Phillips & Buttorff Mfg. Co. v. Carson

• Court: Tennessee Supreme Court
• Writing for the Court: NEIL, Chief Justice.
• Citation: Phillips & Buttorff Mfg. Co. v. Carson, 217 S.W.2d 1, 188 Tenn. 132 (Tenn. 1949)
• Decision Date: 17 January 1949
• Parties: PHILLIPS & BUTTORFF MFG. CO. v. CARSON.

217 S.W.2d 1

188 Tenn. 132

PHILLIPS & BUTTORFF MFG. CO. v. CARSON.

Supreme Court of Tennessee.

January 17, 1949

Appeal from Chancery Court, Davidson County; Thos. A. Shriver Chancellor.

Action by Phillips & Buttorff Manufacturing Company, against Sam E Carson, Commissioner of Finance and Taxation, to recover taxes paid by complainant under protest on materials allegedly exempt under the retailer's tax, and for a declaratory judgment as to the proper construction to be placed on the act. From a decree sustaining the bill in part the complainant and the defendant appeal.

Complainant's assignment overruled, defendant's assignments sustained decree reversed, and bill dismissed.

Charles L. Cornelius, W. Ovid Collins, Jr. and C. W. Tuley, all of Nashville, for appellant.

Roy H. Beeler, Atty. Gen., William F. Barry, Sol. Gen., of Nashville, and Allison Humphreys, Jr., Asst. Atty. Gen., for appellee.

NEIL Chief Justice.

This appeal presents the question of the proper construction of Section 2(c) 2 of Chapter 3 of the Public Acts of 1947, known as the Retailer's Sales Tax, and the validity of 'Rule 40', which was promulgated by the Commissioner of Finance and Taxation and which purports to interpret the section above referred to.

We will refer to the parties as they appeared in the Chancery Court.

The complainant filed its original bill to recover certain taxes which it paid under protest upon materials claimed to be exempt under Section 2(c) 2 of the Retail Sales Tax. Complainant is a wholesaler and engaged in manufacturing articles to be sold at retail, and in the course of its business buys materials to be used in its manufacturing processes. The bill sets out in detail the various articles, materials and substances upon which it was required to pay the sales tax and alleges that each and every such article and material is 'vital and indispensable to complainant's manufacturing process.' It is alleged that because they do not meet the requirements of the defendant Commissioner's ruling (with two possible exceptions) the complainant is required to pay the tax thereon.

The section of the Act, Sec. 2(c) 2, under which the tax is collected provides:

'Sec. 2(c) 2. The terms 'sale at retail', 'use', 'storage' and 'sonsumption' shall not include the sale, use, storage or consumption of industrial materials for future processing, manufacture or conversion into articles of tangible personal property for resale where such industrial materials become a component part of the finished product or are used directly in fabricating, converting, or processing such materials or parts thereof, nor shall such terms include materials, containers, labels, sacks or bags used for packaging tangible personal property for shipment or sale.'

The Rule of the Commissioner, which is assailed by complainant as being unlawful and unauthorized is as follows:

'Rule 40:

'Industrial materials for future processing, manufacturing or converting into articles of tangible personal property for resale, where such industrial materials become a component part of the finished product or are used directly in fabricating, converting or processing are not included in the Sales Tax Act.

'The following are examples of industrial materials not taxable under this provision:

'All raw materials which become a recognizable integral part of such finished articles; also such materials that are used directly in the processing, converting and fabricating tangible personal property such as solvents, refrigerants, purifying chemicals, oxidizing chemicals, catalysts and other chemicals used; also filter cloths, filter papers and other filtering materials.

'The following are examples of materials that are taxable under this provision:

'Fuel, either coal, coke, oil or other fuel, used for producing power, heat, steam, gas or electric energy for use in the processing, manufacturing, fabricating or converting of industrial materials into finished products, unless such fuels become an identifiable part of the finished product; also oil, grease, waste and maintaining materials used in connection with the operation of tools, machines, machinery or equipment which are used in processing, manufacturing, fabricating or converting as aforesaid'.

The bill alleges that by the language of Sec. 2(c) 2 'the legislature expressed the clear intention to exclude from the application of the Sales Tax the 'use', 'storage', and 'consumption' of all raw materials which are processed, manufactured into articles of tangible personal property for resale, and also all industrial materials employed directly in the fabrication, conversion or processing of such raw materials.' It is further alleged that it was intended to exclude from the tax two classes of tangible personal property, to-wit, (1) raw materials which are used in manufacturing and 'become a component part of the finished product' and (2) 'other industrial materials which do not become a component part of the finished product but which are used directly in the method or process of manufacture or conversion.' The several items, or classes of materials which are involved, and which the Commissioner has ruled as subject to the tax, as well as those exempt, appear in 'Rule 40', as copied in this opinion.

It is the contention of the complainant that the Commissioner, while he is authorized to make rules for the enforcement of the Sales Tax Act, has adopted a rule (Rule 40) which is so narrow that it is a burden upon the economic life of the complainant and other manufacturers in Tennessee, and is therefore illegal. The bill prayed for a Declaratory Judgment as to the proper construction to be placed upon the aforesaid Section of the Statute.

The Commissioner answered the bill, and, after admitting certain allegations which are not important to this present controversy, charged that his action in collecting the tax was not illegal and that Rule 40 is in conformity with the legislative intent. The answer denied that the exemption in Section 2(c) 2 was subject to the 'broad interpretation' given it by the bill and denied that it was ever the intention of the legislature to create an exemption which would exempt all industrial materials entering into or essentially vital and indispensable to the manufactured product. There was filed as an exhibit to the answer copies of the Senate and House Journals which disclosed, as defendant insists, the action of the legislature upon certain amendments to the Sales Tax Act, and which clearly indicated that it was not the intention to make the exemptions claimed in the original bill. The defendant denied the right of the complainant to have a Declaratory Judgment declaring the meaning and effect of Sec. 2(c) 2 of the Sales Tax Statute.

The cause was heard on stipulation and the chancellor sustained the bill in part and from this decree both the complainant and the defendant appealed.

Before giving consideration to the assignments of error it is proper to observe that the Commissioner in the lower court conceded that some of the materials upon which the tax had been collected were exempt. We deem it unnecessary to make any further reference to these items, or the reasons for adjudging them to be exempt other than to agree with the conclusion reached.

The Commissioner's assignments of error are as follows:

(1) 'The Chancellor erred in finding and decreeing that coal and fuel oil which are used to generate steam, which is then used to operate machines which are used in the manufacture of tangible personal property for resale, are exempted from taxation under Chap. 3 of the Public Acts of 1947 by the operation of Section 2(c) 2 of said Chap. 3. The Chancellor should have held that coal and fuel oil when so used are not exempt from taxation under said Chap. 3 by the operation of Section 2(c) 2 of said Chap. 3 (Assignment of Error No. I).'

(2) 'The Chancellor erred in finding and decreeing that coal and fuel oil which are used to maintain enameling solutions at uniform temperatures are exempt from taxation under Chap. 3 of the Public Acts of 1947 by the operation of Section 2(c) 2 of said Chap. 3; and in decreeing a recovery in favor of Appellee in the amount of $11.98, the amount of sales tax paid under protest on these items of tangible personal property. The Chancellor should have found and decreed that coal and fuel oil when so used are not exempted from taxation under said Chap. 3 by the operation of said Section 2(c) 2 (Assignment of Error No. II).'

The complainant's single assignment is as follows:

'The Chancellor erred in finding and decreeing that fire brick and clay used to line furnaces in which iron ore is melted, and clay to line the ladles which are used to transfer the molten metal from the iron furnaces to the molds, and all of which are gradually consumed in the manufacturing process, are subject to the tax levied by Chapter 3 of the Public Acts of 1947.'

We have given careful consideration to the learned chancellor's opinion, as well as the able and exhaustive argument of counsel in support of his finding. It was the view of the chancellor, and also of complainant's counsel, that the Commissioner had erred in his misinterpretation of the tax statute, Sec. 2(c) 2; that 'Rule 40' was narrow and was in clear violation of the intention of the legislature in that it imposed burdens upon manufacturers to their great disadvantage, and differed from the tax burden borne by agriculturists and other classes. We think the basic error of the chancellor's finding appears in giving the statute a liberal construction in favor of the taxpayer instead of a strict construction against him. It is a uniform rule of construction of tax statutes, from which we have not...