                                                                                                         03/25/2019
                  IN THE COURT OF APPEALS OF TENNESSEE
                               AT JACKSON
                                    February 12, 2019 Session

   AUTO GLASS COMPANY OF MEMPHIS INC. D/B/A JACK MORRIS
      AUTO GLASS v. DAVID GERREGANO COMMISSIONER,
       DEPARTMENT OF REVENUE, STATE OF TENNESSEE

                    Appeal from the Chancery Court for Shelby County
                       No. CH-16-1433 Walter L. Evans, Judge
                        ___________________________________

                               No. W2018-01472-COA-R3-CV
                           ___________________________________

This is a taxation dispute between the Commissioner of the Department of Revenue and a
Tennessee corporation. The primary point of contention concerns the proper tax
classification of the corporation under Tennessee’s Business Tax Act. After paying an
amount of taxes that it deemed improper, the corporation filed a claim for refund. The
Department of Revenue subsequently denied the claim for refund, and the corporation
thereafter filed suit seeking a refund in the Shelby County Chancery Court. The litigation
quickly advanced with the filing of competing cross-motions for summary judgment.
After a hearing, the chancery court ruled in the corporation’s favor, specifically rejecting
the Commissioner’s tax classification of the business. For the reasons stated herein, we
affirm.

 Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
                                  and Remanded

ARNOLD B. GOLDIN, J., delivered the opinion of the Court, in which ANDY D. BENNETT
and KENNY ARMSTRONG, JJ., joined.

Herbert H. Slatery III, Attorney General and Reporter, Andrée Sophia Blumstein,
Solicitor General, and Brian J. Ramming, Senior Deputy Attorney General, Nashville,
Tennessee, for the appellant, David Gerregano,1 Commissioner, Department of Revenue,

        1
          This lawsuit was initially filed against Richard Roberts, the previous Commissioner. During the
pendency of the action in the trial court, the current Commissioner, David Gerragano, replaced
Commissioner Roberts. Pursuant to Rule 25.04 of the Tennessee Rules of Civil Procedure, Commissioner
Gerregano was automatically substituted as a party. See Tenn. R. Civ. P. 25.04(1) (“When an officer of
the State, a county, a city or other governmental agency is a party to an action in the officer’s official
capacity and during its pendency dies, resigns, or otherwise ceases to hold the office, the action does not
State of Tennessee.

Robert E. Orians and Rebecca K. Hinds, Memphis, Tennessee, for the appellee, Auto
Glass Company of Memphis, Inc. d/b/a Jack Morris Auto Glass.

                                                OPINION

                     BACKGROUND AND PROCEDURAL HISTORY

       Auto Glass Company of Memphis, Inc., d/b/a Jack Morris Auto Glass (“Jack
Morris Auto Glass”), is a Tennessee corporation whose principal place of business is in
Shelby County. It was founded nearly 70 years ago, in 1951, and has been continuously
engaged in business in Tennessee since that time. As a business, Jack Morris Auto Glass
does several things. It is in the business of selling and installing automotive glass and
making repairs to damaged automotive glass. Although Jack Morris Auto Glass will on
occasion just sell automotive glass to a customer without selling any other related
products or services, it typically installs the glass that it sells.

The Department of Revenue’s shifting tax classification determinations
        After the Tennessee Business Tax Act was implemented in 1971, Jack Morris
Auto Glass registered with the Tennessee Department of Revenue (“the Department”)
and filed its business tax returns under Classification 1(B), which includes persons
making sales of glass. See Tenn. Code Ann. § 67-4-708 (listing the various tax
classifications). Following an audit for the 2003-2005 years, the Department did not
change this classification and left the business classified—as it had always been—under
Classification 1(B). However, following a later audit for the time period 2011-2014, the
Department decided that Jack Morris Auto Glass should be reclassified to Classification
3(C) as a seller of services. This new classification, which carried with it an increase in
tax liability, was made notwithstanding the fact that neither the relevant law nor the
business of Jack Morris Auto Glass had changed in the intervening years.

        Jack Morris Auto Glass objected to this reclassification, and the Department
thereafter adjusted the proposed tax assessment. However, the adjustment was not made
as a result of a decision to classify Jack Morris Auto Glass under Classification 1(B), as
Jack Morris Auto Glass thought was proper. Rather, the Department changed Jack
Morris Auto Glass’s classification to Classification 2(A), which includes persons making
sales of motor vehicles and accessories. After Jack Morris Auto Glass objected to this
classification, the Department determined that it had mistakenly classified the business
under Classification 2(A). However, rather than return it to its previous classification
under Classification 1(B), the Department determined that Classification 3(C) was, in


abate and the officer's successor is automatically substituted as a party.”).
                                                     -2-
fact, the proper classification. Nevertheless, citing a statute of limitation concern, the
Department permitted the business to remain under Classification 2(A) for the audit
period and required it to remit taxes under Classification 3(C) going forward, starting in
2015.

Taxpayer’s attempt to seek a refund and subsequent litigation
       On February 12, 2016, Jack Morris Auto Glass paid the assessed tax amount for
the audit period 2011-2014 under protest. It then paid business taxes for 2015 under
Classification 3(C) as had been directed by the Department. Although an informal
taxpayer conference was held with the Commissioner’s designee on April 27, 2016
following the request of Jack Morris Auto Glass, the Commissioner’s designee upheld
the audit division’s determinations and proposed assessment in a letter dated May 27,
2016. Shortly thereafter, on July 14, 2016, Jack Morris Auto Glass filed a claim for
refund with the Department, seeking to recover alleged overpayments for the 2011-2014
audit period and for the 2015 tax year. This claim for refund was subsequently denied by
the Department on July 22, 2016.

        Following the denial of its claim, Jack Morris Auto Glass filed a complaint against
the Commissioner in the Shelby County Chancery Court on September 2, 2016, seeking a
refund of business taxes. According to the complaint, Jack Morris Auto Glass alleged
that it should be classified under Classification 1(B), as a seller of “glass,” as opposed to
under Classification 3(C), as a seller of “services.” Among other things, the complaint
averred as follows:

       Because most of Jack Morris Auto Glass’s income comes from selling a
       product—glass—it is burdened with a substantial cost of goods sold that
       must be recovered in its pricing, and it is unjust to treat the taxpayer as if it
       were a business that generates most of its income from selling services,
       which do not carry a cost of goods sold in their pricing.

In addition to requesting a refund of over $60,000.00 in taxes it believed were wrongfully
collected, Jack Morris Auto Glass prayed for an award of reasonable attorney’s fees and
expenses pursuant to Tennessee Code Annotated section 67-1-1803(d). On October 13,
2016, the Commissioner filed an answer to the complaint, requesting that it be dismissed
with prejudice.

      On February 16, 2017, Jack Morris Auto Glass filed a motion for summary
judgment, arguing that there was no genuine issue of material fact with respect to its
claim for refund. In support of its motion, it relied on a contemporaneously-filed
statement of undisputed material facts, a legal memorandum, and the declaration of Paul
H. Morris, its President. In his declaration, Mr. Morris stated that the corporation’s
statements of gross sales reflected that “the major and principal source of taxable gross
                                             -3-
sales . . . [is] from the sale of glass.” Specifically, Mr. Morris noted that “[g]ross sales
revenue from sales of glass were 58.7% and 59.4% of total gross sales for the 2014 year
and 2015 year, respectively, with the balance of sales revenue coming from the sale of
glass-related products and services, including labor charges[.]” He stated that this was
consistent with the breakdowns of gross sales for all of the tax years at issue. According
to Jack Morris Auto Glass, in light of such sales figures, the Department’s classifications
made after its most recent audit were erroneous. Explaining this position in its
supporting memorandum of law, it argued as follows: “Because the evidence is
uncontroverted that Jack Morris Auto Glass’s dominant business activity is the sale of
glass, a tangible product, rather than the sale of intangible services, . . . Jack Morris Auto
Glass should continue to be taxed under Classification 1(B)—which explicitly applies to
the sale of glass—as it had been for the previous forty-plus years.” The corporation also
contended that Classification 1(B) was appropriate because it was a “service station
selling glass for automobiles as its dominant business activity.” By statute, Classification
1(B) includes “sales of tangible personal property by persons operating service stations,
except sales [of gasoline, diesel fuel and motor oils sold at retail].” Tenn. Code Ann. §
67-4-708(1)(B).

        On December 8, 2017, the Commissioner2 filed his own motion for summary
judgment, arguing that Jack Morris Auto Glass’s claim for refund should be dismissed.
The motion was supported by a number of materials, including a contemporaneously-
filed statement of undisputed material facts and memorandum of law. On December 28,
2017, Jack Morris Auto Glass filed materials in response to the Commissioner’s motion,
and on January 8, 2018, the Commissioner filed a reply memorandum in support of his
request for summary judgment. A hearing on the competing summary judgment motions
was then held on January 10, 2018.

        On July 18, 2018, the chancery court entered a final order granting the motion for
summary judgment filed by Jack Morris Auto Glass and denying the motion for summary
judgment filed by the Commissioner. In support of its conclusion that Jack Morris Auto
Glass was entitled to a refund, as well as an award of attorney’s fees as the prevailing
party, the chancery court found as follows:

       [T]he dominant business activity of [Jack Morris Auto Glass] is selling
       glass, as opposed to the service of installation. Jack Morris Auto Glass
       charges separately for the glass itself, which makes up the majority of its
       sales, and for the ancillary services, which make up the minority of its


       2
            This competing motion for summary judgment was formally brought by Commissioner David
Gerregano, who referenced that he was a party pursuant to the automatic substitution provision in Rule
25.04 of the Tennessee Rules of Civil Procedure. As indicated in an earlier footnote, this action was
initially filed against the previous Commissioner of the Department, Richard Roberts.
                                                -4-
      sales. Therefore, classification 1(B), which includes the sale of glass, is the
      appropriate business tax classification for Jack Morris Auto Glass.

Following the chancery court’s entry of summary judgment, the Commissioner timely
appealed to this Court.

                                 ISSUE PRESENTED

       The sole issue on appeal is whether the chancery court erred in determining that
Jack Morris Auto Glass should be classified for business tax purposes under
Classification 1(B).

                                  STANDARD OF REVIEW

       This case was decided following competing cross-motions for summary judgment.
“Because the resolution of a motion for summary judgment is a matter of law, we review
the trial court’s judgment de novo with no presumption of correctness.” Martin v.
Norfolk S. Ry. Co., 271 S.W.3d 76, 84 (Tenn. 2008) (citation omitted). As this Court has
outlined previously:

      In determining whether a grant of summary judgment was proper, we are
      required to make a fresh determination that the requirements of Rule 56 of
      the Tennessee Rules of Civil Procedure have been satisfied. Hughes v. New
      Life Dev. Corp., 387 S.W.3d 453, 471 (Tenn. 2012) (citations omitted). By
      rule, a motion for summary judgment should only be granted when “the
      pleadings, depositions, answers to interrogatories, and admissions on file,
      together with the affidavits, if any, show that there is no genuine issue as to
      any material fact and that the moving party is entitled to a judgment as a
      matter of law.” Tenn. R. Civ. P. 56.04.

               “The moving party has the ultimate burden of persuading the court
      that ... there are no genuine issues of material fact and that it is entitled to
      judgment as a matter of law.” Town of Crossville Hous. Auth. v. Murphy,
      465 S.W.3d 574, 578 (Tenn. Ct. App. 2014) (citation omitted). If the
      moving party makes a properly supported motion for summary judgment,
      the burden of production then shifts to the nonmoving party to demonstrate
      the existence of a genuine issue of material fact. Id. (citation omitted).
      When a court is faced with competing cross-motions for summary
      judgment, it “must rule on each party’s motion on an individual and
      separate basis.” CAO Holdings, Inc. v. Trost, 333 S.W.3d 73, 83 (Tenn.
      2010) (citations omitted). “The denial of one motion does not necessarily
      imply that the other party’s motion should be granted.” Id. (citation
      omitted).
                                           -5-
Finch v. O.B. Hofstetter/Anderson Trust, No. M2016-00562-COA-R3-CV, 2017 WL
2179951, at *3 (Tenn. Ct. App. May 16, 2017).

      Inasmuch as the matters at issue in this case involve the imposition of a tax, we
must bear in mind that “[t]axation statutes must be liberally construed in favor of the
taxpayer and strictly construed against the taxing authority.” Covington Pike Toyota, Inc.
v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992) (citation omitted).

                                           DISCUSSION

        Under Tennessee’s Business Tax Act, Tennessee Code Annotated section 67-4-
701 et seq., taxes are levied for the privilege of doing business. See Westinghouse Elec.
Corp. v. King, 678 S.W.2d 19, 23 (Tenn. 1984) (“[W]hen construed together, the
statutory provisions tax the privilege of doing business as that business is defined by the
statute.”); see also Worrall v. Kroger Co., 545 S.W.2d 736, 738 (Tenn. 1977) (noting that
when the Business Tax Act was enacted “the legislature undertook to create a system of
. . . taxation upon the privilege of engaging in certain types of business activities”).
Under the enacted taxation scheme, a business is classified according to its dominant
business activity, Tenn. Code Ann. § 67-4-708, and the resulting classification
determines the rate and due date of the tax that is owed. Aabakus, Inc. v. Huddleston,
No. 01A-01-9505-CH-00215, 1996 WL 548148, at * 2 (Tenn. Ct. App. Sept. 25, 1996).
The “dominant business activity” of a business means “the business activity that is the
major and principal source of taxable gross sales of the business.” Tenn. Code Ann. §
67-4-702(a)(5).

        In this appeal, the parties diverge on the question of how Jack Morris Auto Glass
should be classified for purposes of the Business Tax Act. The Commissioner asserts
that the chancery court erred in ruling that Classification 1(B) was appropriate and insists
that the corporation’s dominant business activity is the “sale of services,” not the sale of
glass, thus making Classification 3(C) the correct classification.3 On the other hand, Jack
Morris Auto Glass urges us to affirm the chancery court’s decision that Classification
1(B) applies. It argues that its dominant business activity “is and always has been the
sale of glass.”

        We agree with Jack Morris Auto Glass that its dominant business activity is as a
seller of glass, thus making Classification 1(B) appropriate. See Tenn. Code Ann. § 67-4-
708(1)(B). As we have already noted, the “dominant business activity” is “the business
activity that is the major and principal source of taxable gross sales of the business.”
Tenn. Code Ann. § 67-4-702(a)(5). “The item comprising the largest proportion of

        3
          Classification 3(C) applies to “[e]ach person making sales of services or engaging in the
business of furnishing or rendering services, except those described in subdivisions 3(C)(i)-(xvi).” Tenn.
Code Ann. § 67-4-708(3)(C).
                                                  -6-
taxable gross sales of the business when compared with other items sold determines its
classification.” Tenn. Comp. R. & Regs. 1320-04-05-.15. Here, the sales figures
outlined in the declaration of Paul Morris, the President of Jack Morris Auto Glass, reveal
that the majority of the corporation’s taxable gross sales were attributable to the sale of
glass in the relevant tax years. Although the Commissioner purported to dispute this fact
when responding at summary judgment, he did not actually appear to question the
proffered underlying data. Rather, he challenged the data’s relevance and attempted to
emphasize that nearly all sales of glass were accompanied by glass installations. For
example, following Jack Morris Auto Glass’s documented assertion that 58.7% of total
gross sales in 2014 and 59.4% of total gross sales in 2015 were from sales of glass, the
Commissioner cited portions of the deposition of Paul Morris as support for the notion
that “[v]irtually of Plaintiff’s sales included both the glass and the installation of the
glass.” It is true that, at the cited portions of his deposition, Paul Morris: (1) testified
that the business “normally” sells the glass and does the installation; (2) agreed that
virtually all of the corporation’s labor sales also involved the sale of glass; and (3)
testified that in the vast majority of cases when product is sold to a customer, the
customer will have the corporation install the product. Of course, none of this testimony
actually refutes or contradicts the sales figures outlined by Mr. Morris in his prior
declaration. It remains uncontroverted that the majority of the gross sales of the
corporation are attributable to sales of glass.

       In an effort to marshal a legal argument that countenances against the conclusion
following from this proof, the Commissioner relies on “Revenue Rule 43,” which
provides that “[t]he total charges made by those engaged in the business of repairing
tangible personal property, including parts, labor, and any other charges, shall be deemed
to be service charges and taxable at either the wholesale rate or retail rate, whichever is
applicable.” Tenn. Comp. R. & Regs. 1320-04-05-.43. According to the Commissioner,
because Jack Morris Auto Glass’s dealings with most customers involve both charges for
purchased glass as well as labor charges for installing the glass, all such charges should
be treated as “service charges” under “Revenue Rule 43.” This position is held in spite of
the fact that the statutory language from which “Revenue Rule 43” is derived clearly
provides that “services” “does not include sales of tangible personal property.” Tenn.
Code Ann. § 67-4-702(a)(21) (Supp. 2018).4 It is well-settled law that “the
Commissioner cannot enlarge the scope of a taxing statute by regulation, and rules
contrary to the express directives of a taxing statute are void.” Cardwell, 829 S.W.2d at
134 (citations omitted).5 We agree with Jack Morris Auto Glass that the Commissioner’s

        4
           The definition for “services” was previously codified at different numbering in the Code, Tenn.
Code Ann. § 67-4-702(a)(20).
         5
           The Commissioner also submits that Jack Morris Auto Glass should be classified under
Classification 3(C) as a seller of services because, under the Standard Industrial Classification Index, it
would be considered an “automotive glass replacement shop,” which is classified thereunder as a service.
According to the Commissioner, the Standard Industrial Classification Index provides that the sale of
glass is considered incidental to its replacement. Although the Commissioner argues that the Business
                                                   -7-
position regarding this issue is untenable. If the Commissioner’s position were endorsed,
it would effectively allow the Department, through attempted application of the cited
regulation, to define certain sales as “services” in clear conflict with statutory authority.

        Because the undisputed facts show that the majority of gross sales for Jack Morris
Auto Glass are attributable to sales of glass, as opposed to sales of services, the chancery
court did not err in concluding that Classification 1(B), as opposed to Classification 3(C),
was appropriate. No doubt, Jack Morris Auto Glass provides services to customers as
part of its business, but these services do not as an item comprise the largest proportion of
taxable gross sales of the business. See Tenn. Comp. R. & Regs. 1320-04-05-.15 (“The
item comprising the largest proportion of taxable gross sales of the business when
compared with other items sold determines its classification.”). The activity that is the
major source of taxable gross sales is clearly sales of glass.

                                            CONCLUSION

       For the foregoing reasons, the judgment of the chancery court is affirmed. The
case is remanded for such further proceedings as are necessary and consistent with this
Opinion.


                                                           _________________________________
                                                           ARNOLD B. GOLDIN, JUDGE




Tax Act refers to and adopts the classifications set forth in the Standard Industrial Classification Index, it
should be noted that the index is referenced in the context of determining exceptions under Classification
3(C). Indeed, the statute wherein Classification 3(C) is codified provides as follows: “It is the legislative
intent that the exceptions in subdivisions 3(C)(i)-(xvi) shall include the sales of services by those
businesses or establishments so described in the Standard Industrial Classification Index[.]” Tenn. Code
Ann. § 67-4-708(3)(C). We further observe that, at the summary judgment hearing, counsel for the
Commissioner admitted that the index was not in any way binding, stating, “[W]e’re not arguing that the
SIC Code controls.”

                                                    -8-
