                 IN THE COURT OF APPEALS OF TENNESSEE
                             AT NASHVILLE
                                     May 7, 2004 Session

           SODEXHO MANAGEMENT, INC., v. RUTH E. JOHNSON

                    Appeal from the Chancery Court for Davidson County
                      No. 98-3318-III  Ellen Hobbs Lyle, Chancellor


                   No. M2003-00660-COA-R3-CV- Filed November 8, 2004


This dispute arises from the assessment of the “contractor’s use tax” against Sodexho Management,
Inc. for its use of personal property owned and utilities provided by David Lipscomb University.
Sodexho used the university’s property to provide food service for the tax-exempt university. The
Commissioner assessed a use tax on the value of the personal property and utilities provided by the
university because the university, as an exempt organization, had not previously paid sales tax. The
pivotal issue is whether Sodexho operated the food service as an agent of the tax exempt university
or as an independent contractor. The Chancellor held that Sodexho was an agent of the university
and that no use tax was owed. We reverse, finding that Sodexho did not carry its burden of proof
to establish that it was an agent of the university and thus is liable for the use tax.

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

FRANK G. CLEMENT , JR., J., delivered the opinion of the court, in which WILLIAM C. KOCH , JR., P.J.,
M.S., and WILLIAM B. CAIN , J., joined.

Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General; and Wyla
M. Posey, Assistant Attorney General, for the appellant, Ruth E. Johnson, Commissioner of
Revenue, State of Tennessee.

Patricia Head Moskal and Joseph W. Gibbs, Nashville, Tennessee, for the appellee, Sodexho
Management, Inc.

                                            OPINION

        The issue is whether Sodexho Management, Inc., (Sodexho) (formerly Sodexho-Marriott
Management Services), a for-profit corporation, operated the food service operations of the tax-
exempt, not-for-profit David Lipscomb University (“the university”) as an independent contractor
or as an agent. If Sodexho operated the food service operations of the university as an independent
contractor, then Sodexho owes use tax on the personal property and utilities provided by the
university that Sodexho used in the performance of its contracts. If Sodexho acted as an agent it
does not owe use tax because Sodexho would be considered the same entity as the university, and
thus – like the university – would be tax-exempt.

        The tax at issue is the “use tax” (also referred to as the “contractor’s use tax”).1 Tenn. Code
Ann. § 67-6-209(b). The use tax was assessed against Sodexho – not the university – due to
Sodexho’s use of the university’s personal property in the performance of its food services. The tax
in Tenn. Code Ann. § 67-6-209 is a tax on the contractor’s use of the tangible personal property.
The statute provides that contractors are the consumers of the items of tangible personal property
they use in the performance of their contracts. The use at issue is considered a separate and distinct
taxable activity. United States v. Boyd, 378 U.S. 39, 44 (1964)(when a contractor uses property for
its own private ends, the use tax is owed, regardless of whether its customer is a tax-exempt entity).
The two categories of use tax assessed against Sodexho at issue are (1) customer provided assets and
(2) customer provided expenses (utilities).

        “Customer Provided Assets” are assets used by Sodexho in the operation of the university’s
food service. The assessment does not include assets that were installed as improvements to real
property or fixed assets. It does however include assets that the university provided to Sodexho that
did not become part of the real property, such as pots, pans and tools of the trade. Tenn. Code Ann.
§ 67-6-209(b) and § 67-6-102(31).

       “Customer Provided Expenses” are utilities provided by the university that Sodexho used in
the operation of the university’s food service. The utilities assessed are considered to be tangible
personal property, including electricity, natural or artificial gas and water. Tenn. Code Ann. § 67-6-
209(b) and § 67-6-102(31).

        Customer provided assets and customer provided expenses are subject to the contractor’s use
tax if no sales or use tax was previously paid before being used by Sodexho.2 Tenn. Code Ann. §
67-6-209(b)(Supp. 1990). The use of tangible personal property in the performance of a contract is
taxable “whether the title to such property be in the contractor, subcontractor, contractee,
subcontractee, or any other person, or whether the title holder of such property would be subject to
pay the sales or use tax.” Tenn. Code Ann. § 67-6-209(b). That statute provides:

         (b) Where a contractor or subcontractor . . . uses tangible personal property in the
         performance of his contract, or to fulfill contract or subcontract obligations, whether
         the title to such property be in the contractor, subcontractor, contractee,
         subcontractee, or any other person, or whether the title holder of such property would
         be subject to pay the sales or use tax, . . . such contractor or subcontractor shall pay

         1
           Though a small amount of sales tax was assessed to Sodexho for the sale of banners at the university location,
sales tax is not an issue. A total of $108.00 was estimated for these sales and was assessed to Sodexho. The parties
stipulated that only the use tax assessed was in dispute. Thus only the use tax is at issue.

         2
             It is undisputed that sales tax was not previously paid.

                                                             -2-
       a tax at the rate prescribed by § 67-6-203 measured by the purchase price of such
       property, unless such property has been previously subjected to a sales or use tax, and
       the tax due thereon has been paid.

        The Commissioner bears the initial burden of proving that Sodexho is subject to the use tax
at issue. See Prodigy Services Corp. v. Johnson, 125 S.W.3d 413, 416 (Tenn. Ct. App. 2003). If the
Commissioner makes out such a case, Sodexho then bears the burden of proving that it is exempt,
see Jack Daniels Distillery, Lem Motlow, Prop. v. Johnson, 740 S.W.2d 413, 416 (Tenn. 1987), and
there is a presumption against exemptions. See Kingsport Publishing Corp. v. Olsen, 667 S.W.2d
745, 746 (Tenn. 1984).

        It is undisputed that the university is an exempt entity and that no tax would be owing if the
university provided the food service at issue. Moreover, it is undisputed that Sodexho would also
be exempt and that no tax would be owing if Sodexho’s use of the university’s personal property was
in the capacity as the agent or servant of the university, as distinguished from that of an independent
contractor, because an agent (or contractor) steps into the shoes of its tax-exempt client when it is
a servant of that client. U.S. v. Boyd, 378 U.S. at 44-48; Gehl Corp. v. Johnson, 991 S.W.2d 246
(Tenn. Ct. App. 1998), perm. app. den’d, (1999). For Sodexho to be subject to the use tax
assessment, what matters is that Sodexho used the property in the performance of its food service
contract for its business purposes in its capacity as an independent contractor, not as an agent or
servant.

        An element of the agency relationship is that the object of the contract be for the benefit of
the principal. The test is whether the principal has a right to control the conduct of the agent with
respect to matters entrusted to the agent. The “right of control is the primary or essential test of an
agency relationship without which no agency exists. [citations omitted] The same standard applies
when the agency relationship is implied: the right of the principal to control the agent’s conduct or
the actual exercise of such control is the essential test.” Nidiffer v. Clinchfield RR. Co., 600 S.W.2d
242, 245 (Tenn. Ct. App. 1980). The distinctions between an independent contractor and an agent
are not always easy to determine, and there is no uniform rule by which they may be differentiated.
Carbide & Carbon Chemical Corp. v. Carson, 239 S.W.2d 27, 31 (Tenn. 1951). Our Supreme Court
discussed the differences between the two and stated:

       Generally the distinction between the relation of principal and agent and employer
       and independent contractor is based on the extent of the control exercised over the
       employee in the performance of his work, he being an independent contractor if the
       will of the employer is represented only by the result, but an agent where the
       employer’s will is represented by the means as well as the result.

United States v. Boyd, 363 S.W.2d 193, 197 (Tenn. 1962), aff’d, 378 U.S. 39 (1964) (citing,
Carbide, 239 S.W.2d at 31; 2 C.J.S., Agency, § 2, p. 1027).




                                                 -3-
        Courts of this state have frequently analyzed the type and degree of control principals and
employers exert over agents and servants. Years ago our supreme court concluded that, as a practical
matter, every contract for work to be done reserves to the principal or employer a certain degree of
control because some degree of control is necessary to assure that the work is performed according
expectations or specifications. Odom v. Sanford & Treadway, 299 S.W. 1045, 1046 (Tenn. 1927).

       The employer may exercise a limited control over the work without rendering the
       employee a mere servant, for the relation of master and servant is not inferable from
       the reservation of powers which do not deprive the contractor of his right to do the
       work according to his own initiative so long as he does it in accordance with the
       contract. The control of the work reserved in the employer which makes the
       employee a mere servant is a control, not only of the result of the work, but also the
       means and the manner of the performance thereof; where the employee represents the
       will of the employer as to the result of the work but not as to the means or manner
       of accomplishment, he is an independent contractor. Thus a person employed to
       perform certain work is not necessarily a mere servant because the contract provides
       that the work shall be subject to the approval or satisfaction of the employer. Such
       a provision is not an assumption by the employer of the right to control the employee
       as to the details or methods of doing the work, but is only that the employer may see
       that the contract is carried out according to the plans.

Odom, 299 S.W. at 1046, quoting 14 R.C.L. 67; See also Wilson v. Memphis Pub. Co., 231 S.W.2d
404 (Tenn. Ct. App. 1950) cert. den’d, (1950); Grace v. Louisville & N.R. Co., 89 S.W.2d 354
(Tenn. Ct. App. 1935), cert. den’d, (1936).

         The factor that distinguishes contractors from agents is that the contractor is using the
property “in connection with its own commercial activities.” Boyd, at 45 (quoting United States v.
Township of Muskegon, 355 U.S. 484, 486 (1958)). The United States Supreme Court further
commented that the fact the property was being used for the principal’s benefit was irrelevant for that
is true in virtually every management contract. United States v. New Mexico, 455 U.S. 720, 739
(1982). The New Mexico court observed that the fact federal property involved was being used for
the Government’s benefit was irrelevant, what mattered was the fact that the contractors remained
distinct entities pursuing “private ends” and their actions remained “commercial activities carried
on for profit.” New Mexico, 455 U.S. at 739, quoting Boyd, 378 U.S. at 44-45. When dealing with
issues similar to those presented here, this court found the key factors to be the principal’s “right to
control” and the “extent of control” the principal actually exerted. See Edwin B. Raskin Co., v. Ruth
E. Johnson, No.01-A-01-9708-CH-00392, 1998 WL 242605 (May 15, 1998 Tenn. Ct. App.).




                                                  -4-
        Our analysis starts with the agreement (Agreement) the university entered into with Marriott
Corporation (Sodexho) for the management and operation of the university’s food services.3 The
stated purpose of the Agreement was to retain Sodexho to “manage and operate” the university’s
food service operations.4 The Agreement identified the parties’ relationship as one of agency:

         2.1 Agency Relationship. University grants [Sodexho], as agent for University, the
         exclusive right to manage and operate the Food Service. To accommodate University
         and to facilitate accounting and control of inventories to be utilized by [Sodexho],
         [Sodexho] shall purchase food and supplies in its name, as agent for University, and
         shall pay the invoices.

That paragraph further read, “As principal, [the university] may supervise [Sodexho’s] daily
operation of the Food Service, including working conditions for Food Service employees and the
safety, sanitation, and maintenance of the Food Service facilities.”

       Sodexho identified certain provisions in the Agreement that it argues are indicative of the
university’s right to control the food services operations. The provisions Sodexho emphasized
include the following:

         •          Right to Regulate Operations. The university reserved the right to make
                    reasonable regulations with regard to the food service operations and
                    [Sodexho]5 was required to comply within a reasonable time. (¶2.1)6

         •          Right of Access. University representatives had access to the food service
                    facilities at all reasonable times. (¶2.1)

         •          Locations/Meal Plans. [Sodexho] was required to provide Food Service for
                    the university’s resident dining patrons at nine specified locations in
                    accordance with the meal plans7 selected by the university. (¶¶3.1, 3.2)




         3
         The food services were provided on the university campus and at the university’s high school, middle school
and elementary school.

         4
          The Agreement acknowledged that the university’s food service operation “is maintained as an integral part
of the University’s educational activities solely for the use of students, faculty, staff, employees, invited guests and others
designated by University.”

         5
             The Agreement and Sodexho’s brief identified the party as a Marriott, not Sodexho.

         6
             Parenthetical references are to the paragraphs in the Agreement.

         7
         All meal plans were for seven days a week. Plan A included 21 meals per week, plan B included 15 meals per
week, and plan C included 10 meals per week.

                                                             -5-
       •       Seconds policy and Serving Style. [Sodexho] was required to serve all meals
               cafeteria style. Most meals included unlimited servings of food and
               beverages. (¶¶3.3, 3.4)

       •       Menus and Prices. All menus and prices were to be recommended by
               [Sodexho], but were subject to university approval. (¶3.5)

       •       Locations and Prices. [Sodexho] was required to provide retail sales at two
               specified locations, with prices to be determined by the mutual agreement.
               (¶¶4.1, 4.2)

       •       Management Non-hire. The parties agreed that they would not hire the
               other’s management employees for specified periods following termination
               of the employee or the Agreement. (¶5.4)

       •       Office Facilities. The university owned and provided office facilities,
               including equipment and furniture, at no cost to [Sodexho]. (¶6.3)

       •       Cleaning/Sanitation. [Sodexho] was responsible for the usual and customary
               cleaning of food service areas. The university was responsible for cleaning
               window, walls, ceilings, drapes, fixtures, etc. (¶6.6)

       •       Maintenance. The university was required to furnish its maintenance staff to
               maintain food service facilities and equipment at its cost, including labor and
               supplies. (¶6.7)

       •       Utilities. The university was responsible for the cost/purchase of utilities.
               (¶6.9)

       •       Working Capital. The university deposited $85,000 in October of each year
               to offset [Sodexho’s] operating expenses. Any unused portion was to be
               credited to the university at the end of the year. (¶7.1)

         The Commissioner countered asserting that Sodexho was not a mere agent of the university
for it bore the risk of loss from its food services operations, any profit it made was not paid to the
university, rather Sodexho retained the profits, Sodexho not only had the right to control the means
and methods of its operations, namely ordering, preparing, and serving food and managing the
process, Sodexho indeed did control the means and methods of its operations, that Sodexho
employed and paid “its” workers to conduct the food service operations, and Sodexho had its own
chain of command for management of its food service operations and the chain of command did not
include the university.




                                                 -6-
         The Agreement is a relevant factor; however, it is not the only relevant factor. The conduct
of the parties is also relevant. Raskin, 1998 WL 242605, at * 2. The issue in Raskin was whether
the private manager (Raskin) of a city-owned golf course was entitled to the city’s exemption from
the use tax. Here, the university had the right to control many aspects of Sodexho’s operations;
however, the mere existence of the right to control certain aspects of another’s operations is not
determinative of the agency issue. See Raskin, 1998 WL 242605, at * 2. As pronounced in Boyd
and Raskin, our determination should be based on the extent of control exercised over the
agent/contractor including whether the principal retained and exercised control over the means of
accomplishing the result as distinguished from controlling the result but not the means. See Boyd,
363 S.W.2d at 197; Raskin, 1998 WL 242605, at * 2. A degree of control is not determinative for
every contract for work reserves to the employer/principal a certain degree of control. Odom, 299
S.W. at 1046. The control of the work reserved to the principal which makes the agent a mere
servant is a control not only of the result of the work but of the means and the manner of the
performance. Id., at 1046. Where the agent represents the will of the principal as to the result of the
work but not as to the means or manner of accomplishing the work, it is an independent contractor.
Id., at 1046.

        Here, the chancellor rendered two memorandum opinions. She made numerous findings of
fact, the bulk of which are stated in the first opinion. We believe the more significant findings to
be the following:

         •         The relationship was “more a result-oriented one in which [Sodexho] was
                   retained to use its specialized expertise to efficiently and with quality manage
                   and operate the food services” and “less a relationship where [the university]
                   controlled the plaintiff’s duties.”

         •         The university was “looking for the end result and that the plaintiff acted as
                   an outsourcing contractor,” that the university had “tried unsuccessfully to
                   operate the food services operation,” that it “wanted its food services to be
                   more efficient and provide better quality for the students.”8

         •         Sodexho was “left to its own devices within its field of expertise.”

         •         The Agreement provided that Sodexho had the “exclusive right to manage
                   and operate the Food Service.”




         8
           The chancellor specifically credited the testimony of Carl McKelvey, David Mayo and Michelle Bagley with
this finding. The chancellor cited the testimony of Mr. McKelvey, the university’s vice president of campus affairs, who
characterized the relationship as “an out source contract” and that the director of business operations at the university --
who performed quality control and monitored Sodexho’s food services operations for the university -- David Mayo also
characterized it as one of “outsourcing” and M ichelle Bagley, food services director for Sodexho, testified that what the
university was looking for was an “end result.”

                                                            -7-
         •        The proof showed that Sodexho “controlled cooking and food preparation,”
                  that a primary part of the task of food preparation and service was the
                  personnel to prepare and serve the food and training personnel, which
                  Sodexho was responsible for, and that Sodexho “controlled the personnel of
                  the food services operation.”

         •        The Agreement held Sodexho “solely responsible for the employees on its
                  payroll” and that Sodexho made the decisions to hire and fire non-
                  management employees and though Mr. Mayo, director of business
                  operations for the university, was assigned to monitor Sodexho’s food
                  services operation, he had no authority to hire or fire Sodexho’s employees.9

        In the first memorandum opinion, the chancellor reached the legal conclusion that Sodexho
had failed to prove that it was the university’s agent for purposes of the contractor’s use tax. On
reconsideration, however, the chancellor reversed her ruling by concluding that she had erroneously
compared the facts at issue with those in the Erlanger Hospital dispute10 and that she should not have
deemed as irrelevant specifications for the types of food or prices and facts such as where the food
was served and the hours of operation. Though the chancellor changed her opinion on whether
Sodexho was the university’s agent, she did not rescind her findings of fact in the first memorandum
opinion. The chancellor stated that she should have considered others factors as more relevant and
should have placed less emphasis on the differences with the Erlanger Hospital dispute. Thus, they
stand as the chancellor’s findings of fact, which are entitled to our review with a presumption that
the factual findings are correct, absent a showing that the evidence preponderates to the contrary.
Tenn. R. App. P. 13(d); see Berryhill v. Rhodes, 21 S.W.3d 188, 190 (Tenn. 2000).

        We agree with the part of the chancellor’s second opinion wherein she determined that less
emphasis should have been placed on the differences with the Erlanger Hospital agreement and that
time and place were relevant factors but we differ with the significance the chancellor placed on the
latter. Time and place are relevant when considering agency; however, all such agreements are fact
intensive and one of the pertinent facts here is that the enterprise at issue is a food service operation.
Thus, it is less significant that the locations of the food service operations were established in the


         9
           The chancellor found there were two personnel issues involving interaction between a Sodexho employee and
students and an alleged theft, where the university was involved in termination of the employee; nevertheless, she found
that, these incidents were not indicative of an exercise of control over Sodexho’s personnel. However, the chancellor
also found that Sodexho “hired, fired, paid salary and benefits and trained food services employees and that the plaintiff
controlled how the food was prepared.”

         10
            Sodexho commenced this action seeking a refund of use tax assessed on its use of equipment and utilities in
connection with its management of food services for Erlanger Hospital in Chattanooga and David Lipscomb University
in Nashville. Initially the chancellor held in favor of Sodexho concerning Erlanger but in favor of the Commissioner
concerning the university. On reconsideration, the chancellor reversed herself stating that she “erroneously arrived at
its conclusion that [Sodexho] did not prove agency with respect to the [university] contract because the proof on that
contract was not as ponderous as the proof on the Erlanger contract.” The Commissioner only appealed the ruling
concerning the university, not Erlanger.

                                                           -8-
agreement because most food service operations are stationery. It was also less significant that the
hours of operation were established in the agreement for food service operations in schools have
customary hours of operation. We also find the fact that the university controlled the type of food
relevant but not overly significant because the requirement that Sodexho provide cafeteria style food
or another type of food is more a control of the result than the means or manner of operation.11 We
therefore agree with the chancellor that these are relevant factors but find their relevance to be less
significant.

        We now return to the Raskin opinion for the facts there and here are similar but we do not
find them to be “on all fours” as Sodexho characterized them in its brief. Upon examination of the
contractual provisions and the course of dealings between Raskin and the City of Hendersonville,
it is apparent that the city had more control and exerted more control than the university had or
exerted. For example, all of Raskin’s net operating profits were paid over to the city while Sodexho
retained the operating net income and only paid the university a small percentage of its profits;
Raskin was paid a guaranteed minimum annual fee of $40,000, assuring Raskin of being
compensated for its services while Sodexho bore the risk of loss; the proceeds of the golf course
operation belonged to the city and Raskin’s bank accounts were accessible to the city at all times
while the proceeds of the food service operation belonged to Sodexho and the university merely had
the right to audit the accounts; and Raskin’s personnel policies were subject to the city’s approval
while Sodexho’s employees were only subject to the university’s standard of conduct while on the
campus.12

        Making the determination that Sodexho is an independent contractor or an agent is certainly
not easy. This is due in part to the fact that such determinations are fact intensive and there is no
uniform rule by which they may be distinguished. Carbide & Carbon Chemical Corp. v. Carson,
239 S.W.2d 27, 31 (Tenn. 1951). “Generally the distinction between the relation of principal and
agent and employer and independent contractor is based on the extent of the control exercised over
the employee in the performance of his work, he being an independent contractor if the will of the
employer is represented only by the result, but an agent where the employer’s will is represented by
the means as well as the result.” Boyd, 363 S.W.2d 193, 197. A person employed to perform certain
work is not necessarily a servant because the contract provides that the work is subject to the
approval of the employer. “Such a provision is not an assumption by the employer of the right to
control . . . the details or methods of doing the work, but is only that the employer may see that the
contract is carried out according to the plans.” Odom, 299 S.W. at 1046 (quoting 14 R.C.L. 68).




         11
            An analogous example would be that of a principal requiring a contractor to construct a road and requiring
that it be paved with asphalt instead of concrete.

         12
            John Sobrero, former district manager for Sodexho, testified that Sodexho employees were subject to the
university’s standards of conduct while they were on the campus. They were not subject to personnel policies of the
university.

                                                         -9-
         In Raskin, the court presented the issue before it as follows: “If Raskin is merely an agent,
the City is operating the golf course through Raskin’s agency; if Raskin is an independent contractor,
it is operating the golf course as an independent entity, and the operation is not the City’s.” Raskin,
at *2. Having examined not only the Agreement but also the conduct of the university and Sodexho,
we are unable to conclude that the university was operating the food service operations, to the
contrary, Sodexho was. Our conclusion is based on the fact that the evidence does not preponderate
against the chancellor’s findings of fact set forth in the first memorandum opinion and the fact that
we respectfully disagree with the chancellor’s legal conclusion as stated in the second and final
memorandum opinion. We have reached the same conclusion as did the chancellor in the first
memorandum opinion, that Sodexho failed to carry its burden of proof to establish that it was the
agent of the university. Specifically, we have concluded that the Agreement and the control exerted
by the university was results oriented and did not constitute sufficient control over the means and
methods of Sodexho’s food service operations to render Sodexho an agent of the university for
purposes of the exemption. Thus, Sodexho is not entitled to the tax exempt status of the university
and is liable for the contractor’s use tax pursuant to Tenn. Code Ann. § 67-6-209(b) as assessed by
the Commissioner.

       This matter is remanded to the trial court for further proceedings consistent with this opinion.
Costs are assessed against Sodexho Management, Inc.




                                                        ___________________________________
                                                        FRANK G. CLEMENT, JR., JUDGE




                                                 -10-
