, 101 Westpark Drive, Suite 250, Brentwood, Tennessee 37027, ATTORNEY FOR PLAINTIFFS/APPELLEES

JOHN KNOX WALKUP, Attorney General and Reporter

CHRISTINE LAPPS, NATALIE S. PRICE, Assistant Attorneys General, Office of the Attorney General, Tax Division, Cordell Hull Building, Second Floor, 425 Fifth Avenue North, Nashville, Tennessee 37243-0489, ATTORNEYS FOR DEFENDANT/APPELLANT

WILLIAM B. CAIN, JUDGE

CONCUR: BEN H. CANTRELL, PRES. JUDGE, M.S., WILLIAM C. KOCH, JR., JUDGE

OPINION

This case is an appeal from the ruling of the Chancellor granting a sales tax refund to Nashville Clubhouse Inn, Clubhouse Inn of Knoxville, and Clubhouse Inn and Conference Center.

The taxpayers consist of two hotels in Nashville and one hotel in Knoxville that are licensees of Clubhouse Inns of America, Inc. These "upscale limited service" hotels cater to business travelers, and a majority of their guests are repeat customers because of the corporate rates the hotels offer. The hotels offer oversized rooms with the standard amenities but do not offer room service, valet service, or a full dining service.

In order to promote a perception that their guests receive "exceptional value" for their money, each Clubhouse Inn provides registered guests with a complimentary breakfast each morning and with complimentary alcoholic and nonalcoholic beverages at a manager's reception held each evening. Each hotel's marketing materials prominently state that hotel guests "awake each morning to a complimentary full, hot breakfast buffet and unwind at night at our two-hour guest reception with complimentary beverages." The purpose of offering complimentary breakfast and beverages is to obtain a marketing edge on other hotels competing for business customers.

This method of operation is known as the "American Plan," a system of hotel management in which a guest pays a daily rate for room and meals. It can be contrasted to the "European Plan" in which the rate charged to the guest includes only the charge for the room and not for meals.

In order to provide the breakfast buffet and the manager's reception, each hotel has a restaurant and lounge. Each hotel must obtain appropriate state and local licenses and permits in order to provide these services. Essentially, each hotel must be licensed to operate a restaurant and a cocktail lounge. These facilities are open to the public as well. Persons who are not registered guests must purchase their breakfast or alcoholic beverages. The Commissioner does not contest the retail character of the sales to non-guests.

The hotels carefully control access to the complimentary breakfasts and beverages. Hotel guests must sign a register at breakfast and may only obtain alcoholic beverages at the manager's reception by presenting dated tickets furnished to hotel guests each day of their stay. Since the cost of the breakfast service and the beverages is included in the price of the room, the hotel guests' bills do not contain a separate charge for either the breakfast or the beverage service. Room rates at Clubhouse Inns do not vary depending on whether the guest eats breakfast or receives beverages at the manager's reception. Thus, persons who do not take advantage of the complimentary breakfast and beverages pay the same daily room rate as guests who do partake of the breakfast and beverage services.

Persons not staying at the hotel who are accompanying hotel guests are not entitled to complimentary breakfast or alcoholic beverages. These non-guests must purchase breakfast or tickets for alcoholic beverages at the hotel's front desk, or the hotel guest may arrange to have these charges included on his or her bill. Under the latter arrangement, the charges for the persons who are not registered hotel guests are itemized separately on the guest's bill and are accounted for separately on the hotel's books.

Persons purchasing separate breakfasts or alcoholic beverage tickets must pay the applicable sales and alcoholic beverage taxes on their purchases. Guests do not pay separate sales or alcoholic beverage taxes on their complimentary breakfasts or beverages. The hotel collects the applicable sales tax on each guest's bill and remits the appropriate alcoholic beverage taxes based on the tickets redeemed at the manager's reception.

Each Clubhouse Inn incurs substantial cost in providing breakfast and alcoholic beverages to its registered guests. These costs are reflected in each hotel's financial records as separate and distinct components of the hotel's overall operating costs. When each hotel purchases the food and beverages for its inventory, it presents its suppliers with the proper certificate and, as a result, does not pay sales tax on these items. The price of the rooms at each hotel takes into account the cost incurred for providing the breakfast and beverages, and the prices are set in order to enable each hotel to make a profit on the entire overnight room package that includes the room and the complimentary breakfast and beverages.

The current dispute arises from sales tax audits performed by the Department of Revenue for the period from January 1, 1990 through August 31, 1993.¹ Following these audits, the Commissioner assessed the Knoxville Clubhouse Inn $26,243, the Nashville Clubhouse Inn $25,700, and the Clubhouse Inn and Conference Center $29,296. The hotels paid the assessed taxes under protest and filed suit in the Chancery Court for Davidson County seeking to recover the disputed taxes. Following a bench trial, the trial court entered an order on December 18, 1998, finding that each of the hotels were not required to pay the disputed tax and awarding each hotel a judgment for the disputed tax, together with interest and reasonable legal expenses pursuant to Tennessee Code Annotated section 67-1-1803(d) (1998). The Commissioner has appealed from this order.

At the outset it must be noted that the taxpayer bears the burden of demonstrating its entitlement to the "sales for resale" exemption in Tenn. Code Ann. § 67-6-102(24)(A) (1998).

The "for any purpose other than for resale" language in Tenn. Code Ann. § 67-6-102(24)(A) has been construed as an exception to the sales tax statute. See Colemill Enters., Inc. v. Huddleston, 967 S.W.2d 753, 756 (Tenn. 1998). Accordingly, it must be construed against the taxpayer, and an exception from sales tax must positively appear because it will not be implied. See, e.g., Hyatt v. Taylor, 788 S.W.2d 554, 556 (Tenn. 1990); American Cyanamid Co. v. Huddleston, 908 S.W.2d 396, 400 (Tenn. Ct. App. 1995). Any well-founded doubt is sufficient to defeat a claimed exemption from taxation. See United Canners, Inc. v. King, 696 S.W.2d 525, 527 (Tenn. 1985).

That being said, however, we must look to the statutes and the regulations to determine the scope of the exemption. In this case, Tenn. Code Ann. § 67-6-102(24)(A) defines "sale at retail" as "taxable sale of tangible personal property . . . to a consumer . . . for any purpose other than for resale." In addition, Tenn. Comp. R. & Regs. r. 1320-5-1-.63(1) (1987) defines "sales for resale" as "those whereby a supplier of materials . . . makes available to legitimate dealers actually selling such property . . . as such." Thus, in order to prevail, the hotels must demonstrate that they are actually selling breakfast and beverages "as such" to the registered guests at their hotels.

Tenn. Code Ann. § 67-6-102(25)(A) defines a "sale" as "any transfer of title or possession . . . of tangible personal property for a consideration." Thus, there are three elements necessary to constitute a taxable sale: (1) the transfer of title or possession or both, (2) of tangible personal property, and (3) for a consideration. See Mast Advertising & Publishing, Inc. v. Moyers, 865 S.W.2d 900, 902 (Tenn. 1993); Volunteer Val-Pak v. Celauro, 767 S.W.2d 635, 636 (Tenn. 1989). For this purpose, consideration means either a benefit to the promisor or a detriment to or obligation on the promisee. See Trailer Conditioners, Inc. v. Huddleston, 897 S.W.2d 728, 731 (Tenn. Ct. App. 1995).

The Commissioner argues that the hotels must live with the legal consequences of their choice to represent to registered guests that they are giving away breakfasts and beverages free rather than selling them. Thus, the Commissioner insists that the form of the transaction is of controlling importance. See Standard Advertising Agency, Inc. v. Jackson, 735 S.W.2d 441, 443 (Tenn. 1987). The hotels respond that the courts should not apply the "form-over-substance" doctrine and that the substance of the transaction should control over its form.

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