Vodafone Americas Holdings, Inc. v. Roberts
| Decision Date | 23 March 2016 |
| Docket Number | No. M2013-00947-SC-R11-CV.,M2013-00947-SC-R11-CV. |
| Citation | 486 S.W.3d 496 |
| Parties | Vodafone Americas Holdings, Inc. & Subsidiaries v. Richard H. Roberts, Commissioner of Revenue, State of Tennessee |
| Court | Tennessee Supreme Court |
Michael D. Sontag, Stephen J. Jasper and Ashley N. Bassel, Nashville, Tennessee, for the appellant, Vodafone Americas Holdings, Inc.
Herbert H. Slatery III, Attorney General and Reporter, William E. Young, Associate Attorney General, Charles L. Lewis, Deputy Attorney General, and Talmage M. Watts, Senior Counsel, Nashville, Tennessee, for the appellee, Richard H. Roberts,1 Commissioner of Revenue, State of Tennessee.
Joseph F. Welborn, III, Lauren B. Patten, Catherine Picou Oryl, Christopher Andrew Wilson and George Michael Yopp, Nashville, Tennessee for the Amicus Curiae, Council on State Taxation.
Carolyn W. Schott, Nashville, Tennessee for the Amicus Curiae, The Institute for Professionals in Taxation.
Brett R. Carter, Nashville, and Jeffrey Friedman, Washington, D.C., for the Amicus Curiae, Tennessee Cable Telecommunications Association.
Joe Huddleston, Helen Hecht, and Bruce Fort, Washington, D.C., for the Amicus Curiae, Multistate Tax Commission.
HOLLY KIRBY
, J., delivered the opinion of the Court, in which SHARON G. LEE, C.J., and CORNELIA A. CLARK and GARY R. WADE, JJ., joined. JEFFREY S. BIVINS, J., filed a separate opinion, concurring in part and dissenting in part.
In this appeal, we review a tax variance. The Commissioner of Tennessee's Department of Revenue determined that, if the standard apportionment formula in Tennessee's franchise and excise tax statutes were applied to the appellant taxpayer, a multistate wireless telecommunications company, nearly all of the taxpayer's sales receipts for services to its Tennessee customers—over a billion dollars in receipts—would not be subject to Tennessee franchise and excise taxes. Pursuant to his authority under Tennessee's franchise and excise tax variance statutes, the Commissioner imposed on the taxpayer a variance that required the taxpayer to pay taxes on the receipts from its Tennessee customers. The taxpayer now argues that, by imposing the variance, the Commissioner has usurped the legislature's prerogative to set tax policy. After review of the legislative history, we find that Tennessee's legislature intended for the Commissioner to have the authority to impose a variance where, as here, application of the statutory apportionment formula does not fairly represent the extent of the taxpayer's business activity in Tennessee. We decline to judicially abrogate the legislature's express delegation of this authority to the Commissioner. The variance in this case comports with Tennessee's franchise and excise tax statutes, the implementing regulation, and the statutory purpose of imposing upon corporations a tax for the privilege of doing business in this State. Finding no abuse of the Commissioner's discretion, we affirm.
Plaintiff/Appellants Vodafone Americas Holdings, Inc., and Subsidiaries (“Vodafone” or “taxpayer”)2 own a 45% partnership interest in Cellco Partnership, a Delaware company that does business throughout the United States as Verizon Wireless. Verizon Wireless provides wireless communication and data services to customers nationwide, including customers in Tennessee.
As discussed more fully infra, Vodafone calculated its franchise and excise tax liability for the period from December 31, 2000, through March 31, 2006, by determining its sales billed to Cellco customers with a Tennessee billing address and including that amount in the apportionment formula sales factor. Utilizing that method, Vodafone paid the State of Tennessee franchise and excise taxes totaling over $13 million during that period.
At some point, Vodafone retained new tax and accounting counsel; it reviewed the method used by Vodafone to calculate its franchise and excise taxes in several states, including Tennessee, for the period from December 31, 2000, through March 31, 2006. After doing so, the new counsel opined that, for that period, Vodafone had not engaged in any activity in Tennessee that would constitute “business activity” within the meaning of Tennessee tax laws. Vodafone's new counsel took the position that Vodafone actually owed no franchise and excise taxes to Tennessee for that period, so the entirety of the over $13 million paid to Tennessee constituted an overpayment.
In light of this opinion from its new counsel, Vodafone filed claims with the Tennessee Department of Revenue (“Department”) seeking a refund of all franchise and excise taxes it had paid for December 31, 2000, through March 31, 2006. Vodafone asserted that, during that period, it did not have “a taxable presence in the state,” so virtually all of the taxes it had paid for that period constituted an overpayment. The Department denied Vodafone's refund claims in their entirety.3
In August 2007, Vodafone filed the instant lawsuit against the Commissioner of Revenue for the State of Tennessee (“Commissioner”). Vodafone's original complaint asserted that it was not doing business in Tennessee and did not have a taxable nexus with Tennessee, so it was entitled to a refund of the franchise and excise taxes it had paid for the relevant period.4 The Commissioner filed an answer denying Vodafone's claims.
After the litigation had been underway for some time, Vodafone commissioned a tax study by PricewaterhouseCoopers (PwC) concerning the method Vodafone had used to calculate its taxes in a number of states, including Tennessee. The PwC study took the position that Vodafone had utilized the wrong methodology to calculate its franchise and excise taxes for Tennessee, and other states as well, for the period in question. Among its findings was a conclusion that Vodafone should have used a cost-of-performance methodology that would have excluded from Tennessee franchise and excise taxes all of Vodafone's earnings from Tennessee telecommunication service contracts. Based on the PwC study, Vodafone amended its complaint to include alternative legal theories for its claim for a partial refund.
Among the amendments to Vodafone's complaint was the addition of Count Eight. This new count asserted for the first time that the primary-place-of-use method originally used by Vodafone to calculate its franchise and excise taxes for the Relevant Period was inconsistent with Tennessee's statutes. It alleged that Vodafone had erroneously calculated the proportion of its earnings attributable to Tennessee by sourcing sales of its telecommunications services to Tennessee whenever the customer had a Tennessee billing address. The amended complaint asserted that this method was contrary to Tennessee law and had resulted in an overstatement of the amount of Vodafone's earnings attributable to Tennessee for the relevant tax period. The correct methodology for sales other than tangible personal property, the amended complaint claimed, was cost of performance, that is, attributing Vodafone's earnings to Tennessee only if most of Vodafone's earnings-producing activities or “costs of performance” took place in Tennessee. The great majority of Vodafone's receipts in Tennessee came from services rather than the sale of tangible personal property, i.e., cell phone service as opposed to the sale of cell phones and related items. Vodafone contended that the greater proportion of its costs associated with such services were incurred in another state, namely, New Jersey. Consequently, the amended complaint asserted that millions of dollars that Vodafone had paid to Tennessee in franchise and excise taxes during the relevant tax period constituted an overpayment for which a refund was due.5
In February 2009, the Commissioner filed an answer to the amended complaint, denying all claims. The Commissioner asserted that the statute of limitations had run on Vodafone's claims regarding taxes paid for the years 2000 and 2001. Subsequently, in recognition that the limitations period had lapsed, Vodafone abandoned its claims for those years. It is undisputed, then, that the tax period at issue in this appeal is January 1, 2002, to March 31, 2006 (the “Relevant Period”).
On May 21, 2010, the Commissioner sent Vodafone a letter notifying Vodafone of his decision to invoke his authority under Tennessee Code Annotated §§ 67–4–2014(a)6
and 67–4–2112(a)7 to impose a “variance” as to Vodafone's franchise and excise taxes for the Relevant Period. As set forth in these statutes, under certain circumstances discussed more fully below, the Commissioner may “vary” from the statutory method for calculating a particular taxpayer's franchise and excise taxes; hence, such an action is referred to as issuing or imposing a variance. The taxpayer may request such a variance or the Commissioner may, of his own volition, decide to impose one on the taxpayer. In this case, the Commissioner exercised his discretion to impose the variance on Vodafone.
The Commissioner's letter to Vodafone set forth his reasoning for issuing the variance. The Commissioner compared the cost-of-performance (COP) method of calculating the amount of Vodafone's business attributable to Tennessee with the primary-place-of-use (PPU) method utilized by Vodafone in its original tax returns for the Relevant Period. The variance letter explained that the PPU method utilized by Vodafone in its original tax returns for the Relevant Period was straightforward, and that method allowed the Commissioner to readily verify the underlying receipts supporting the taxpayer's return. Importantly, the Commissioner stated, the PPU methodology resulted in a calculation that fairly represented the extent of Vodafone's business in Tennessee because it treated as Tennessee receipts the payments that Tennessee customers made for Vodafone's cell phone services. In contrast, the letter claimed, the COP method as advocated by...
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