Sears, Roebuck & Co. v. Woods

• Decision Date: 24 February 1986
• Docket Number: No. 85-15-I,85-15-I
• Citation: Sears, Roebuck & Co. v. Woods, 708 S.W.2d 374, 12 MediaL.Rep. 1897 (Tenn. 1986)
• Parties: 12 Media L. Rep. 1897 SEARS, ROEBUCK & COMPANY, Appellant, v. Jayne Ann WOODS, Commissioner of Revenue of the State of Tennessee, and Martha B. Olsen, Commissioner of Revenue of the State of Tennessee, Appellees.
• Court: Tennessee Supreme Court

Page 374

708 S.W.2d 374

12 Media L. Rep. 1897

SEARS, ROEBUCK & COMPANY, Appellant, v.Jayne Ann WOODS, Commissioner of Revenue of the State of Tennessee and Martha B. Olsen, Commissioner of Revenue of the State of Tennessee, Appellees.

No. 85-15-I

Supreme Court of Tennessee at Nashville.

Feb. 24, 1986.

Lewis R. Donelson, Boyd L. Rhodes, Jr., Robert Mark Glover, Heiskell, Donelson, Bearman, Adams, Williams & Kirsch, Memphis, for appellant.

Joe C. Peel, Asst. Atty. Gen., Nashville, W.J. Michael Cody, Atty. Gen., Nashville, for appellees.

Marian F. Harrison, Alan D. Johnson, Willis & Knight, Nashville, for amicus curiae, NewspaperPrinting Corp.

Kenneth H. King, Jr., Boult, Cummings, Conners & Berry, Nashville, for amicus curiae, Dayton Hudson Corp.

OPINION

JERRY SCOTT, Special Justice.

In the context of the sales and use tax statutes, this case presents an issue of first impression in Tennessee.The question is whether preprinted advertising supplements inserted in a newspaper are part of the newspaper.The plaintiff contends that they are and that they are therefore exempt from the use tax, pursuant to TCA § 67-6-329(a)(3).The Chancellor held that the supplements are not part of the newspaper and thus subject to the use tax.In its first issue, Sears contends this was error.

Sears, Roebuck & Company is a New York corporation which operates a well-known nationwide chain of department stores.In order to promote sales at its stores, Sears spends large sums of money on advertising in the print and broadcast media.In the newspaper business, this advertising is done in a number of ways.The first is known as "run of the press"(ROP) advertising.These are the advertisements which are included in the body of the newspaper interspersed among the news and editorial contents of the paper.Their placement within the paper is determined by the newspaper staff.Newspaper advertising is also done by separate advertising sections printed by and contained in the newspaper.These sections contain no news or editorial material, but consist entirely of advertising for the particular advertiser.In the trade, these are known as "we prints".The third type of advertising is a preprinted advertising supplement, printed by an independent printer and shipped directly to the newspaper by the printer for inclusion in editions designated by the advertiser.These are known in the trade as "preprints".Only preprints are the subject of this lawsuit.

The preprints under consideration here were printed during the years 1971 through 1981 by a printer located in the state of Georgia.Sears instructed the printer to deliver the preprints to designated newspapers in Tennessee where they were stored in the newspapers' warehouses.Upon Sears' instructions, the newspapers inserted the preprints into designated editions of the papers.This was accomplished by two methods.In some instances, after the paper was printed, insertion machines were used to insert the preprints.The other method is known in the trade as "topping".In that case the preprints were delivered to the carriers in separate packages and one preprint was placed on top of each paper before it was rolled or tubed.In some instances, the carriers did not place the preprints into the paper, but delivered them as separate packages.

The preprint business has grown markedly since it began in about 1966.Newspapers have responded by developing innovative means of distributing this type of advertising.For example, newspapers can provide "total market coverage," i.e., total distribution to all homes in a targeted delivery area whether they subscribe to the newspaper or not.In addition, they can provide "total paid circulation" to all subscribers.They can also provide coverage in any smaller areas desired by the advertiser all the way down to "zoned circulation," in which only targeted portions of the circulation area will receive preprints with the newspaper.For example, if the advertiser is selling a product which can only be afforded by the rich, it is possible to deliver the preprint with the newspapers that are delivered on specified streets where the rich live, while leaving them out of papers delivered to less affluent areas.They can also provide total market coverage in a zoned area.For example, all homes within a specified radius of a particular store can be targeted for delivery of the preprints with no others receiving that particular preprint.

Because newspapers now have this flexible delivery capability, there was proof that, from time to time, they receive complaints from customers who have not received a particular preprint when they learn about it from friends who live where the preprints were distributed.

The proof also revealed that control over the preprints is retained by the advertiser.Newspapers are paid a fee for each thousand preprints that are distributed.Preprints can be recalled by the advertiser up until the time that they are actually placed into the paper for distribution.In that casethey would be returned to the advertiser.Newspapers retain the right to reject preprint advertising which does not meet the newspaper's standards for good taste or decency, and Steve Harper, the Director of Advertising for Newspaper Printing Corporation, which distributes The Tennessean and The Nashville Banner, testified that his company had done so.

Because preprints often contain coupons which can be redeemed for discounts on merchandise, newspapers are required to provide additional security on their premises when preprints are in their warehouses.The newspapers must strictly account for the preprints and insure that they are not being pilfered by employees or others.

The Advertising Manager of The Jackson Sun testified that preprints are not copyrighted by the newspaper and that microfilm copies of the newspaper do not include preprints.They are not included in newspapers that are mailed to subscribers.

Preprints are produced in various sizes ranging from the exact dimensions of the newspaper itself down to cards and mailer envelopes.Product samples such as aluminum foil and dish cloths are also distributed by newspapers as preprints.

Preprints are preferred by advertisers because they have more longevity, i.e., they are not thrown away as soon as the rest of the paper.Some preprints are printed on a better grade of paper than that used by the newspapers, and the quality of the color reproduction is far superior to that produced by the newspapers.Others are printed on newsprint.Some preprints are actually mini-catalogues.

Preprints were contrasted with the Sunday comics sections, which are printed by the Greater Buffalo Press and purchased by the newspapers.Advertising in the comics section is sold by the papers.Parade magazine is likewise purchased from the printer and advertisements are placed in Parade by the newspapers.

Sears introduced the testimony of Dr. David Furse, who conducted a market survey consisting of 932 telephone interviews with newspaper subscribers in Davidson County.The survey showed that many readers considered the advertising supplements as integral components of the paper, and their use of the papers would be materially affected by their absence.In response to that testimony, the state offered the testimony of Dr. Robert Bibb, another market researcher.Dr. Bibb evaluated Dr. Furse's study and pointed out problems in research design, sampling and data interpretation.He concluded that Dr. Furse's study failed to show that advertising supplements are components of newspapers.

TCA § 67-6-329(a)(3) provides:

The sale at retail, the use, the consumption, the distribution, and the storage for use or consumption in this state of the following tangible personal property is specifically exempted from the tax imposed by this chapter:

* * *

(3) Newspapers;

The Chancellor held that Sears failed to carry the burden of proof to establish that preprints are exempt under this section of our code.

In tax suits as in other appeals from the Chancery Court, the case comes to this Court with a presumption of correctness, and the burden is on the appellant to show that the evidence preponderates against the findings of the Chancellor.Morton Pharmaceuticals, Inc. v. MacFarland, 212 Tenn. 168, 368 S.W.2d 756, 758-759(1963).

The rule is also well established that taxing legislation is liberally construed in favor of the taxpayer and strictly construed against the taxing authority.However, the burden of establishing an exemption is on the taxpayer seeking it and the exemption must be expressed in clear language which includes the taxpayer.An exemption must not be broadened beyond the command of the provision.Commercial Equities Corp. v. Tollett, 596 S.W.2d 801, 804(Tenn.1980).

As they have interpreted their taxing statutes, courts in other states have faced the issue of whether preprints are components of newspapers.As one would expect, there is a split of authority among the states that have considered the issue.Among the decisions holding that preprinted advertising supplements are an integral part of the newspaper and thus entitled to the same exemption from sales or use tax as the remainder of the newspaper are: Sears, Roebuck & Co. v. State Tax Commission, 370 Mass. 127, 345 N.E.2d 893(1976);Eagerton v. Dixie Color Printing Corp., 421 So.2d 1251(Ala.1982);andDaily Record Co. v. James, 629 S.W.2d 348(Mo.1982).Other courts have held that the supplements do not fall within their newspaper exemptions from sales or use tax.These cases include Ragland v. K-Mart Corp., 274 Ark. 297, 624 S.W.2d 430(1981);Caldor, Inc. v. Heffernan, 183 Conn. 566, 440 A.2d 767(1981);Wisconsin Dept. of Revenue v. J.C. Penney Co., 108 Wis.2d 662, 323 N.W.2d 168(1982);andK-Mart Corp. v. South Dakota Dept. of Revenue, 345 N.W.2d 55(S.D.1984).

Many of these cases rely on Friedman's Express v. Mirror Transp. Co., 71 F.Supp....