R. J. Reynolds Tobacco Co. v. Carson

• Decision Date: 17 July 1948
• Parties: R.J. REYNOLDS TOBACCO CO. v. CARSON, Commissioner of Finance and Taxation, et al.
• Court: Tennessee Supreme Court

213 S.W.2d 45

187 Tenn. 157

R.J. REYNOLDS TOBACCO CO. v. CARSON, Commissioner of Finance and Taxation, et al.

Supreme Court of Tennessee.

July 17, 1948

Appeal from Chancery Court, Davidson County William J. Wade, chancellor.

Suit by R.J. Reynolds Tobacco Company against Sam K. Carson Commissioner of Finance and Taxation, and others, to recover excise and franchise taxes, back assessed November 18, 1946 and paid under protest, for the years 1941 through 1945. From decree for complainant for taxes due for year preceding July 1, 1941, on ground that their back assessment and collection were barred by six-year statute of limitations, but holding complainant liable for taxes assessed for the years 1942 through 1945, both parties appeal.

Decree modified and, as so modified, affirmed.

Dudley Porter, Jr., and Tyne, Peebles, Henry & Tyne, all of Nashville, for complainant.

Roy H. Beeler, Atty.Gen., William F. Barry Sol.Gen., of Nashville, and Harry Phillips, Asst.Atty.Gen., for defendants.

GAILOR Justice.

This is a suit by the Tobacco Company to recover excise and franchise taxes, back assessed November 18, 1946, and paid under protest, for the years 1941 through 1945, in the sum of $54,362.17 with interest. The Chancellor rendered a decree for the Complainant for the taxes due for the year preceding July 1, 1941, on the ground that their back assessment and collection were barred by the 6-year Statute of Limitations, but held the Complainant liable for the taxes assessed for the years 1942 through 1945. From the parts of the decree that are adverse to their respective interests, both parties have appealed and assigned errors.

The Tobacco Company sells Camel cigarettes and other tobacco products in Tennessee in two ways: (1) It owns and operates a fleet of motor vehicles which are loaded with the Company's products and from which sales are made to customers direct. There is no controversy about liability for taxes on this operation from which the gross sales for the years in question were from $150,000 to $175,000 per year. (2) By a very much larger operation, the Tobacco Company ships carloads of its products to public warehouses in Memphis and Nashville, where the merchandise is stored in the name of the Tobacco Company, and whence orders are shipped to customers on order of the Company by employees of the warehouses, or in some cases deliveries by the warehouses to customers in Memphis and Nashville, on orders from the Tobacco Company. When the merchandise comes to rest in the public warehouses, it has not been sold to or ordered by customers. The bulk of the sales made thereafter is to customers in Tennessee, but some orders are filled for customers in other States, and shipped interstate by the warehouses. Some orders are made on the stock in warehouses by the traveling salesmen of the Complainant, but most of the orders to the warehouses originate from the home office of the corporation in North Carolina, which approves all credit to customers.

On this part (2) of its operation from which Complainant's sales grossed from 6 to 9 million dollars per year from 1941 through 1945, the Company insists that it is not liable for franchise and excise taxes, as it was held to be by the Defendant Commissioner, or his predecessor. The determination of this liability is the main issue in the present suit.

By its bill and assignments of error, the Complainant contends that by agreement reached with the Commissioner of Finance and Taxation after conferences in 1937 and 1938, it made no return and paid no franchise and excise taxes on sales through warehouses during the years 1941 through 1945, and that therefore, the back assessment to collect taxes on the sales through warehouses is, on account of the agreement with the Commissioner, inequitable and unjust; that sales through public warehouses were not sales "made through or by offices, agents or branches located in Tennessee;" that the decision of this Court in Sealed Power Co. v. Stokes, 174 Tenn. 493, 127 S.W.2d 114, was erroneously held by the Chancellor to determine the present controversy; and finally, that the levy of these taxes by the Department of Finance and Taxation, as it was approved and validated by the Chancellor, violated Art. I, sec. 8 and the 14th Amendment of the Constitution of the United States and sec. 8, Art. I, of the Constitution of Tennessee.

The excise tax and the franchise tax are both privilege taxes ( Corn v. Fort, 170 Tenn. 377, 95 S.W.2d 620, 106 A.L.R. 647) levied on corporations for the privilege of doing business in Tennessee. The excise tax is measured by the "net earnings" (Bank of Commerce & Trust Co. v. Senter, 149 Tenn. 569, 596, 260 S.W. 144) within the State, and the franchise tax undertakes to reach the use of the corporate franchise and is based on that proportionate part of the corporate capital stock, surplus and undivided profits employed in doing the business in Tennessee. Obviously, the amount due for excise tax being based on "net earnings" in any year can be calculated with precision from the corporate books, but the amount of the franchise tax cannot be reached with such accuracy and must be, in its final analysis, a matter of opinion and approximation.

However, both the franchise and excise tax Acts, contain a formula for calculating the amount of taxes due from foreign corporations and the validity of the formula is not in controversy. For the franchise tax on the Complainant the formula is:

"(2) If the principal business in this state is selling, distributing, dealing in or using tangible personal property the capital stock, surplus and undivided profits shall be apportioned to Tennessee on the basis of the ratio obtained by taking the arithmetical average of the following two ratios:

"(a) The ratio of the value of its real estate and tangible personal property in this state on the day of the close of its fiscal year is to the value of its entire real estate and tangible personal property then owed ("owned"--Ch. 100 Pu.A.1937) by it, with no deductions on account of encumbrances thereon.

"(b) The ratio of the total sales made through or by offices, agencies, or branches located in Tennessee during the income year to the total sales made everywhere during said year." Williams' Code, sec. 1248. 145(2).

For the excise tax the formula is:

"(2) If the principal business in this state is selling, distributing, dealing in or using tangible personal property, the entire net earnings shall be apportioned to Tennessee on the basis of the ratio obtained by taking the arithmetical average of the following three ratios:

"(a) The ratio of the value of its real estate and tangible personal property in this state on the day of the close of the fiscal year is to the value of its entire real estate and tangible personal property then owned by it, with no deductions on account of the encumbrances thereon.

"(b) The ratio of the total sales made through or by offices, agencies, or branches located in Tennessee during the income year to the total sales made everywhere during said year.

"(c) The ratio of the gross sales to customers within Tennessee is to the total gross sales from all sources." Williams' Code, sec. 1316(2).

From the tax returns for the years in question, it appears that for this taxpayer 1316(b) and (c) are the same figure. The only question on these formulae presented on this appeal is whether the warehouse operation of the Complainant is to be construed as "sales made through or by offices, agencies, or branches located in Tennessee." Sec. 1248. 145(2)(b), sec. 1316(2)(b).

Where, as here, in a legislative act, words are used in a series, effect must be given to every word ( Mensi v. Walker, 160 Tenn. 468, 26 S.W.2d 132), and it must be presumed that the Legislature did not use three words where one would do, and that each was intended to have an individual meaning of its own different from the meaning of the other two words. So here, although it cannot be said that under the facts, the public warehouses in Nashville and Memphis were "offices" or "branches" of the Tobacco Company, yet the warehouses are definitely "agencies" of the Tobacco Company for the storage of its products and delivery of those products to customers in Tennessee and neighboring states.

In the original bill, the Complainant alleged that in 1937 or 1938 the business done through the warehouses was held by the then Commissioner of Finance and Taxation to be exempt from excise and franchise taxes. In its answer the State denies such agreement with the Commissioner and such exemption, and asserts that the warehouse operation of the Complainant was first discovered by the Department in 1946, shortly before the back assessment was made, and that the only agreement that the Complainant had with the Department in 1937 or 1938 was that it was liable for the taxes as a "selling" and not a "manufacturing" corporation. The Chancellor found that the Complainant had failed to show the alleged agreement with the Department of Finance and Taxation, and the record supports that finding, but we prefer to base our affirmance of the Chancellor on the rule of law that the Commissioner of Finance and Taxation had no authority to waive the State's right to collect the tax, and that the facts here, since they fail to show any injury to the taxpayer, are insufficient to create an estoppel:

"The policy of the state is reflected in the act, and that policy has not been changed. Appellant can have no advantage from the circumstances that several of the commissioners, after the act became effective, erroneously permitted it to withhold from its net earnings, reported as a measure of its tax, the interest on tax exempt bonds." Natl. Life...