                 IN THE COURT OF APPEALS OF TENNESSEE
                             AT NASHVILLE
                               NOVEMBER 3, 2004 Session

 ALLEY-CASSETTY COAL CO., INC. v. RUTH JOHNSON, Commissioner
             of the Tennessee Department of Revenue

                Direct Appeal from the Chancery Court for Davidson County
                        No. 00-2758-II   Carol McCoy, Chancellor



                    No. M2003-02327-COA-R3-CV - Filed March 29, 2005


This appeal involves a trial court’s grant of summary judgment to the Tennessee Department of
Revenue. The taxpayer operates a brick and block business on a ten-acre tract of land in
Murfreesboro, Tennessee, on which is located a block manufacturing facility and retail sales office.
Upon undertaking an audit of the taxpayer, the department inspected the property in Murfreesboro.
The department subsequently assessed a sales and use tax liability against the taxpayer for the
Murfreesboro property. The department determined that the Murfreesboro property constituted one
location, and sales of concrete blocks manufactured at the facility constituted less than fifty-one
percent (51%) of the gross sales at this location. The taxpayer filed an action in the trial court
alleging it was entitled to a sales tax exemption under section 67-6-206 of the Tennessee Code
because it operated two “locations” at the Murfreesboro property under the fifty-one percent (51%)
test used by the department. Both parties moved for summary judgment. The trial court granted the
department’s motion and denied the taxpayer’s motion. The taxpayer filed an appeal to this Court.
We affirm.


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

ALAN E. HIGHERS, J., delivered the opinion of the court, in which DAVID R. FARMER , J., and HOLLY
M. KIRBY , J., joined.

John W. Lewis, John R. Wingo, Nashville, TN, for Appellant

Paul G. Summers, Attorney General and Reporter, Mary Ellen Knack, Assistant Attorney General,
Nashville, TN, for Appellee
                                                 OPINION

                                                       I.
                        FACTUAL BACKGROUND AND PROCEDURAL HISTORY

        This appeal involves a trial court’s grant of summary judgment to a party in the course of the
proceedings below. The relevant facts are undisputed.1 Alley-Cassetty Coal Co., Inc. (“Alley-
Cassetty” or “Appellant”) operates a brick and block business on a ten-acre tract of land located on
New Salem Road in Murfreesboro, Tennessee. The ten-acre tract of land contains three buildings:
a concrete block manufacturing facility, a retail sales office, and a warehouse. The entire tract of
land is surrounded by a chain-link fence and is accessed by using the only entrance to the property
from New Salem Road. A single gravel driveway provides access to all three buildings.

         On the tract of land in Murfreesboro, Alley-Cassetty operates two divisions: a Brick Division
and a Block Division. The Block Division is located within the concrete block manufacturing
facility, and its sole function is to manufacture concrete blocks. The Brick Division is located in the
retail sales office and warehouse. The Brick Division, through the retail sales office, sells all of the
concrete blocks manufactured by the Block Division, as well as related products manufactured by
other entities.

         The entire ten-acre tract shares a common address, and Alley-Cassetty pays one property tax
bill for the entire ten-acre tract. Both divisions use the same federal tax identification number and
the same state sales and use tax registration number. Each division maintains separate managers and
employees with job duties unique to their respective division. The managers of each division do not
report to each other, but they receive directions directly from Alley-Cassetty’s corporate office
located in Nashville, Tennessee. The concrete block manufacturing facility and the retail sales office
have separate utility meters and receive separate utility bills. Alley-Cassetty maintains separate
ledgers and separate profit/loss statements for each division.

         In the later part of 1990, the Tennessee Department of Revenue (the “Department” or
“Appellee”) conducted an audit of Alley-Cassetty’s sales and use taxes for the period running from
December 1, 1995, to September 30, 1998. As part of its audit, the Department inspected the
property operated by Alley-Cassetty on New Salem Road in Murfreesboro. The Department
determined that sales of concrete blocks by the retail sales office on the New Salem Road property
constituted less than fifty-one percent (51%) of the entire gross sales received at this particular
facility. In fact, the audit revealed that sales of concrete blocks manufactured by the Block Division
through the retail sales office amounted to only forty-one percent (41%) of Alley-Cassetty’s gross
sales at this particular facility.




        1
          The parties submitted a “Stipulated Statement of Undisputed, Material Facts” to the chancery court for
purposes of their respective motions for summary judgment.

                                                      -2-
        On January 25, 2000, the Department issued a Notice of Assessment to Alley-Cassetty which
contained a sales and use tax liability of $47,066.11, of which $36,462.00 related to Alley-Cassetty’s
brick and block business on New Salem Road in Murfreesboro. On September 1, 2000, Alley-
Cassetty filed a complaint in the Chancery Court of Davidson County challenging the Department’s
assessment of a sales and use tax liability. In particular, Alley-Cassetty alleged that the Department
improperly denied Alley-Cassetty the benefit of the sales tax exemption set forth in section 67-6-206
of the Tennessee Code.2 Alley-Cassetty asserted that the New Salem Road property actually
contained two separate businesses at two distinct locations on the same contiguous parcel of land,
therefore, the cement block manufacturing plant qualified for the tax exemption.

         On January 31, 2003, the Department filed a motion for summary judgment in the chancery
court. The Department alleged that Alley-Cassetty’s business located on New Salem Road in
Murfreesboro did not satisfy the fifty-one percent (51%) test used by the Department in evaluating
the availability of a sales tax exemption under section 67-6-206 of the Tennessee Code. “Under this
test, to be considered a manufacturer for the purposes of T.C.A. § 67-6-206, the taxpayer is required
to manufacture at least 51 percent of the gross sales made at each location.” Tenn. Farmers’ Coop.
v. State, 736 S.W.2d 87, 89 (Tenn. 1987) (approving of the Department’s use of the fifty-one percent
(51%) test in evaluating tax exemptions under the statute).

        On March 19, 2003, Alley-Cassetty filed its motion for summary judgment with the chancery
court alleging it was not liable for any sales or use taxes for the period specified in the Notice of
Assessment filed by the Department. Following a hearing, the chancery court entered a
memorandum order on August 18, 2003, granting the Department’s motion for summary judgment
and denying Alley-Cassetty’s motion for summary judgment. The chancery court’s memorandum
order provided, in relevant part, as follows:

                          Here, the company’s manufacturing, retail sales, and other
                  business operations occur at the same geographical location. Alley-
                  Cassetty contends that the word “location,” as used in Tennessee
                  Farmers’ Cooperative, supports its claim to the exemption.
                  However, it is the statute, and not the case law, that affords Alley-
                  Cassetty an opportunity to seek an exemption. The word “location”
                  does not appear in the statute. Thus, the inquiry should not be
                  narrowly fixed on the situs of the operations. Instead, a natural and
                  unforced reading of the applicable statutory language clearly focuses
                  on the primary business of the manufacturer, not the location.
                  ....

         2
           Pursuant to this statute, a manufacturer is not required to pay sales tax on industrial machinery purchased for
use in the manufacturer’s business. Tenn. Code Ann. § 67-6-206(a) (2003). In addition, a manufacturer may purchase
water, electricity, and various other fuels used in the manufacturing process at reduced tax rates. Tenn. Code Ann. § 67-
6-206(b) (2003). A manufacturer may be exempt entirely from the tax on these substances when the Commissioner of
the Department determines “they are exclusively used directly in the manufacturing process.” Tenn. Code Ann. 67-6-
206(b)(3) (2003).

                                                           -3-
                        In this instance, the Commissioner audited Alley-Cassetty’s
               retail sales at its sales office and found that less than 51% of its retail
               sales came from the cement blocks it manufactures. The
               Commissioner reasonably concluded that cement block
               manufacturing was not the primary business of Alley-Cassetty and
               denied the exemption. . . .

Alley-Cassetty filed an appeal to this Court presenting the following issues for our review:

I.     Whether the chancery court erred in finding that the term “location” was not relevant for
       purposes of the tax exemption under section 67-6-206 of the Tennessee Code; and
II.    Whether Appellant’s concrete block manufacturing facility qualifies as a “location,” distinct
       and separate from its retail sales office, thereby qualifying for a tax exemption under the
       applicable statute.

For the reasons set forth more fully herein, we affirm the decision of the chancery court.

                                              II.
                                       STANDARD OF REVIEW

        In this case we are presented with undisputed facts, i.e. there is no conflict in the evidence,
therefore, the question presented on appeal becomes one of law. Tibbals Flooring Co. v.
Huddleston, 891 S.W.2d 196, 198 (Tenn. 1994) (citing Union Carbide Corp. v. Huddleston, 854
S.W.2d 87, 91 (Tenn. 1993)). “The standard for reviewing a grant of summary judgment is de novo
without any presumption that the trial court’s conclusions were correct.” Webber v. State Farm Mut.
Auto. Ins. Co., 49 S.W.3d 265, 269 (Tenn. 2001). In addition, we are mindful that:

               Because this case requires us to construe and apply an exemption in
               the use tax statute, we review familiar rules that are applicable. First,
               our role in construing statutes is to ascertain and give effect to the
               legislative intent without unduly restricting or expanding a statute’s
               coverage beyond its intended scope. State v. Sliger, 846 S.W.2d 262,
               263 (Tenn. 1993). Next, we must determine the legislative intent,
               whenever possible, from the plain language of the statute, “read in the
               context of the entire statute, without any forced or subtle construction
               which would extend or limit its meaning.” National Gas
               Distributors, Inc. v. State, 804 S.W.2d 66, 67 (Tenn. 1991). Since
               exemptions in tax statutes are strictly construed against the taxpayer,
               the burden is on the taxpayer to establish its exemption. Every
               presumption is against the exemption and a well-founded doubt is
               fatal to the claim. Kingsport Publishing Corp. v. Olsen, 667 S.W.2d
               745 (Tenn. 1984); Shearin v. Woods, 597 S.W.2d 895 (Tenn. 1980);
               Woods v. General Oils, Inc., 558 S.W.2d 433 (Tenn. 1977).


                                                  -4-
Tibbals Flooring Co., 891 S.W.2d at 198; see also Norandal USA, Inc. v. Johnson, No. M2003-
00559-COA-R3-CV, 2004 Tenn. App. LEXIS 539, at *15–16 (Tenn. Ct. App. Aug. 20, 2004).

                                             III.
                                       LAW AND ANALYSIS

        Pursuant to section 67-6-206 of the Tennessee Code, a “manufacturer” owes no tax on
industrial machinery purchased for use in the manufacturer’s business. Tenn. Code Ann. § 67-6-
206(a) (2003). A “manufacturer” may purchase water, electricity, and other fuels at reduced tax
rates, Tenn. Code Ann. § 67-6-206(b)(1) (2003), however:

               Such substances shall be exempt entirely from the taxes imposed by
               this chapter whenever it may be established to the satisfaction of the
               commissioner, by separate metering or otherwise, that they are
               exclusively used directly in the manufacturing process, coming into
               direct contact with the article being fabricated or processed by the
               manufacturer, and being expended in the course of such contact.
               Whenever the commissioner determines that the use of such
               substances by a manufacturer meets such test, the commissioner shall
               issue a certificate evidencing the entitlement of the manufacturer to
               the exemption, and a certified copy thereof shall be furnished by the
               manufacturer to the manufacturer’s supplier of such exempt
               substances. The certificate may be revoked by the commissioner at
               any time upon finding that the conditions precedent to the exemption
               no longer exist. . . .

Tenn. Code Ann. § 67-6-206(b)(3) (2003). The term “manfuacturer” is defined as “one whose
principal business is fabricating or processing tangible personal property for resale.” Tenn. Code
Ann. § 67-6-206(b)(2) (2003).

        The chancellor correctly noted the absence of the term “location” in the statute. However,
the Department has utilized a fifty-one percent (51%) test in evaluating the availability of the
statutory exemption to a given taxpayer. The Tennessee Supreme Court has expressly recognized
the Department’s use of this test, stating:

               The Commissioner has used the 51 percent test on a location-by-
               location basis to determine the principal business of a taxpayer for at
               least twenty years. Under this test, to be considered a manufacturer
               for the purposes of T.C.A. § 67-6-206, the taxpayer is required to
               manufacture at least 51 percent the gross sales made at each location.

Tenn. Farmers’ Coop. v. State, 736 S.W.2d 87, 89 (Tenn. 1987) (emphasis added). The supreme
court went on to state:


                                                -5-
                       The Commissioner has utilized the 51 percent test for at least
               twenty years and “the Commissioner’s interpretation is not ‘palpably
               erroneous’ and has been unchallenged for a substantial period. . . .”
               While an administrative interpretation of a statute is not binding on
               a court, . . . the 51 percent test is consistent with the express statutory
               language of T.C.A. §§ 67-6-202 and 67-6-206. . . . We do not
               disagree with the Plaintiff that the Commissioner could devise
               another test than the 51 percent test to determine whether a taxpayer
               is a manufacturer within the meaning of T.C.A. § 67-6-206, but we
               cannot say that this test bears no rational relation to the statutory
               requirement; rather, the test is not only consistent with the intent of
               the statute but it also incorporates the basis on which the Retailers’
               Sales Tax is computed (i.e., gross sales).

Id. at 91–92 (citations omitted).

        Thus, “[i]f at least 51 percent of a taxpayer’s revenues at a given location are derived from
fabricating or processing tangible personal property for resale, the taxpayer is considered to be a
manufacturer at that location.” Beare Co. v. Tenn. Dep’t of Revenue, 858 S.W.2d 906, 908 (Tenn.
1993) (emphasis added) (citing Tenn. Farmers’ Coop., 736 S.W.2d at 91–92)); see also Freedom
Broad. of Tenn., Inc. v. Tenn. Dep’t of Revenue, 83 S.W.3d 776, 784–85 (Tenn. Ct. App. 2002);
Misenheimer Saw & Tool, Inc. v. Huddleston, No. 03A01-9406-CH-00226, 1994 Tenn. App. LEXIS
668, at *13–14 (Tenn. Ct. App. Nov. 21, 1994).

         Turning to Alley-Cassetty’s first issue on appeal, the chancellor stated that “a natural and
unforced reading of the applicable statutory language clearly focuses on the primary business of the
manufacturer, not its location.” On appeal, the Department admits that it too has difficulty with the
chancery court’s conclusion that the meaning of the term “location” is not an issue under section 67-
6-206 of the Tennessee Code. Our supreme court has clearly approved of the Department’s use of
the fifty-one percent (51%) test on a “location-by-location basis to determine the principal business
of a taxpayer.” Tenn. Farmers’ Coop., 736 S.W.2d at 89 (emphasis added). In order to qualify for
the statutory tax exemption, “the taxpayer is required to manufacture at least 51 percent of the gross
sales made at each location.” Id. (emphasis added). In fact, the supreme court, through its holding
in Tennessee Farmers’ Cooperative, impliedly rejected the taxpayer’s argument that the fifty-one
percent (51%) test is not required by the statutory language. Id. Thus, the crux of the present dispute
involves the determination of what portions of Alley-Cassety’s business operations on New Salem
Road constitute the “location” under the fifty-one percent (51%) test used by the Department.

        “Once the Tennessee Supreme Court has addressed an issue, its decision regarding that issue
is binding on the lower courts.” Davis v. Davis, No. M2003-02312-COA-R3-CV, 2004 Tenn. App.
LEXIS 664, at *18 (Tenn. Ct. App. Oct. 12, 2004) (citations omitted); see also Barger v. Brock, 535
S.W.2d 337, 341 (Tenn. 1976). Accordingly, to the extent the chancellor’s order ignored the



                                                  -6-
importance of the term “location” in the Department’s decision regarding Alley-Cassetty’s “principle
business” and sought to apply a different standard, we find error.

        We now turn to the second issue raised by Alley-Cassetty on appeal. Alley-Cassetty bears
the burden of proving that it qualifies for the statutory sales tax exemption. Jersey Miniere Zinc Co.
v. Jackson, 774 S.W.2d 928, 930 (Tenn. 1989). Alley-Cassetty does not dispute that the fifty-one
percent (51%) test is the proper test for the Department to use in evaluating a manufacturer’s
business for purposes of the tax exemption statute. Instead, Alley-Cassetty urges this Court to adopt
a definition of the term “location” that would permit a taxpayer to qualify as a manufacturer when
it operates two distinct businesses, each being a separate location, within the confines of a single
parcel of real property.

        Alley-Cassetty correctly notes that the courts of this state have not specifically defined what
will qualify as a “location” under the fifty-one percent (51%) test used by the Department. In Beare
Company v. Tennessee Department of Revenue, 858 S.W.2d 906, 907 (Tenn. 1993), our supreme
court was asked to apply section 67-6-206 of the Tennessee Code to a food preservation company
operating two plants in separate cities in west Tennessee. In evaluating what qualified as
“processing” under the definition of a “manufacturer” in the statute, the supreme court found that
one plant “produces more than 51 percent of that plant’s total revenue, while processing at the
[other] plant produces less than 51 percent of the revenue.” Beare Co., 858 S.W.2d at 909. Thus,
in granting an exemption to one of the taxpayer’s plants but not the other, our Supreme Court has
impliedly held that a single taxpayer may have separate “locations” for purposes of the sales tax
exemption contained in section 67-6-206 of the Tennessee Code. See id.

       Our research has not identified a Tennessee case addressing whether a taxpayer may have two
separate “locations” on a single piece of property for purposes of the sales tax exemption statute.
Although the chancery court erred in the reasoning employed in reaching its result in this case, we
believe the chancery court reached the correct result nonetheless. While certain factual
circumstances may warrant a finding that two separate “locations” exist on the same parcel of
property for purposes of the statutory sales tax exemption, this is not that case. Determining what
will qualify as a “location” is a fact specific inquiry, and our supreme court has indicated that the
Department is permitted to use the fifty-one percent (51%) test on a “location-by-location basis” to
determine the taxpayer’s principal business. Tenn. Farmers’ Cooperative, 736 S.W.2d at 89.

        Alley-Cassetty attempts to distinguish its concrete block manufacturing facility and retail
sales office for purposes of the statute by pointing to the following facts: each division has separate
managers and employees who work independent of each other; the divisions receive instructions
from the corporate office; they have separate utility meters and separate utility billing; and the
company maintains separate ledgers and profit/loss statements for each division. However, these
facts do not mask the reality that the two divisions co-exist and are dependent upon one another,
thereby forming one “location” for purposes of the fifty-one percent (51%) test utilized by the
Department.



                                                 -7-
        The determinative fact in this case is that, as Alley-Cassetty acknowledges, “[a]ll concrete
blocks manufactured by the Block Division are sold out of the Brick Division’s retail sales office.”
The record contains no evidence indicating that the Block Division sells the concrete blocks it
manufactures independent of the Brick Division. To the contrary, both divisions use the same state
sales and use tax registration number. “Under the fifty-one percent test, the Department examines
the taxpayer’s gross sales receipts to determine whether a majority of the taxpayer’s revenues are
from fabricating or processing tangible personal property.” Freedom Broad. of Tenn., Inc. v. Tenn.
Dep’t of Revenue, 83 S.W.3d 776, 785 (Tenn. Ct. App. 2002); see also Tenn . Code Ann. § 67-6-
202(a) (2003); Tenn. Farmers’ Coop., 736 S.W.2d at 91. Since all sales of concrete blocks
manufactured by Alley-Cassetty at the New Salem Road facility go through the retail sales office,
the Department properly characterized the entire property as one “location” for purposes of the sales
tax exemption statute. Stated differently, if the retail sales office did not sell the concrete blocks
manufactured by the concrete block facility, there would be no gross sales attributable to the Block
Division.

         It may very well be that Alley-Cassetty may consume more than fifty-one percent (51%) of
its total fuel and water in manufacturing concrete blocks, but “[w]hen the proportion of sales of
purchased goods for resale exceeds that of sales of manufactured goods, then a taxpayer is no longer
engaged in the principal business of manufacturing goods for resale for purposes of T.C.A. § 67-6-
206(b)(2).” Tenn. Farmers’ Coop., 736 S.W.2d at 91. “[C]onsumption of utilities is not the proper
standard on which the Retailers’ Sales Tax is computed.” Id.

        While not determinative in and of themselves, additional facts support the conclusion that
the New Salem Road property constitutes one “location” for purposes of the sales tax exemption
statute. The entire property is enclosed within one chain-link fence with one road providing access
to the entire property. The entire property is designated by a single street address, and Alley-Cassetty
receives one property tax bill for the entire New Salem Road property. Finally, both divisions use
the same federal tax identification number.

        We find that the New Salem Road facility operated by Alley-Cassetty constitutes one
“location” for purposes of the fifty-one percent (51%) test used by the Department in applying the
sales tax exemption statute. Alley-Cassetty does not dispute that the concrete blocks manufactured
at the New Salem Road facility accounted for only forty-one percent (41%) of the gross sales from
the retail sales office. Accordingly, we affirm the chancery court’s grant of summary judgment to
the Department.




                                                  -8-
                                                 IV.
                                           CONCLUSION


        For the reasons contained herein, we affirm the chancery court’s grant of summary judgment
to the Appellee. Costs of this appeal are to be taxed to the Appellant, Alley-Cassetty Coal Co., Inc.,
and its surety, for which execution may issue if necessary.



                                                       ___________________________________
                                                       ALAN E. HIGHERS, JUDGE




                                                 -9-
