Walker's Inc. D/B/A Walker's Quality Cleaners v. Farr

• Decision Date: 07 September 2010
• Docket Number: No. W2010–00164–COA–R3–CV.,W2010–00164–COA–R3–CV.
• Citation: 338 S.W.3d 887
• Parties: WALKER'S, INC. d/b/a Walker's Quality Cleanersv.Reagan FARR, Commissioner of the Department of Revenue, State of Tennessee.
• Court: Tennessee Court of Appeals

338 S.W.3d 887

WALKER'S, INC. d/b/a Walker's Quality Cleaners

v.Reagan FARR, Commissioner of the Department of Revenue, State of Tennessee.

No. W2010–00164–COA–R3–CV.

Court of Appeals of Tennessee, Western Section, at Jackson.

June 15, 2010 Session.Sept. 7, 2010.Permission to Appeal Denied by

Supreme Court Feb. 16, 2011.

Robert E. Cooper, Jr., Attorney General and Reporter, Michael E. Moore, Solicitor General, and R. Mitchell Porcello, Nashville, Tennessee, for the appellant, Reagan Farr, Commissioner of the Department of Revenue.Louis F. Allen, Steven H. McCleskey, and Amy Ferguson Dudek, Memphis, Tennessee, and John R. Moss, Jackson, Tennessee, for the appellee, Walker's, Inc.

OPINION

HOLLY M. KIRBY, J, delivered the opinion of the Court, in which ALAN E. HIGHERS, P.J., W.S., and J. STEVEN STAFFORD, J., joined.HOLLY M. KIRBY, Judge.

This appeal involves the Retailers' Sales Tax Act. The plaintiff taxpayer is a dry-cleaning business. The taxpayer did not pay Tennessee sales tax for the sale of dry-cleaning and laundering services to a formalwear rental business. After an audit, the Tennessee Department of Revenue concluded that the taxpayer's sales of these services did not qualify as “sales for resale” that were exempt from taxation under the Retailers' Sales Tax Act, and assessed unpaid sales taxes. The taxpayer filed this lawsuit challenging the assessment. The parties filed cross-motions for summary judgment. The trial court concluded that the taxpayer's sales of dry-cleaning and laundering services qualified for the “sale for resale” exemption and abated the assessment. The Commissioner of the Department of Revenue appeals. We reverse, finding, inter alia, that the sales do not fall within the “sale for resale” exemption from taxation under the Retailers' Sales Tax Act because dry-cleaning and laundering garments does not amount to “processing” under the Act.

Facts and Procedural History

The facts in this case are undisputed. Plaintiff/Appellee Walker's, Inc. (“Walker's”) is a Tennessee corporation with its principal place of business in Jackson, Tennessee. Doing business as Walker's Quality Cleaners, Walker's is a full-service dry-cleaning business. Walker's provides dry-cleaning and laundering services to Brasher's, Inc. (“Brasher's”), a formalwear business that rents and sells tuxedos, shirts and accessories to its customers.

Brasher's is a separate Tennessee corporation from Walker's, but both do business in the same building in Jackson. During the pertinent time period, when Walker's was paid by Brasher's for dry-cleaning and laundering services, Walker's did not collect sales tax from Brasher's. Rather, Brasher's would provide Walker's with a resale certificate, to evidence that the sale of the laundering and dry-cleaning services fell within the “sale for resale” exception to the Retailers' Sales Tax Act (“the Act”), Tennessee Code Annotated § 67–6–101 et seq.¹

In 2007, the Tennessee Department of Revenue (“Department”) conducted a sales and use tax audit of Walker's business for the period of January 1, 2004 through December 31, 2006. At the conclusion of the audit, the Department determined that sales by Walker's of laundering and dry-cleaning services to Brasher's did not constitute exempt “sales for resale” under the Act and disallowed exemption from the sales and use tax claimed by Walker's. Consequently, the Department issued a Notice of Assessment against Walker's in the amount of $57,580 for the unpaid sales and use taxes.²

Walker's refused to pay the assessment and asked for an informal conference with a Department representative to try to resolve the dispute. Alas, the conference proved unsuccessful. Walker's then filed the instant lawsuit in the Madison County Chancery Court (“trial court”) challenging the assessment. Pursuant to Tennessee Code Annotated § 67–1–1801(a)(1)(B),³ the complaint named the Commissioner of the Department of Revenue, Reagan Farr (“Commissioner”), as defendant. In the complaint, Walker's asserted that the laundering and dry-cleaning services provided to Brasher's fell within the sale for resale exemption from sales and use tax because the services “constitute[d] the packaging and processing of the same product rented by Brasher's, Inc. to its customers.” On this basis, Walker's sought abatement of the assessment and an award of attorney fees and litigation expenses pursuant to Tennessee Code Annotated § 67–1–1803(d).

The Commissioner answered the complaint and denied that Walker's qualified for the sale for resale exemption from taxation. Because Walker's had not paid the assessment prior to filing its lawsuit, the Commissioner asserted a counterclaim for the amount of the assessment plus interest. In addition, the Commissioner sought an award of attorney fees and litigation expenses.

Thereafter, the parties filed cross-motions for summary judgment. After a hearing, the trial court concluded that there were no genuine issues of material fact. The trial court found as follows:

The services provided by Walker's to Brasher's is clearly a process by which it reworks Brasher's product without which the product could not be resold or re-rented to the ultimate consumer. Brasher's does not use either the process or the clothing. It is a process that is necessary in retail sales, or rentals, of clothing. It cannot be separated necessarily from the clothing and is a component part of the clothing being rented by Brasher's at retail. The services of dry cleaning and laundry [sic] are incapable of being separated from the garments sold or rented at retail.

Thus, the trial court determined that Walker's services constituted a necessary “process” in the formalwear rental and sales business conducted by Brasher's. On this basis, the trial court concluded that the sales by Walker's to Brasher's of dry-cleaning and laundering services came within the sale for resale exemption from taxation under the Act. The trial court referred to Walker's providing packaging services as well, a second exemption from taxation under the Act. Accordingly, the trial court abated the Commissioner's assessment in its entirety and awarded attorney fees to Walker's.

The Commissioner now appeals.

Issues on Appeal and Standard of Review

On appeal, the Commissioner argues that the trial court erred in holding that the sale of dry-cleaning and laundering services by a dry-cleaner to a formalwear store that sells and rents tuxedos and related accessories to customers at retail constitutes a “sale for resale” exempt from sales tax under the Act. The Commissioner argues also that the trial court erred in holding that the sale of dry-cleaning and laundering services by a dry-cleaner to a formalwear store that sells and rents tuxedos and related accessories to customers at retail constitutes the sale of “packaging materials” exempt from sales tax under the Act.

“Our review of a trial court's award of summary judgment is de novo with no presumption of correctness, the trial court's decisions being purely a question of law.” Wylie Steel Fabricators, Inc. v. Johnson, 179 S.W.3d 509, 514 (Tenn.Ct.App.2005) (quoting BellSouth Adver. & Publ'g Co. v. Johnson, 100 S.W.3d 202, 205 (Tenn.2003)). Summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law based on the undisputed facts. Chapman v. Bearfield, 207 S.W.3d 736, 739 (Tenn.2006) (citing Blair v. W. Town Mall, 130 S.W.3d 761, 764 (Tenn.2004)). In granting summary judgment to Walker's, the trial court construed certain provisions of the Retailers' Sales Tax Act. The trial court's construction of the statutes is reviewed de novo with no presumption of correctness. See Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 506 (Tenn.2004) (citing Bryant v. Genco Stamping & Mfg. Co., 33 S.W.3d 761, 765 (Tenn.2000); Freeman v. Marco Transp. Co., 27 S.W.3d 909, 911 (Tenn.2000)).

In construing statutes, the duty of the court is “to ascertain and give effect to the intention and purpose of the legislature.” Id. at 507 (citing Lipscomb v. Doe, 32 S.W.3d 840, 844 (Tenn.2000); Freeman, 27 S.W.3d at 911). When possible, this intent is gleaned from “the natural and ordinary meaning of the language used, without forced or subtle construction that would limit or extend the meaning of the language.” Id. (quoting Lipscomb, 32 S.W.3d at 844). Statutes must be read in their entirety, because the court assumes that the legislature used each word purposefully to convey its intent, meaning, and purpose. Id. (citing Tenn. Growers, Inc. v. King, 682 S.W.2d 203, 205 (Tenn.1984)). “The background, purpose, and general circumstances under which words are used in a statute must be considered, and it is improper to take a word or a few words from its context and, with them isolated, attempt to determine their meaning.” Id. (citing First Nat'l Bank of Memphis v. McCanless, 186 Tenn. 1, 207 S.W.2d 1007, 1009–10 (1948)).

We must also consider principles of statutory construction that specifically apply to taxation statutes. “Statutes imposing a tax are to be construed strictly against the taxing authority,” while “statutes granting exemptions from taxation are construed strictly against the taxpayer.” Id. (citing Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196, 198 (Tenn.1994); Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn.1992)).

Analysis

Originally enacted in 1947, the Tennessee Retailers' Sales Tax Act ⁴ levies a tax on retail sales of tangible personal property and specifically enumerated services.⁵ T.C.A. §§ 67–6–202, 67–6–205 (2006); see Timothy R. Hurley, Curing the Structural Defect in State Tax Systems: Expanding the Tax Base to Include Services, 61 Mercer L.Rev. 491, 500 (Winter 2010). Tennessee Code Annotated § 67–6–202 provides: “For the exercise of the privilege of engaging in the business of selling tangible personal property at retail in this state,...