                IN THE COURT OF APPEALS OF TENNESSEE
                            AT NASHVILLE
                               November 21, 2013 Session

     VODAFONE AMERICAS HOLDINGS INC. & SUBSIDIARIES v.
  RICHARD H. ROBERTS, COMMISSIONER OF REVENUE, STATE OF
                        TENNESSEE

                Appeal from the Chancery Court for Davidson County
                     No. 071860IV    Russell T. Perkins, Judge



                No. M2013-00947-COA-R3-CV           - Filed June 23, 2014


At issue in this case is the methodology by which multi-state taxpayers are to compute their
liability for franchise and excise taxes to Tennessee and, specifically, the authority of the
Commissioner of Revenue to require the taxpayers to use an apportionment methodology
other than the standard cost of performance methodology codified in Tenn. Code Ann. §§
67-4-2012 and 67-4-2110. Plaintiffs, taxpayers that provide wireless communication and data
services within and without Tennessee, contend they are entitled to apportion their receipts
(income) based upon Tennessee’s standard apportionment formulas because the majority of
their “earnings producing activities” occurred in a state other than Tennessee. The
Commissioner of Revenue disagreed, insisting that Plaintiffs’ approach, even if statistically
correct and derived from the language of Tenn. Code Ann. § 67-4-2012(i)(2), fails to meet
the higher goal of fairly representing the business Plaintiffs derive from Tennessee. For this
reason the Commissioner, acting pursuant to Tenn. Code Ann. § 67-4-2014(a), varied the
standard formula requiring Plaintiffs to include “as Tennessee sales” its receipts from service
provided to customers with Tennessee billing addresses. The trial court affirmed the decision.
In this appeal, Plaintiffs contend the Commissioner does not have authority to impose a
variance unless “unusual fact situations,” which are unique to the particular taxpayers,
produce “incongruous results” unintended by Tenn. Code Ann. § 67-4-2012; they also insist
that no unusual fact situations exist and that no incongruous results occurred when the
statutorily-mandated cost of performance methodology was applied. We have determined that
the Commissioner acted within the scope of the discretion granted to him by the statutes and
rules. Therefore, we affirm the trial court’s decision.

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

A NDY D. B ENNETT, J., delivered the opinion of the Court, in which P ATRICIA J. C OTTRELL,
P.J., M.S., joined. F RANK G. C LEMENT, J R., J., filed a dissenting opinion.

Michael D. Sontag, Stephen J. Jasper, and Ashley N. Bassel, Nashville, Tennessee, for the
appellant, Vodafone Americas Holdings, Inc.

Robert E. Cooper, Jr., Attorney General and Reporter, William E. Young, Solicitor 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.

                                                 OPINION

       The taxpayers, Vodafone Americas Holdings Inc. and several of its subsidiaries,2 own
a 45% partnership interest in Cellco Partnership,3 a Delaware company that does business
throughout the United States as Verizon Wireless phone services. Some of Cellco’s
customers, meaning customers of Verizon Wireless, had Tennessee billing addresses during
the tax period at issue; other customers had billing addresses in other states.

        For the tax period at issue, January 1, 2002 through March 31, 2006, Vodafone and
its subsidiaries (“Plaintiffs”) paid $13,645,288 in excise and franchise taxes to the Tennessee
Department of Revenue. On August 16, 2007, Plaintiffs timely filed their original complaint


        1
          Reagan Farr was the Commissioner of Revenue of the State of Tennessee when this action was
commenced and he was a defendant in his official capacity. Tenn. R. App. P. 19(c) provides that when an
officer of the state is a party in his official capacity and during the pendency of the action he ceases to hold
office, the officer’s successor is automatically substituted as a party. Richard H. Roberts succeeded Mr. Farr
as Commissioner of Revenue. Thus, pursuant to Tenn. R. App. P. 19(c), Commissioner Roberts is substituted
for Mr. Farr as the defendant.
        2
          Vodafone Americas Holdings Inc. (“VAHI”), is a wholly owned, indirect subsidiary of Vodafone
Group Plc, a British mobile phone operator headquartered in Newbury, Berkshire, England, which is a
mobile telecommunications network company with ownership interests in 27 countries on five continents.
VAHI has four direct and indirect subsidiaries: Vodafone Americas Inc. (“VAI”), Vodafone Holdings Inc.
(“VHI”), JV PartnerCo, LLC, and AirTouch Paging, Inc. VHI and VAI are partners in a wholly-owned
partnership, PCS Nucleus, L.P., a Delaware limited partnership. VAI is a wholly-owned subsidiary of VAHI
and is a Delaware corporation with its principal place of business and commercial domicile during the years
at issue being located in Walnut Creek, California. AirTouch Paging was a Nevada corporation with its
principal place of business and commercial domicile during the years at issue being located in Walnut Creek,
California. AirTouch Paging was merged into JV PartnerCo on March 31, 2003, with JV PartnerCo as the
surviving entity. VAI is the single member of JV PartnerCo.
        3
      Verizon Communications Inc. owns the remaining 55% interest in Cellco; however, Verizon
Communications Inc. has no involvement in this appeal.

                                                      -2-
seeking a refund of franchise and excise taxes paid to the Tennessee Department of Revenue
for the period at issue.

        In the original complaint Plaintiffs contended, inter alia, that they were not subject
to the franchise and excise tax because they did not conduct business in Tennessee during
the relevant period.4 The Commissioner filed an answer denying all claims.

        While this action was pending, Plaintiffs commissioned a study by
PricewaterhouseCoopers and, after receiving the report, decided they had been using “the
wrong methodology” to calculate their franchise and excise tax liability to Tennessee. As a
result, Plaintiffs filed an amended complaint on December 23, 2008, in which they asserted
that they were entitled to calculate their Tennessee tax liability pursuant to the
statutorily-mandated “cost of performance methodology” in Tenn. Code Ann. § 67-4-2012(i).

     The operative claim for purposes of this appeal was asserted in Count Eight of the
Amended Complaint, which reads as follows:

       25. In the alternative, even if the earnings Plaintiff received as a result of its
       ownership interests in Cellco were to constitute business earnings subject to
       Tennessee franchise and excise tax, the amount of Tennessee franchise and
       excise taxes [Plaintiffs] paid during the years at issue was in error because the
       amounts paid were based on an incorrect over-apportionment of Cellco’s sales
       to Tennessee during the years at issue.

       26. Under Tennessee law, a taxpayer with business activities taxable both
       within and without the State of Tennessee must determine the amount of
       Tennessee franchise and excise taxes owed by apportioning its business
       earnings among the various states in which it conducts business. See Tenn.
       Code Ann. §§ 67-4-2110 and 67-4-2110 [sic]. The precise apportionment is
       determined according to the formula provided in Tenn. Code Ann. §§ 67-4-
       2012 and 67-4-2111 which, generally speaking, determines the percentage of
       a taxpayer’s business earnings to apportion to Tennessee based on the average
       of the following factors: the property factor, the payroll factor, and the receipts
       or sales factor (this factor is double weighted). These factors represent the
       percentage - expressed in terms of a fraction - of a taxpayer’s overall property,
       payroll, or sales located in Tennessee during the relevant tax period.

       27. Under Tenn. Code Ann. § 67-4-2012(g), the receipt or sales factor is a

       4
           This issue was referred to by the parties as the “nexus issue.”

                                                      -3-
fraction, the numerator of which is a taxpayer’s total receipts attributed to
Tennessee during the relevant tax period and the denominator of which is the
taxpayer’s total receipts everywhere during the tax period. Tenn. Code Ann.
§ 67-4-2012(g) also provides that a taxpayer’s ownership share of the gross
receipts of a general partnership in which it has an ownership interest
constitutes receipts to be included in the taxpayer’s sales factor.

28. Assuming for the purposes of this Court that the earnings Plaintiff received
as a result of its ownership interests in Cellco were business earnings subject
to Tennessee franchise and excise tax, those earnings must be included in the
denominator of Plaintiff’s sales or receipts factor pursuant to Tenn. Code Ann.
§ 67-4-2012(g). The earnings, however, would only be included in the
numerator of Plaintiff’s sales or receipts factor to the extent those earnings
could be attributed to Tennessee during the years at issue.

29. Under Tenn. Code Ann. § 67-4-2012(i), sales other than sales of tangible
personal property are attributable to Tennessee - and, therefore, included in the
numerator of a taxpayer’s sales or receipts factor - if and only if the majority
of the taxpayer’s earnings producing activity related to the intangible property
was performed in Tennessee. For those purposes, the determination of where
the majority of a taxpayer’s earnings producing activity took place is based on
the cost of performance associated with that activity.

30. In the franchise and excise tax returns [Plaintiffs] filed with Tennessee
during the years at issue, [Plaintiffs] attributed to Tennessee earnings from the
sales of Cellco’s telecommunication service based on the billing addresses of
Cellco’s customers. In other words, earnings from sales of Cellco’s
telecommunication service were attributed to Tennessee if the customer to
whom the service was sold had a Tennessee billing address. This method of
attributing earnings from the sales of Cellco’s telecommunication service was
in error and contrary to Tennessee law. Because Cellco’s sales of its
telecommunication service constitute sales other than sales of tangible personal
property, Tenn. Code Ann. § 67-4-2012(i) provides that the earnings from each
such sale should only be attributed to Tennessee if the majority of costs
incurred in providing the service sold took place in Tennessee.

31. By using the billing address of Cellco’s customers, rather than a cost of
performance analysis, to attribute to Tennessee earnings from the sale of
Cellco’s telecommunication service, [Plaintiffs] substantially overstated the
amount of those earnings attributed to Tennessee in their franchise and excise

                                       -4-
       tax returns originally filed for the years at issue. The amount of Tennessee
       franchise and excise taxes [Plaintiffs] paid during the years at issue, therefore,
       was in error and contrary to the laws of Tennessee.

       32. Accordingly, even if the earnings Plaintiff received as a result of its
       ownership interest in Cellco constitute business earnings subject to Tennessee
       franchise and excise tax, Plaintiff is entitled to a refund of Tennessee franchise
       and excise taxes for the years at issue, the amount of which is equal to the
       difference between the amount [Plaintiffs] paid and the amount that would be
       owed through the correct application of a sales factor that only attributed to
       Tennessee those earnings from the sales of Cellco’s telecommunication service
       where the majority of costs incurred with regard to the service sold took place
       in Tennessee.

       In their prayer for relief, Plaintiffs asked to “be awarded a refund of franchise and
excise taxes in the amount of $13,645,288, together with such interest as may be due
[Plaintiffs] under Tenn. Code Ann. § 67-1-1803(b);” plus “all of the costs of this cause,
together with its reasonable attorney’s fees and expenses of litigation incurred herein,
pursuant to Tenn. Code Ann. § 67-1-1803(d).”

        The Commissioner filed an answer on February 13, 2008, denying that Plaintiffs were
entitled to any refund and requesting that he be awarded attorneys’ fees and expenses
pursuant to Tenn. Code Ann. § 67-1-1803(d) should judgment be rendered in his favor.

        Two years later, by letter dated May 21, 2010, Plaintiffs were informed that the
Commissioner, sua sponte, imposed a variance pursuant to Tenn. Code Ann. §§ 67-4-2014(a)
and 67-4-2112(a) (also referred to collectively as “the variance statute”). The Commissioner
ruled that a variance was necessary to effectuate an equitable computation and allocation that
fairly represents the extent of Plaintiffs’ business activities in Tennessee. Specifically, the
variance imposed by the Commissioner required Plaintiffs to continue to assign to the
numerator of the “sales factor” of the Tennessee apportionment formula its receipts for cell
phone services (not cell phone products) it provided to customers with Tennessee billing
addresses.5 The net effect of the variance was that Plaintiffs could not employ the cost of
performance methodology to calculate their tax liability to Tennessee.

       Thereafter, each party filed a motion for summary judgment on the nexus issue, that
being whether Plaintiffs conducted business in Tennessee during the relevant period, and the
variance issue, which is the focus of this appeal. The trial court concluded that Plaintiffs

       5
           This issue was referred to by the parties as the “variance issue.”

                                                      -5-
conducted business in Tennessee during the relevant period and, thus, granted partial
summary judgment in favor of the Commissioner on the nexus issue. As for the variance
issue, the trial court denied both motions for summary judgment and, by agreement of the
parties, the variance issue was tried based upon stipulated facts and exhibits.

       In the memorandum and order, which was entered following the bench trial, the trial
court stated in the section titled “Facts”:

       In its Amended Complaint, [Plaintiffs] sought a substantial refund based on
       cost-of-performance sourcing, as opposed to the sourcing in its original returns
       based upon customer billing address. After Bellsouth Advertising & Publishing
       Company v. Chumley, 308 S.W.3d 350 (Tenn. Ct. App. 2009) perm. app.
       denied, March 1, 2010, (“BAPCO”) was decided, then-Commissioner Farr, by
       letter dated May 21, 2010, issued a variance pursuant to the statutory authority
       of Tenn. Code Ann. §§ 67-4-2014(a) & 67-4-2112(a). The variance required
       [Plaintiffs] to continue to source to Tennessee receipts from sales of wireless
       services to customers with Tennessee billing addresses.

       Under the cost-of-performance methodology relied upon by [Plaintiffs], for the
       Relevant Period, the cumulative numerator of the sales factor of the
       apportionment formula would fall more than $1,200,000,000, from
       $1,357,566,794 to $150,896,965, an 89% difference from the billing-address
       sourcing used by [Plaintiffs] in its original [franchise and excise] returns.
       [Plaintiffs’] receipts from customers with Tennessee billing addresses, which
       receipts have not been included in the numerator of the sales factor through
       use of its cost-of-performance sourcing methodology, have not been reported
       to or claimed by any other jurisdiction. After application of its cost-of-
       performance sourcing methodology, the numerator of the sales factor of the
       apportionment formula in [Plaintiffs’] [franchise and excise] returns would
       include only sales of tangible personal property, and no revenues from its
       delivery of wireless services to customers in Tennessee. January 30, 2010,
       [Plaintiffs] ha[ve] filed refund claims based upon a nexus theory similar to the
       one advanced in this case in 12 other states and upon a similar cost-of-
       performance theory in 11 other states (18 total states, including Tennessee).

        After quoting the Commissioner’s variance letter, dated May 21, 2010, the trial court
set forth the following observations in its memorandum and order:

       The Commissioner did not put great emphasis on the regulations in articulating
       his reasons for the variance. He put most of his emphasis on the statutory

                                             -6-
        standard requiring him to demonstrate that [Plaintiffs’] cost-of-performance
        approach did not fairly represent [Plaintiffs’] business activity in Tennessee.
        A review of the variance letter (Trial Exhibit 14), therefore, yields the
        following points:

                1. [Plaintiffs’] original franchise/excise tax returns used the
                primary-place-of-use (“PPU”) methodology, sourcing their
                earnings to the states where their cell phone customers were
                located; (¶ 3)6

                2. [Plaintiffs’] specific calculation of the cost of performance,
                which the Commissioner challenged, resulted in a substantial
                reduction of [Plaintiffs’] gross receipts that they would use in
                the formula; (¶ 4)

                3. After carefully studying the details of [Plaintiffs’]
                methodologies as presented to him, the Commissioner could not
                determine that the receipts were attributed to the actual place
                where [Plaintiffs] incurred the costs of providing services; (¶ 5)

                4. The PPU method was readily substantiated, while the cost-of-
                performance was not and was potentially subject to arbitrary
                assignment of costs to particular states; (¶¶ 6-9)

                5. The particular calculations offered included [Plaintiffs’] costs
                everywhere and did not capture Tennessee-specific costs,
                resulting in over a billion dollars in taxable receipts from
                Tennessee customers not being taxed in Tennessee or any other
                state; (¶¶ 10-11 )

                6. The cost-of-performance methodology, coupled with their
                direct and indirect partnership interests in Cellco partnership,
                allows these particular taxpayers to shift over a billion dollars in
                previously taxable receipts in such a way that they are not
                captured by Tennessee or any other state; (¶ 12) and

                7. Given all of the foregoing, the Commissioner concluded that


        6
         The parenthetical references are to the specific paragraphs in the Commissioner’s variance letter
(Trial Exhibit 14).

                                                   -7-
             the cost-of-performance methodology, as proposed by
             [Plaintiffs], did not fairly reflect [Plaintiffs’] business activity in
             Tennessee and, conversely, that use of what the Commissioner
             characterized as the PPU method would fairly represent the
             extent of [Plaintiffs’] business activities in Tennessee. (¶¶ 12 &
             14).

       The trial court continued by referencing pertinent testimony of each party’s expert
witness, both of whom the court found to be “distinguished experts on the variance
question.” The court noted in pertinent part:

      Professor John A. Swain, a law professor at the University of Arizona Rogers
      College of Law, testified on [Plaintiffs’] behalf. Professor Swain concluded
      that “[t]here are no unusual circumstances to justify the imposition of the
      Variance” and that the problems that the Commissioner articulated in support
      of the variance “apply equally to all providers of telecommunication services.”
      Trial Exh. 7, pp. 2 & 3. Additionally, Professor Swain opined that the
      Commissioner “cannot . . . enact the broader, industry-wide policy change
      effectuated by the Variance on a case-by-case basis through the imposition of
      a variance.” Id. at 4.

      Professor Swain concluded that the Commissioner applied the variance
      retroactively and that the Commissioner was not authorized through the
      variance procedure to prevent “so-called ‘nowhere income.’” Id. at 4-5. He
      opined that “[t]he cost-of-performance methodology reaches a fair result when
      applied to [Plaintiffs] by taking into account all of the costs that are related to
      providing Verizon Wireless services.” Id. Professor Swain concluded that the
      Commissioner abused his discretion in all of the foregoing respects given that
      “there were no unusual circumstances present that would justify the need to
      deviate from the legislative chosen methodology.” Id. at 4-6.

      The Commissioner’s expert, Benjamin F. Miller, is a distinguished state tax
      lawyer with substantial legal, regulatory, and other pertinent experience. Mr.
      Miller opined that “two fundamental principles of [the Uniform Division of
      Income for Tax Purposes Act] are: (1) that no income should be assigned to
      more than one State; and (2) that no income should escape taxation, such
      income frequently being referred to as ‘nowhere income.’” Trial Exh. 8, pg.
      2 (footnote with citation omitted). Mr. Miller agreed with the Commissioner’s
      conclusion in his variance letter, opining that “[a]doption of the taxpayers’
      proposal would result in none of the Tennessee sales being attributed to any

                                               -8-
       state and would result in a substantial portion of their income escaping any
       state taxation.” Id. at 13.

        In the section titled “Discussion and Conclusions of Law,” the trial court conducted
the following legal analysis:

       [T]he Commissioner’s statutory and regulatory authority to issue variances is
       both narrow and discretionary. See BellSouth Adver. & Publ’g Corp. v.
       Chumley, 308 S.W.3d 350 (Tenn. Ct. App. 2009) (“BAPCO”); American
       Bemberg Corp.v. Carson, 219 S.W.2d 169 (Tenn. 1949). One of the variance
       statutes which applies here, Tenn. Code Ann. § 67-4-2014(a), reads as follows:

              (A) If the tax computation, allocation or apportionment
              provisions of this part or chapter 2 of this title do not fairly
              represent the extent of the taxpayer’s business activity in this
              state, or the taxpayer’s net earnings, the taxpayer may petition
              for, or the department through its delegates may require, in
              respect to all or any part of the taxpayer’s business activity, if
              reasonable:

              (1) Separate accounting;
              (2) The exclusion of any one (1) or more of the formula factors;
              (3) The inclusion of one (1) or more additional apportionment
              formula factors that will fairly represent the taxpayer’s business
              activity in this state;
              (4) The use of any other method to source receipts for purposes
              of the receipts factor or factors of the apportionment formula
              numerator or numerators; or
              (5) The employment of any other method to effectuate an
              equitable computation, allocation and apportionment of the
              taxpayer’s net earnings or losses that fairly represents the extent
              of the business entity’s activities in Tennessee.

       Under the statute, the Commissioner has discretion to choose a narrow or
       sweeping change in the standard apportionment formula for a specific situation
       once he has decided to issue a variance. See Tenn. Code Ann. § 67-4-
       2014(a)(1)-(5). In other words, once the Commissioner has used his narrow
       discretion to determine that the taxpayer’s use of the standard formula does not
       fairly represent the extent of the taxpayer’s business activity in the state, then
       the Commissioner’s discretion to choose a different methodology for a

                                              -9-
particular taxpayer is, by the language of the statute, considerably broader. The
pertinent regulation anticipates that the variance statute would “permit a
departure from the allocation and apportionment provisions only in limited and
specific cases.” Tenn. Comp. R. & Regs. 1320-06-1-.35(1)(a)(4). This same
regulation provides that the Commissioner’s variance power “may be invoked
only in specific cases where unusual fact situations (which ordinarily will be
unique and nonrecurring) produce incongruous results under the
apportionment and allocation provision contained in the Franchise and Excise
Tax Laws.” Id.

In short, the Commissioner is permitted to issue a variance in a situation when
application of the statutory formula would yield a result that does not “fairly
represent the extent of the taxpayer’s business activity in Tennessee,” or the
taxpayer’s net earnings. BAPCO, 308 S.W.3d at 367. In examining the
question of whether the “tax computation, allocation or apportionment
provisions . . . fairly represent the extent” of the taxpayer’s business activity
or net earnings in Tennessee, Tenn. Code Ann. § 67-4-2014(a), the regulation
provides that a variance or “a departure from the allocation and apportionment
provisions” is permitted “only in limited and specific cases.” Id. at 367.
Additionally, the regulation anticipates that these “limited and specific cases”
would be “where unusual fact situations . . . produce incongruous results[.]”
Id. Parenthetically, the regulation provides that these unusual fact situations
producing incongruous results are “ordinarily . . . unique and nonrecurring.”
Id. In BAPCO, the Court pointed out that use of the “ordinarily” qualifier
permitted the Commissioner to issue a variance in circumstances that may not
necessarily be “unique and nonrecurring.” BAPCO, 308 S.W.3d at 367.
....

As indicated above, variance regulations permit the Commissioner to grant a
variance “only in limited and specific cases.” Tenn. Comp. R. & Regs. 1320-
06-1-.35(1)(a)(4). The Commissioner is permitted to grant a variance only in
specific cases “where unusual fact situations (which ordinarily will be unique
and nonrecurring) produce incongruous results” under the apportionment
statutes. Id. The Court concludes that the Commissioner’s decision to issue the
variance here complies with these regulations and that the Commissioner has
met his burden of proof here.


The Court agrees that this case is not really on all fours with BAPCO. The
situation in BAPCO was factually different than the situation in this case.

                                      -10-
        BAPCO is helpful, however, to the analysis here because it affirms that the
        Commissioner’s variance decisions must be reasonable and follow the
        applicable statutory and regulatory language. BAPCO also reiterates that the
        scope of the Commissioner’s discretion is narrow in determining whether a
        taxpayer’s apportionment methodology fairly represents a taxpayer’s business
        activity in the state. For the reasons stated in this Memorandum and Order, the
        Court concludes that the Commissioner properly followed BAPCO and the
        variance statutes and regulations.

       In its “Conclusion,” the trial court held that the Commissioner “met his burden of
showing that the variance was properly issued” and the Commissioner “properly exercised
his discretion under [the Uniform Division of Income for Tax Purposes Act] regulations in
issuing the variance.” Citing Tenn. Code Ann. §§ 67-4-2014(a) and 67-4-2112(a), the trial
court also held that the variance was issued in response to a “tax computation, allocation or
apportionment” which did not “fairly represent the extent of the taxpayer’s business activity
in the state.” Thus, the trial court dismissed Plaintiffs’ amended complaint and entered
judgment in favor of the Commissioner.7 This appeal followed.

                                       S TANDARD OF R EVIEW

       Courts are to construe statutes to ascertain and give effect to the intention and purpose
of the legislature. Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 507 (Tenn. 2004);
Lipscomb v. Doe, 32 S.W.3d 840, 844 (Tenn. 2000); Am. Tel. & Tel. Co. v. Huddleston, 880
S.W.2d 682, 686 (Tenn. Ct. App. 1994) (“AT&T”). “‘Legislative intent is to be ascertained
whenever possible 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.’”
Eastman, 151 S.W.3d at 507 (quoting Lipscomb, 32 S.W.3d at 844) (quoting Hawks v. City
of Westmoreland, 960 S.W.2d 10, 16 (Tenn. 1997)). If the statute is clear and unambiguous,
we must apply the language’s plain meaning in its normal and accepted use, without a forced
interpretation that would limit or expand the statute’s application. Id. However, if an
ambiguity exists, we are to consider the entire statutory scheme and elsewhere to ascertain
the legislative intent and purpose. Id.

        “The statute must be construed in its entirety, and it should be assumed that the
legislature used each word purposely and that those words convey some intent and have a
meaning and a purpose.” Id. “The background, purpose, and general circumstances under


        7
         The trial court also ruled that the Commissioner was entitled to an award of attorneys’ fees under
Tenn. Code Ann. § 67-1-1803(d). The amount of fees to be awarded was reserved pending application after
all appeals have been resolved.

                                                   -11-
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.

        We must also consider the rules of construction specifically applicable to tax statutes.
Id. “Statutes imposing a tax are to be construed strictly against the taxing authority.” Id.
(citing Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992)).

                                          A NALYSIS

                              I. T HE C OMPETING A RGUMENTS

        Plaintiffs contend that Tennessee’s statutory scheme expressly requires them to source
their receipts for telecommunications services based upon the “cost of performance
methodology” stated in our franchise and excise tax statutes, specifically, Tenn. Code Ann.
§§ 67-4-2012(i)(2) and 67-4-2111(i)(2). They insist that service receipts are sourced -- on an
all-or-nothing basis -- to a single state, that being the state where the preponderance of the
taxpayer’s costs of performing the service occur, under Tennessee’s statutorily-mandated
cost of performance methodology. Noting the stipulation of fact that the majority of
Plaintiffs’ “earnings producing activities” occurred in a state other than Tennessee, they
conclude that no receipts from their telecommunications services, not even those attributable
to customers with Tennessee billing addresses, can be sourced to Tennessee.

       Plaintiffs identify the fundamental issue as follows:

       Does applying the standard sourcing rule to Plaintiffs achieve the result the
       General Assembly intended when it adopted that rule? If so, the variance
       statute is inapplicable because Plaintiffs’ business activities in Tennessee are
       measured in the way the General Assembly intended and, thus, those activities
       are ‘fairly represented’ in accordance with the policy decisions of the General
       Assembly.

        The Commissioner insists that Plaintiffs’ approach, even if statistically correct and
derived from the language of Tenn. Code Ann. § 67-4-2012(i)(2), fails to meet the higher
goal of fairly representing the business Plaintiffs’ derive from Tennessee. The Commissioner
states he exercised authority expressly accorded by the General Assembly, pursuant to Tenn.
Code Ann. § 67-4-2014(a), to vary the standard formula so as to fairly represent the extent
of the taxpayer’s business activity in this state. By imposing the variance, the Commissioner
merely required Plaintiffs to include “as Tennessee sales” its receipts from cell phone service
it provided to customers with Tennessee billing addresses. Thus, the Commissioner insists
his approach was within his statutory authority to ensure that all franchise and excise

                                              -12-
taxpayers pay an amount that reasonably comports with their Tennessee business in order to
avoid an inequitable result.

       Because each party relies on specific statutes to support their positions, and because
the variance statute, Tenn. Code Ann. § 67-4-2014(a), permits the Commissioner, in certain
circumstances, to supersede the statutorily-mandated apportionment methodology stated in
Tenn. Code Ann. §§ 67-4-2012(i)(2) and 67-4-2111(i)(2), we must ascertain the intent of the
General Assembly as it pertains to the Commissioner’s authority to impose a variance.

                                      II. T HE S TATUTORY S CHEME

                                    A. F RANCHISE AND E XCISE T AXES

        Tennessee’s franchise and excise taxes are imposed for the privilege of doing business
in the state.8 First Am. Nat’l Bank of Knoxville v. Olsen, 751 S.W.2d 417, 421 (Tenn. 1987);
BellSouth Adver. & Pub. Corp. v. Chumley, 308 S.W.3d 350, 352 (Tenn. Ct. App. 2009)
(“BAPCO”). Tennessee Code Annotated section 67-4-2001 et seq.9 codifies the excise tax,
which is imposed on the net earnings of companies. Tennessee Code Annotated Section 67-
4-2101 et seq.10 codifies the franchise tax, which is imposed on the net worth of companies.
Both statutory schemes are based on the Uniform Division of Income for Tax Purposes Act
(“UDITPA”), a model law drafted by the National Conference of Commissioners on Uniform
State Laws. Blue Bell Creameries, LP v. Roberts, 333 S.W.3d 59, 65 (Tenn. 2011).
Tennessee’s franchise and excise tax statutory scheme requires companies to pay taxes on
their net earnings or losses as provided in Tenn. Code Ann. § 67-4-2010 et seq., and on their
net worth as provided in Tenn. Code Ann. § 67-4-2110 et seq.11

        States are given wide latitude under the U. S. Constitution to adopt various methods


        8
          The Tennessee Corporate Excise Tax, Tenn. Code Ann. § 67-4-2001 et seq., and the Tennessee
Franchise Tax, Tenn. Code Ann. § 67-4-2101 et seq., are privilege taxes. See First Am. Nat’l Bank of
Knoxville v. Olsen, 751 S.W.2d 417, 421 (Tenn. 1987). The Tennessee Excise Tax and the Tennessee
Franchise Tax are imposed on different tax bases; the excise tax is based on the taxpayer’s “net earnings,”
see Tenn. Code Ann. § 67-4-2007, while the franchise tax is based on the taxpayer’s “net worth.” See Tenn.
Code Ann. § 67-4-2106. Nevertheless, the Tennessee General Assembly intends that “these taxes be taken
in tandem and construed together as one scheme of taxation” and that both taxes are to be paid “in addition
to all other taxes.” First Am., 751 S.W.2d at 421.
        9
            Formerly Tenn. Code Ann. § 67-4-801 et seq. (Repl. 1998).
        10
             Formerly Tenn. Code Ann. § 67-4-901 et seq. (Repl. 1998).
        11
             Identical language appears in both sections.

                                                      -13-
for attributing earnings of multi-state companies to a taxing state. AT&T, 880 S.W.2d at 689
(citing Moorman Mfg. Co. v. Bair, 437 U.S. 267, 279 (1978)). There are three methods by
which corporate income may be divided for excise/franchise tax purposes: (1) separate
accounting; (2) allocation; and (3) apportionment. Id. (citing Holiday Inns, Inc. v. Olsen, 692
S.W.2d 850, 852 (Tenn. 1985)). The separate accounting method “seeks to determine a
corporation’s profits from its operations in each state as if conducted as separate entities to
determine the profits attributable to each state’s portion of the company’s business.” Id. The
allocation method traces income to a source, meaning a particular state, and then attributes
that income to that state. Id. The apportionment method “‘takes all the corporate income and
divides it among all jurisdictions where business is done, based on a formula that takes
property, payroll, and sales into account.’” Id. (quoting Holiday Inns, 692 S.W.2d at 852).

        Tennessee employs the apportionment method, and the apportionment provisions in
effect today were adopted by the Tennessee General Assembly in 1976 based upon UDITPA.
AT&T, 880 S.W.2d at 686. Companies doing business within and without Tennessee are
entitled to apportion12 their net earnings and net worth as specified in Tenn. Code Ann. §§
67-4-2012 and 67-4-2111. Unless a variance is imposed pursuant to Tenn. Code Ann. §
67-4-2014, a company’s net earnings and worth are apportioned and calculated in accordance
with the standard statutory apportionment formula specified in Tenn. Code Ann. §§
67-4-2012 (excise tax) and 67-4-2111 (franchise tax).

                   B. T ENNESSEE’S S TANDARD A PPORTIONMENT F ORMULA

        1. The Franchise Tax Apportionment Formula

        The statutory formula for apportionment of a multi-state company’s franchise tax is
set forth in Tenn. Code Ann. § 67-4-2111(a):

        Except as may otherwise be provided in this part, the net worth of a taxpayer
        doing business both in and outside Tennessee shall be apportioned to this state
        by multiplying such values by a fraction, the numerator of which shall be the
        property factor plus the payroll factor plus twice the receipts factor and the
        denominator of such fraction shall be four (4).

        2. The Excise Tax Apportionment Formula



        12
          Apportionment is designed “‘to obtain a rough approximation of the [taxpayer’s] income that is
reasonably related to the activities conducted within the taxing state.’” Blue Bell Creameries, 333 S.W.3d
at 65 (quoting Exxon Corp. v. Wis. Dep’t of Revenue, 447 U.S. 207, 223 (1980)).

                                                  -14-
        The statutory formula for apportionment of a multi-state company’s excise tax is an
average of three separate factors: (1) the property factor, (2) the payroll factor, and (3) the
sales (or receipts) factor, which is double-weighted. Tenn. Code Ann. § 67-4-2012(a). Only
the “sales factor” is at issue in this appeal. The apportionment formula reads:

       (a) Except as may otherwise be provided in this part, all net earnings shall be
       apportioned to this state by multiplying the earnings by a fraction, the
       numerator of which shall be the property factor plus the payroll factor plus
       twice the receipts [sales] factor and the denominator of such fraction shall be
       four (4).
       ...
       (g) The receipts factor is a fraction, the numerator of which is the total receipts
       of the taxpayer in this state during the tax period, and the denominator of
       which is the total receipts of the taxpayer everywhere during the tax period.
       For this purpose, “gross receipts” includes a taxpayer’s ownership share of the
       gross receipts of any general partnership, or entity treated as a general
       partnership for federal income tax purposes, in which such taxpayer has an
       ownership interest. A return being filed by a limited liability company that has
       a general partnership as its single member shall include in its receipts factor
       only the gross receipts attributed to the limited liability company. “Gross
       receipts” also includes a taxpayer’s ownership share of gross receipts of any
       limited partnership, subchapter S corporation, limited liability company, or
       other entity treated as a partnership for federal income tax purposes, in which
       the taxpayer has an ownership interest, directly or indirectly through one (1)
       or more such entities, and that is not doing business in Tennessee and thus is
       not subject to Tennessee excise tax.
       ...
       (i) Sales, other than sales of tangible personal property, are in this state, if the
       earnings-producing activity is performed:

              (1) In this state; or
              (2) Both in and outside this state and a greater proportion of the
              earnings-producing activity is performed in this state than in any
              other state, based on costs of performance.

Tenn. Code Ann. § 67-4-2012.

       The term “earnings producing activity,” referenced immediately, “applies to each
separate item of income and means the transactions and activity directly engaged in by the
taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining

                                              -15-
gains or profit.” Tenn. Comp. R. & Regs. 1320-6-1-.34(2). The regulation further states that
“earnings producing activity” includes but is not limited to the following:

        (a) The rendering of personal services by employees or the utilization of
        tangible and intangible property by the taxpayer in performing a service.
        ...

        (d) The sale, licensing or other use of intangible personal property. The mere
        holding of intangible personal property is not, of itself, an earning producing
        activity.

Tenn. Comp. R. & Regs. 1320-6-1-.34(2).

                              C. T ENNESSEE’S V ARIANCE S TATUTE

         The variance is a delegation of legislative authority to the commissioner. It must
contain adequate standards to guide the agency in the exercise of its delegated authority.
State v. Edwards, 572 S.W.2d 917, 919 (Tenn. 1978). Such delegations are “necessary to
implement the expressed policy and program of a given statute.” Id. The policy of the
statute is plainly explained: “Doing business in Tennessee by any person or taxpayer, and/or
exercising the corporate franchise, is declared to be a taxable privilege.” Tenn. Code Ann.
§ 67-4-2005. The tax is “a recompense for the protection of [the entity’s] local activities and
. . . compensation for the benefits it receives from doing business in Tennessee.” Tenn. Code
Ann. § 67-4-2007(b); See First Am. Nat’l, 751 S.W.2d at 421 (citing former statute Tenn.
Code Ann. § 67-4-806(b)). The need for the variance provision is also plain. When the
UDITPA was created, the drafters recognized that many unusual fact situations existed and
the formula would not be satisfactory for every one of them—thus, the need for the variance
provision. BAPCO, 308 S.W.3d at 364-65.

        The variance provision, Tenn. Code Ann. § 67-4-2014(a),13 states:

        If the tax computation, allocation or apportionment provisions of this part or
        chapter 2 of this title do not fairly represent the extent of the taxpayer’s
        business activity in this state, or the taxpayer’s net earnings, the taxpayer may
        petition for, or the department through its delegates may require, in respect to
        all or any part of the taxpayer’s business activity, if reasonable:



       13
          There are actually two variance statutes, Tenn. Code Ann. §§ 67-4-2014 and 67-4-2112. They are
identical except for the phrases “net earnings” in § 67-4-2014(a) and “net worth” in §67-4-2112(a).

                                                 -16-
        (1) Separate accounting;
        (2) The exclusion of any one (1) or more of the formula factors;

        (3) The inclusion of one (1) or more additional apportionment formula factors
        that will fairly represent the taxpayer’s business activity in this state;

        (4) The use of any other method to source receipts for purposes of the receipts
        factor or factors of the apportionment formula numerator or numerators; or

        (5) The employment of any other method to effectuate an equitable
        computation, allocation and apportionment of the taxpayer’s net earnings or
        losses that fairly represents the extent of the business entity’s activities in
        Tennessee.

The standards found in the variance statute are: (a) the apportionment does not fairly
represent the extent of the taxpayer’s business in Tennessee, and, (b) if (a) is found, then the
commissioner may require one of the options in (1)–(5), if it is reasonable to do so. Tenn.
Code Ann. § 67-4-2014(a). The department’s administrative rules elaborate on the standards:

        The employment of any other method to effectuate an equitable allocation and
        apportionment of the taxpayer’s capital and net earnings for purposes of
        computing franchise and excise taxes. [Tenn. Code Ann.] §§ 67-4-911 and
        67-4-812 permit a departure from the allocation and apportionment provisions
        only in limited and specific cases. [Tenn. Code Ann.] §§ 67-1-911 and
        67-4-812 may be invoked only in specific cases where unusual fact situations
        (which ordinarily will be unique and nonrecurring) produce incongruous
        results under the apportionment and allocation provisions contained in the
        Franchise and Excise Tax Laws

Tenn. Comp. R. & Regs. 1320-6-1-.35(1)(a)(4).14 Thus, the department imposes additional
standards on itself. The cases in which other methods are used are limited and specific.
They involve unusual fact situations which ordinarily are unique and nonrecurring where
incongruous results are produced under the statutory formula. Subsection (1)(c) also directs
that application for a variance must be in writing and must set forth the reasons why the
statutory apportionment provisions do not fairly represent the extent of the taxpayer’s




        14
        The rule still refers to the former codifications of the current statutes. For purposes of this opinion,
we presume that the rules are still valid.

                                                     -17-
business activity in Tennessee. Tenn. Comp. R. & Regs. 1320-6-1-.35(1)(c).15 Further, the
rule requires that, “[i]t must be shown by clear and cogent evidence that peculiar or unusual
circumstances exist which would cause application of the said statutory provisions to work
a hardship or injustice.” Id.

                  III. T HE C OMMISSIONER’S R EASONS FOR THE V ARIANCE

        By letter dated May 21, 2010, the Commissioner corresponded with Plaintiffs, through
their counsel. He acknowledged the pending litigation and notified Plaintiffs of his decision
to issue a variance pursuant to authority granted by Tenn. Code Ann. §§ 67-4-2014 and 67-4-
2112. The pertinent portions of the letter, in which he refers to Plaintiffs as “Taxpayers,” read
as follows:

        On their original franchise/excise tax returns filed with this Department, the
        Taxpayers used the pay-per-use or primary-place-of-use (“PPU”) methodology
        to determine the gross receipts to be included in the numerators of the gross
        receipts factors of each of their apportionment formulas. Under the PPU
        methodology the Taxpayers sourced their earnings according to the locations
        of their cellphone customers.
        Now, through their refund claims and the resulting litigation, the Taxpayers
        assert that they are entitled to use a methodology that is different from the PPU
        methodology originally used to compute receipts. One of the principal theories
        that the Taxpayers advance in support of their refund claims asserts that the
        numerator of each Taxpayer’s gross receipts factor in this apportionment
        formula should be determined under the provisions of Tenn. Code Ann. §§ 67-
        4-2012(i) and 67-4-2111(i), sometimes referred to as the cost-of-performance
        (“COP”) methodology. Use of the so-called COP methodology, at least as the
        Taxpayers have calculated it, would result in a substantial reduction in the
        gross receipts that each Taxpayer would include in the numerator of the
        receipts factor of its apportionment formula for each tax period. As a result,
        there would be substantial reduction in each Taxpayer’s franchise/excise tax
        liability.
        I have given careful study to information produced by the Taxpayers that

        15
           The rule is written from the perspective that the taxpayer is the applicant; nevertheless, the same
criteria have been applied to the Commissioner when the Commissioner imposes a variance that was not
applied for by the taxpayer, a circumstance the Commissioner acknowledges on page 18 of his Appellee’s
brief in this appeal, stating “[b]y its very terms, the variance provisions of Section 18 were intended as a
means for both taxpayers and tax administrators to effect the fundamental purpose of the UDITPA
apportionment formula when the standard provisions of Section 17 (Tenn. Code Ann. § 67-4-2012(i)) do not
capture the market.”

                                                    -18-
shows the difference in the COP and PPU methodologies when applied in
determining gross receipts to be included in the numerators of their
apportionment gross receipts factors. The PPU methodology originally used
by the Taxpayers sources receipts according to the places at which the
Taxpayers’ customers are located and where the cellphone services are
provided. But the COP methodology proposed by the Taxpayers sources
receipts according to the place where the taxpayer arguably incurs the costs of
providing services.
The PPU method is straightforward and conceptually satisfying in that it treats
as Tennessee receipts the payments that Tennessee customers/residents make
for cellphone services provided by the Taxpayers. In this context, it is not
reasonable to say that receipts from a Tennessee customer should be attributed
to another jurisdiction because, for example, a call that he or she made was
routed through some facilities in other jurisdictions or more of the Taxpayers’
general overhead costs are incurred in other jurisdictions than in Tennessee.
Under the PPU method, it is easy to determine the state to which receipts from
services provided to the Taxpayers’ cellphone customers should be attributed
because a receipt from a customer residing in a particular state is attributed to
that state. To verify whether a receipt has been correctly attributed to a
particular state, it is only necessary to determine the state in which the
cellphone customer from which the payment was received is located.
The COP method is not so straightforward because it sources receipts to the
state where the greater proportion of the earnings-producing activity is
performed, based on costs of performance. In the Taxpayers’ particular
situation, activities that produce earnings from providing cellphone service
take place in multiple states. It may be a matter of judgment or opinion as to
the particular state in which the greater portion of the earnings-producing
activities associated with a particular receipt are performed based on costs of
performance. At best, in the Taxpayers’ particular situation, calculation of
receipts to be included in the numerators of their gross receipts apportionment
factors would be extremely complex using the COP method that the Taxpayers
propose.
Costs associated with the performance of a particular earnings-producing
activity that takes place across several states may, arguably, have been
arbitrarily assigned by the Taxpayers to the various states in which the activity
takes place. When attempting to verify whether a receipt has been correctly
attributed to a particular state, the Department may find itself largely
dependent on the opinions and judgments of the Taxpayers, which may,
arguably, be considered biased.
I am aware of an October 30, 2009, memorandum prepared by

                                      -19-
PricewaterhouseCoopers to explain the COP methodology that the Taxpayers
propose to employ. It appears from that memorandum that the Taxpayers’
calculations under their COP methodology include their costs for rendering all
of their services to their customers everywhere, rather than being limited to
their costs for rendering services in Tennessee. While the latter would
doubtless be a complex calculation, it may well be that a reliable calculation
under the COP method would produce a far different result than the Taxpayers
claim.
According to the PricewaterhouseCoopers Memorandum, the states in which
these Taxpayers had higher costs of performance than Tennessee were
California, Georgia, and New Jersey, none of which follows a COP
methodology. Because the statutes of some states in which Taxpayers do
business do not employ a COP methodology, application of the COP method
as calculated by the Taxpayers would result in many millions of dollars of their
earnings from Tennessee residents escaping their fair share of taxation in
Tennessee or anywhere else. As calculated by the Taxpayers, application of the
COP methodology would mean that the overwhelming majority of these
Taxpayers’ earnings would not be captured in any other state. According to
information provided by the Taxpayers, the receipts that escape taxation in any
state when the Taxpayers apply their calculation of the COP methodology to
the years in litigation exceed $1 billion.
It is clear to me that application of the COP methodology when determining
gross receipts to be included in the numerators of the Taxpayers’ gross receipts
factors in their apportionment formulas would not fairly represent the extent
of business activities conducted in Tennessee by the Taxpayers as a result of
their direct and indirect general partnership interests in Cellco Partnership. Use
of the COP methodology allows the Taxpayers, through their direct and
indirect general partnership interests in Cellco Partnership, to derive
substantial receipts from Tennessee markets without such receipts being
accounted for in the Tennessee receipts factors of their franchise/excise tax
apportionment formulas and without such receipts being recognized in other
taxing jurisdictions.
Accordingly, I have decided to require a variance for the tax years under
litigation and for all subsequent tax years pursuant to the authority granted me
by Tenn. Code Ann. §§ 67-4-2014 and 67-4-2112.
Under the variance imposed, the Taxpayers will be required to determine the
gross receipts to be included in the numerators of their apportionment formula
gross receipts factors for the tax years in litigation and for all subsequent tax
years by using the PPU methodology that they originally used when filing their
franchise/excise tax returns for the tax years in litigation. I believe that use of

                                       -20-
       the PPU method is necessary to fairly represent the extent of the business
       activities that the Taxpayers conduct in Tennessee through their direct and
       indirect general partnership interests in Cellco Partnership.
       The variance requirements described above will continue in effect so long as
       the circumstances justifying a variation remain substantially unchanged or until
       changed or discontinued by this Department, whichever occurs first.

                    IV. A PPLICATION OF THE C OMMISSIONER’S V ARIANCE

       “The Department has the burden of showing that a variance was proper.” BAPCO,
308 S.W.3d at 357. However, it must be remembered that “‘[t]he Commissioner may . . .
exercise reasonable discretion in determining whether facts or circumstances justify
departure from the statutory formula.’” Id. at 367. (quoting AT&T, 880 S.W.2d at 691-92).
The determinative question is whether the Commissioner acted within his discretion when
he issued the variance.

        The Commissioner found that the apportionment does not fairly represent the extent
of the taxpayer’s business in Tennessee. He determined that the cost of performance
(“COP”) methodology led to no (or minimal) tax liability on the part of the taxpayer to
Tennessee and no liability anywhere else for Tennessee receipts.16 The primary place of use
(“PPU”) methodology considers sources receipts where the taxpayer’s customers are located
and, in this case, leads to a tax liability of $13,645,288. In BAPCO, the tax to be paid under
the statutory formula compared to the number of directories and amount of income from
Tennessee was sufficient to find that the COP formula did not fairly represent BAPCO’s
business in Tennessee. BAPCO, 308 S.W.3d at 366. The same is true for Vodafone. Using
the statutory method favored by Vodafone, its sales factor falls 89%, from $1,357,566,794
to $150,896,965. We cannot say that the Commissioner has not exercised “reasonable
discretion in determining whether facts or circumstances justify departure from the statutory
formula.” Id. at 367.

       The Commissioner’s choice of an alternate method falls within the options provided
in Tenn. Code Ann. § 67-4-2014(a)(4) & (5). The regulation contains additional standards
to consider for an alternative method. An alternative may be used in limited and specific
cases involving unusual fact situations which are ordinarily unique and nonrecurring when
the statutory formula produces incongruous results. Tenn. Comp. R. & Regs. 1320-6-1-




       16
            Such income is commonly called “nowhere income.”

                                                 -21-
.35(1)(a)(4).17

        Is this a limited and specific case? Yes. While it may provide a precedent for other
similarly situated companies in the future, those similarly situated companies would be a very
small part of all the entities that must pay the tax. The variance applied here will not lead to
an evisceration of the statutory formula. Furthermore, the variance will not burden the
taxpayer because the method chosen by the Commissioner is actually easier to compute and
verify.

       Is it an unusual fact situation? Yes. The deposition testimony of Professor John A.
Swain indicates that the drafters of the UDITPA likely did not anticipate the wireless
industry. Again, if the variance is precedent for other entities, there would not be many.

        Is it ordinarily unique and nonrecurring? While it may be unique to this taxpayer or
to this industry,18 it does not appear to be nonrecurring. However, the use of the word
“ordinarily” indicates that this is not a hard and fast requirement. In addition, Tenn. Code
Ann. § 67-4-2014(d) states that, “When another method of tax computation, allocation or
apportionment as set out above has once been established, it shall continue in effect so long
as the circumstances justifying the variation remain substantially unchanged, or until changed
or discontinued by the department, whichever occurs first.” Clearly, recurrence was
envisioned by the statute.

        Is the result under the statute incongruous? We have already established that “[t]he


        17
          At least one case suggests that the variance should be interpreted very narrowly. See AT&T, 880
S.W.2d at 692 (“Decisions regarding relief provisions have indicated that the purpose of such provisions was
to assure that the apportionment of interstate source income provides a division which satisfies the
requirements of fair apportionment under the Federal Constitution.”). This court’s most recent discussion
of the variance provision, BAPCO, does not take such a narrow view. BAPCO, 308 S.W.3d at 367. We
believe BAPCO is more consistent with the statutory language and implementing regulations.
        18
         The limited application to this taxpayer or to this industry does not deprive the situation of its
uniqueness. This limited application is distinguished from the situation in Kellogg Co. v. Olsen, 675 S.W.2d
707 (Tenn. 1984), where the Tennessee Supreme Court rejected the Commissioner’s contention:

        The Commissioner points to the distortion which results when expenses incurred in earning
        non-taxable income are deductible as justification for her reduction of the dividends
        received deduction. That distortion, if any, is not peculiar to the facts of this case. It will
        exist in every situation in which the deduction is available to a corporation, and therefore
        we believe the distortion was contemplated and authorized by the legislature.

Id. at 709.

                                                     -22-
Commissioner may . . . exercise reasonable discretion in determining whether facts or
circumstances justify departure from the statutory formula.” BAPCO, 308 S.W.3d at 367.
It has been suggested that the lack of taxation under the statutory formula is a policy choice
and what other states do is irrelevant—that lack of taxation in other jurisdictions is not
grounds to tax here. However, the Commissioner’s authority to issue a variance is also a
policy choice made by the legislature. It applies when the statutory formula “misfires.” 19
Such instances were anticipated. Because it applies when the statutory formula does not
“fairly represent the extent of the taxpayer’s business activity in this state,” the variance can
apply where the state is entitled to receive more taxes as well as a situation where the
taxpayer is entitled to pay less taxes. The fact that other states do not tax the Tennessee
receipts indicates that it is not unfair for Tennessee to do so.20 Furthermore, it is not
reasonable to allow the company’s Tennessee receipts to remain untaxed just because a call
may be routed through facilities in other jurisdictions. Such a result is not consistent with
the principles adopted in our statutes on taxation for the privilege of doing business in this
state. Thus, there is “clear and cogent evidence that peculiar or unusual circumstances exist
which would cause application of the said statutory provisions to work a hardship or
injustice.” Tenn. Comp. R. & Regs. 1320-6-1-.35(1)(c).

                                             V. C ONCLUSION

       We find that the issuance of the variance is within the discretion granted to the
Commissioner by the statute. We further find that the variance is consistent with the rules
promulgated by the department. Consequently, we affirm the trial court’s decision upholding
the variance.

        Costs of appeal are assessed against Vodafone, and execution may issue if necessary.


                                                                      __________________________
                                                                       ANDY D. BENNETT, JUDGE




        19
             Consequently, the variance provision may be viewed as akin to a “catch-all” tax provision.
        20
          Indeed, “[t]he goal of the UDITPA and the Tennessee statutes modeled on it is to ensure that each
state taxes an appropriate portion of a corporation’s income, so that no more than 100% of its income will
be subject to tax in all jurisdictions.” BAPCO, 308 S.W.3d at 352. Taxing otherwise untaxed income does
not run afoul of this goal.

                                                     -23-
