Wylie Steel Fabricators, Inc. v. Johnson

• Decision Date: 24 October 2005
• Citation: 179 S.W.3d 509
• Parties: WYLIE STEEL FABRICATORS, INC. v. Ruth E. JOHNSON, Commissioner of Revenue for the State of Tennessee.
• Court: Tennessee Supreme Court

179 S.W.3d 509

WYLIE STEEL FABRICATORS, INC. v. Ruth E. JOHNSON, Commissioner of Revenue for the State of Tennessee.

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

March 1, 2005 Session.

April 28, 2005.

Application for Permission to Appeal Denied by Supreme Court October 24, 2005.

Gerald B. Kirksey, Timothy H. Nichols, Brentwood, TN, for Appellant.

Paul G. Summers, Attorney General and Reporter, Wyla M. Posey, Assistant Attorney General, Nashville, TN, for Appellee.

OPINION

ALAN E. HIGHERS, J., delivered the opinion of the court, in which W. FRANK CRAWFORD, P.J., W.S., and HERSCHEL P. FRANKS, P.J., joined.

This appeal involves a sales and use tax assessment issued by the Tennessee Department of Revenue against a taxpayer engaged in the business of fabricating steel products for use in various structures. The taxpayer obtained purchase orders from three churches for raw materials to be used in the fabrication of steel products which were to be incorporated into the churches then under construction. The taxpayer secured the raw materials, fabricated the steel products, and installed them in the churches. The taxpayer did not pay sales or use tax on any of the raw materials used in the fabrication process. The department subsequently audited the taxpayer and assessed a tax liability for taxes owed on the materials. The taxpayer paid the amount assessed and filed suit in the chancery court to contest the assessment. Specifically, the taxpayer asserted that it was entitled to an exemption under section 67-6-209(b) of the Tennessee Code. After both parties filed cross-motions for summary judgment, the chancery court granted the department's motion and denied the taxpayer's motion. We affirm in part, reverse in part, and remand this case to the trial court for further proceedings consistent with this opinion.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Wylie Steel Fabricators, Inc. ("Wylie Steel" or "Appellant") is a Tennessee Corporation engaged in the business of fabricating steel products for use in various structures. Wylie Steel's principal business office is located in Brentwood, Tennessee, and its primary fabrication facility is located in Springfield, Tennessee. In order to fabricate steel products, Wylie Steel purchases raw materials from suppliers in Tennessee and other states. Ordinarily, Wylie Steel contracts with the general contractor at a particular construction project to fabricate and install the steel products to be used in the construction process. Wylie Steel does not utilize its own employees to install the steel products it fabricates but, instead, subcontracts with another company to carry out the installation process. Occasionally, Wylie Steel will sell some of the products it fabricates to other persons or businesses without installing the items. When Wylie Steel purchases raw materials from its suppliers, it does not pay sales tax at the time of purchase. Instead, Wylie Steel provides its suppliers with a resale certificate.

At issue in this case are three church construction projects undertaken in Tennessee for which Wylie Steel fabricated and installed the necessary steel products.¹ For each church project, the church issued a purchase order to Wylie Steel for the raw materials to be utilized in fabricating the steel products necessary for each construction project. The purchase orders did not contain a specific quantity of materials, but they merely expressed an approximate cost of securing such materials. After securing the raw materials, Wylie Steel contracted with the general contractor for each church project to fabricate, deliver, and install the fabricated steel products. The amount to be paid to Wylie Steel under each subcontract represented Wylie Steel's cost for securing the raw materials and fabricating them, as well as its overhead and profit.

On its Tennessee sales and use tax return, Wylie Steel claimed, as exempt sales, the cost of the raw materials it used to fabricate the steel products installed in the churches. In 2000, the Tennessee Department of Revenue ("Department") audited Wylie Steel for the period between December 1, 1996, through December 31, 1999. During the audit, the Department used a "test period" audit method and examined sample periods which included the three church projects. Wylie Steel signed an audit procedure agreement expressing its agreement with the audit procedure used, but it wrote the following at the bottom of the document: "WSF reserves the right to demonstrate actual volume of certain transaction types occurring during the audit periods selected above."

The Department identified the three church projects as having taxable sales and/or uses for which Wylie Steel did not pay taxes. The Department asserted that Wylie Steel could not claim the cost of the raw materials for each church as exempt. As a result, the Department issued a sales and use tax assessment against Wylie Steel in the amount of $201,720.00 for taxes owed and $47,194.62 in interest. Of the $201,720.00 in taxes assessed, $52,158.00 represented unpaid sales tax on materials purchased by Wylie Steel from out-of-state suppliers or from Tennessee suppliers by presenting a resale certificate which Wylie Steel later fabricated and installed on non-church projects. Wylie Steel did not challenge this portion of the assessment. The remainder, $149.562.00, represented tax allegedly owed by Wylie Steel on the purchase and use of materials it installed for tax exempt entities. Wylie Steel contested this portion of the assessment.

In March of 2001, Wylie Steel met informally with the Department to discuss the tax assessment. The Department's Administrative Hearing Officer subsequently informed Wylie Steel that the Department correctly assessed the tax liability. On July 27, 2001, Wylie Steel sent a check to the Department in the amount of $274,980.00 for payment in full of the tax assessment. The Department received the payment on July 30, 2001, and applied the payment to Wylie Steel's account. As of that date, $54,304.73 in interest had accrued on the challenged portion of the assessment, and $18,468.57 in interest had accrued on the unchallenged portion of the assessment. Thus, as of July 30, 2001, the total amount due was $274,493.30. Having overpaid by $486.70, the Department credited Wylie Steel's account in this amount.

On January 25, 2002, Wylie Steel filed a complaint in the Chancery Court of Davidson County against the Commissioner of Revenue ("Commissioner"), pursuant to section 67-1-1801 et seq. of the Tennessee Code,² to challenge the Department's tax assessment. Specifically, Wylie Steel alleged that it was entitled to the tax exemption found in section 67-6-209(b) of the Tennessee Code. In the alternative, Wylie Steel sought a refund of the tax it paid arguing that, as a result of the audit method utilized by the Department, it was required to make an overpayment in taxes.

The parties subsequently filed cross-motions for summary judgment. The trial court conducted a hearing on the motions on September 4, 2003, and entered a Final Judgment on September 30, 2003, granting the Department's motion and denying Wylie Steel's motion. In entering its judgment in this case, the trial court made the following findings:

Wylie Steel contends that it is entitled to a refund of taxes paid in the amount of $203,866.73 and that the refund claimed includes $159,744.55 regarding the taxes assessed on the materials used to construct the churches involved, and $44,172.18 in an asserted over-assessment on those materials by the Commissioner of Revenue. Wylie Steel contends that it is exempt from the sales and use taxes assessed in this case under Tenn.Code Ann. § 67-6-209(b). The Commissioner contends that Wylie Steel is not entitled to the contractor's use tax exemption stated in Tenn.Code Ann. § 67-6-209(b) since Wylie Steel either purchased or used all of the materials at issue in Tennessee, that none of the churches involved purchased any of the materials at issue, and that Wylie Steel could not, by law, resell and transfer title to any of those materials to those churches as tangible personal property since Wylie Steel contracted to install those materials as a part of realty. The Commissioner also contends that the Tennessee Code contains an explicit codification of this legal concept in Tenn.Code Ann. § 67-6-209(c) which clearly states that any transfer by Wylie Steel of materials that [sic] installs as part of realty cannot be considered a sale of tangible personal property for sales and use tax purposes. All of the materials involved in this case fit in this category.

Upon consideration of the entire record including the complaint, answer, motions for summary judgment by both parties and memoranda in support thereof, responses and replies of both parties, affidavits, material fact statements, and the parties' joint stipulations of fact, the Court concludes that the Commissioner of Revenue properly assessed sales and use tax upon Wylie Steel's purchase or use of all the disputed items in this case and that Wylie Steel does not qualify for any exemption from the tax assessed. The Court finds that the churches involved did not have title to the tangible personal property involved prior to its installation as realty. Wylie Steel purchased all of that property, the materials at issue, and then later transferred those materials to the churches in the form of realty by installing them as part of a building. Thus, the materials were not transferred to the churches as tangible personal property. Such a transfer cannot, by law, be considered a sale or resale of tangible personal property since those materials are not transferred as tangible personal property, but rather as realty. Such a transfer also cannot, by law, be considered a sale or resale of those materials since Tenn.Code Ann. § 67-6-209(c) explicitly codifies this principle of law and states that any...