                   IN THE COURT OF APPEALS OF TENNESSEE
                               AT NASHVILLE

         EQUIFAX CHECK SERVICES, INC. v. RUTH E. JOHNSON,
         COMMISSIONER OF REVENUE, STATE OF TENNESSEE

                Direct Appeal from the Chancery Court for Davidson County
                       No. 95-4077-II   Carol L. McCoy, Chancellor



                   No. M1999-00782-COA-R3-CV - Decided June 27, 2000


Ruth E. Johnson, Commissioner of Revenue, State of Tennessee, appeals the trial court’s final
judgment which ruled that electronic check guarantee services provided by Equifax Check Services,
Inc., to Tennessee merchants were not taxable as telecommunication services under the Tennessee
Retailers’ Sales Tax Act. We affirm the trial court’s judgment.

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

FARMER , J., delivered the opinion of the court, in which CRAWFORD , P.J.,W.S., and HIGHERS , J.,
joined.

Paul G. Summers, Attorney General and Reporter, and Margaret M. Huff, Assistant Attorney
General, for the appellant, Ruth E. Johnson, Commissioner of Revenue, State of Tennessee.

Michael D. Sontag, Bryan W. Metcalf, Nashville, Tennessee, and John L. Coalson, Jr., Atlanta,
Georgia, for the appellee, Equifax Check Services, Inc.

                                            OPINION

         The parties stipulated to the following facts. Equifax is a Delaware corporation which has
its principal place of business in St. Petersburg, Florida. During the relevant audit period, Equifax
provided check guarantee services to merchants that accepted personal checks from their customers.
Most of Equifax’s check approval services were provided by the use of telecommunications, and,
in fact, telecommunications were essential to Equifax’s method of operation.

        In a typical transaction, the telecommunication began and ended at the merchant’s point-of-
sale terminal. The merchant was responsible for entering certain identifying information into its
point-of-sale device. The point-of-sale device’s modem then transmitted the information to Equifax
over telephone lines owned by third-party carriers. In most cases, the merchant’s modem contacted
Equifax by dialing a 1-800 number. Equifax provided the 1-800 number to its merchants, and the
third-party carrier billed Equifax for use of the number. In some cases, rather than using a 1-800
number, Equifax or the merchant leased a dedicated telephone line from a third-party provider. In
the small remainder of cases, the merchant communicated with Equifax by using an existing
telecommunication network provided by a third-party vendor, such as American Express,
MasterCard, or Visa.

       The third party’s telephone lines transmitted the call from the merchant’s modem to one of
Equifax’s modems at its facility in Tampa, Florida. Usually, the entire transmission took place
between the merchant’s and Equifax’s respective modems. The merchant’s modem transmitted the
check identifying information to Equifax’s modem. Equifax’s modem then transmitted this
information to its computer system, which had a database containing information about millions of
check writers. Based on the information received, Equifax’s computer system either approved or
declined the check, and it sent an approval or declination code back to the merchant using the same
modems and telephone lines that were used to submit the check approval request.

       Equifax charged the merchant a fee for its check approval services that was based primarily
on a percentage of the check’s face amount. Equifax did not itemize its invoices to show
telecommunication costs, nor did it separately bill merchants for telecommunication costs. Instead,
telecommunication costs were considered to be part of Equifax’s overhead costs.

       The Commissioner conducted an audit of Equifax for the period from December 1989
through December 1994. Based upon her conclusion that Equifax provided telecommunication
services to its check approval customers, the Commissioner assessed Tennessee sales and use taxes
upon Equifax’s entire gross receipts from customers located within the state of Tennessee. The tax
assessed against Equifax for the audit period totaled $767,496. The Commissioner also assessed
$278,912 in interest and $191,901 in penalties against Equifax.

         Equifax challenged the Commissioner’s tax assessment by filing this lawsuit in the Chancery
Court of Davidson County. See Tenn. Code Ann. § 67-1-1801 (1994 & Supp. 1995). Equifax later
moved for summary judgment on the issue of whether its check guarantee services constituted
taxable telecommunication services. After considering the parties’ arguments and stipulations of
fact, the trial court entered a final judgment ruling in favor of Equifax. In support of this ruling, the
trial court reasoned, inter alia,

        that Equifax Check never provided telecommunications services separate and apart
        from the check guarantee services for which its customers contracted. The
        telecommunications services were completely without value to the customer except
        in connection with and as a part of the check guarantee service that Equifax Check
        provided and for which its customers actually contracted. Equifax Check and its
        customers did not bargain for telecommunications services separate and apart from
        the check guarantee services.

               Although telecommunications services are essential to Equifax Check’s
        guarantee services, telecommunication services are merely a means for delivering


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       those check guarantee services and, as such, are merely incidental to the provision
       of those services. The statute, . . . does not provide that all services which are
       delivered, in whole or in part, through the use of telecommunications services are
       taxable. Rather it provides that when the totality of the circumstances indicates that
       telecommunications services, such as paging services, are themselves being furnished
       for a consideration, those services are taxable. The delivery of check guarantee
       services through a telecommunications system does not render the check guarantee
       services taxable.

       On appeal, the Commissioner concedes that Equifax’s check guarantee service, by itself, did
not constitute a taxable service under Tennessee’s tax code. Nevertheless, the Commissioner
contends that, because telecommunication services were an essential element of Equifax’s check
guarantee services, Equifax was furnishing taxable telecommunication services to its Tennessee
customers.

        We begin our analysis of this issue with the well-established rule that courts must construe
tax statutes liberally in favor of the taxpayer and, conversely, strictly against the taxing authority.
See White v. Roden Elec. Supply Co., 536 S.W.2d 346, 348 (Tenn. 1976); Memphis St. Ry. v.
Crenshaw, 55 S.W.2d 758, 759 (Tenn. 1933). Where any doubt exists as to the meaning of a taxing
statute, courts must resolve this doubt in favor of the taxpayer. See Memphis Peabody Corp. v.
MacFarland, 365 S.W.2d 40, 42 (Tenn. 1963); accord Carl Clear Coal Corp. v. Huddleston, 850
S.W.2d 140, 147 (Tenn. Ct. App. 1992). Courts may not extend by implication the right to collect
a tax “beyond the clear import of the statute by which it is levied.” Boggs v. Crenshaw, 7 S.W.2d
994, 995 (Tenn. 1928). By the same token, courts must give effect to the “plain import of the
language of the act” and must not use the strict construction rule to thwart “the legislative intent to
tax.” International Harvester Co. v. Carr, 466 S.W.2d 207, 214 (Tenn. 1974); see also Bergeda v.
State, 167 S.W.2d 338, 340 (Tenn. 1943) (indicating that courts “must give full scope to the
legislative intent and apply a rule of construction that will not defeat the plain purposes of the act”).

        During the audit period, the Tennessee Retailers’ Sales Tax Act imposed a sales tax on all
retail sales, including “[t]he furnishing, for a consideration, of either intrastate or interstate
telecommunication services.” Tenn. Code Ann. § 67-6-102(22)(F)(iii) (1989).1 The Act defined
“telecommunication” as “communication by electric or electronic transmission of impulses,”
 including the “transmission by or through any media such as wires, cables, microwaves, radio
waves, light waves or any combination of those or similar media.” Tenn. Code Ann. § 67-6-102(27)
(1989).2 The Act provided that, unless otherwise indicated, the term telecommunication included,
but was not limited to,


       1
        This section later became Tenn. Code Ann. § 67-6-102(23)(F)(iii) (1994), and is now
codified at Tenn. Code Ann. § 67-6-102(24)(F)(iii) (1998 & Supp. 1999).
       2
       This section later became Tenn. Code Ann. § 67-6-102(29) (1994), and is now codified at
Tenn. Code Ann. § 67-6-102(30) (1998 & Supp. 1999).

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        all types of telecommunication transmissions, such as telephone service, telegraph
        service, telephone service sold by hotels or motels to their customers or to others,
        telephone service sold by colleges and universities to their students or to others,
        telephone service sold by hospitals to their patients or to others, WATS service,
        paging service, value added networks, and cable television service sold to customers
        or to others by hotels or motels.

Tenn. Code Ann. § 67-6-102(27)(B) (1989).3

         We agree with the trial court’s interpretation of the foregoing provisions and, thus, conclude
that Equifax was not providing taxable telecommunication services within the meaning of the
Retailers’ Sales Tax Act. The purpose of the check guarantee services provided by Equifax to its
Tennessee merchants was to approve or decline checks written by the merchants’ customers.
Although this information was communicated via telecommunications, Equifax was not in the
business of providing telecommunication services to the merchants. As pointed out by the trial
court, the telecommunications used to convey this information had no value to the merchant separate
and apart from the check guarantee services provided by Equifax. The record contains no indication
that the merchants used the 1-800 numbers or telephone lines provided by Equifax to communicate
with any party other than Equifax or to communicate any information that was not related to
Equifax’s check guarantee services.

        In our view, this interpretation of the statute is consistent with the Act’s provision describing
the types of telecommunication services that were taxable under the Act. Although the Act broadly
defined “telecommunication” as “communication by electric or electronic transmission of impulses,”
including the “transmission by or through any media such as wires, cables, microwaves, radio waves,
light waves or any combination of those or similar media,” see Tenn. Code Ann. § 67-6-102(27)
(1989), the Act provided a list of the types of telecommunication transmissions that the legislature
intended to tax. These examples included telephone service, telegraph service, WATS service,
paging service, value added networks, and cable television service sold by hotels or motels. See
Tenn. Code Ann. § 67-6-102(27)(B) (1989). For the most part, these examples described services
that could be used by the consumer for purposes of general communication. That is, the consumer
could use the service to communicate with a multitude of parties, not just the party providing the
services.4




       3
           See supra note 2.
       4
        As for the remaining examples, we note that the Commissioner does not contend that
Equifax’s check guarantee service constituted a value added network. The “value added networks”
example was deleted by the legislature in 1993. See 1993 Tenn. Pub. Acts 51. We further note that
the provision’s reference to cable television service did not include all cable television services, but
only those services sold by hotels and motels. See Tenn. Code Ann. § 67-6-102(27)(B) (1989).

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        We also believe that this interpretation is supported by the court’s decision in Commerce
Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976). Although the issue in that case was
different, i.e. whether computer software recorded on magnetic tapes was taxable as tangible
personal property, the court’s analysis is instructive. In rejecting the Commissioner’s argument that
the software was taxable, our supreme court explained that

         [w]hat is created and sold here is information, and the magnetic tapes which contain
         this information are only a method of transmitting these intellectual creations from
         the originator to the user. It is merely incidental that these intangibles are transmitted
         by way of a tangible reel of tape that is not even retained by the user.

                  ....

                . . . . A magnetic tape is only one method whereby information may be
         transmitted from the originator to the computer of the user. That same information
         may be transmitted from the originator to the user by way of telephone lines, or it
         may be fed into the user’s computer directly by the originator of the program.

                 . . . . Transfer of tangible personal property under these circumstances is
         merely incidental to the purchase of the intangible knowledge and information stored
         on the tapes.

Commerce Union, 538 S.W.2d at 407-08.

         In a subsequent decision, the supreme court further explained its holding in Commerce
Union:

         [T]he Commerce Union Court concluded that the tapes and cards were merely
         incidental methods of transmitting intangible intellectual creations from the
         originator to the user. In essence, this Court held that the basis for the tax
         assessment, the tangible personal property – the tapes and cards – was not a “crucial
         element” of the true object of the transactions, the intangible information.
         [Commerce Union, 538 S.W.2d] at 407.

                  ....

                  . . . . In short, the tapes and cards were not required for the information to
         exist.

Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 622-24 (Tenn. 1987).5

         5
        The court also pointed out, however, that the legislature subsequently redefined “tangible
personal property” to include computer software. See Thomas Nelson, 723 S.W.2d at 622 n.3; see

                                                    -5-
        We similarly conclude that, in the present case, the product created and sold by Equifax was
information, not telecommunication services. Telecommunication was merely the method of
transmitting this information to Equifax’s merchants. Stated another way, the true object of the
transactions was not telecommunication services, but the information itself. Although Equifax
admittedly relied upon telecommunications to transmit the information, telecommunications were
not required for the information to exist.

        This approach is consistent with other supreme court decisions which, in determining the
nature of the service being provided, look at the primary purpose of the transaction. In Sky Transpo,
Inc. v. City of Knoxville, 703 S.W.2d 126 (Tenn. 1985), for example, the supreme court was
required to determine whether the gondola and chair lift operated by the taxpayer at the 1982
World’s Fair in Knoxville constituted a taxable amusement. Ruling in favor of the taxpayer, the
supreme court concluded

        that [the taxpayer’s] gondola and chair lift were primarily means of transportation
        rather than amusements within the meaning of Chapter 776, Private Acts of 1947.
        [The taxpayer], therefore, is not subject to the 5% admissions tax imposed by the
        Act.

                 We adhere to the rule that “tax statutes are to be liberally construed in favor
        of the taxpayer and strictly construed against the taxing authority.” White v. Roden
        Electrical Supply Co., Inc., 536 S.W.2d 346, 348 (Tenn. 1976). We are not
        persuaded by the City’s argument that the Sky Transpo system was primarily an
        amusement because it provided passengers with an entertaining vantage point from
        which to view the fair below. We agree with the Court of Appeals that

                “[i]n the case at bar sight-seeing [was] not the ostensible purpose for which
                tickets were purchased. In the first place, the majority of one’s view
                consisted of people, many of whom were standing in line waiting to enter a
                pavilion. The principal and interesting sights to be seen were those displayed
                inside the various national pavilions.”

Sky Transpo, 703 S.W.2d at 129. The court reasoned that the primary purpose of the lift was not
to entertain passengers, but to transport them along the mile-long, linear fair site. See id. at 128; cf.
Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987) (holding that models designed
to convey advertising ideas were taxable as tangible personal property under the Act because “these
models were the very embodiment of the ideas”).

        In the present case, the primary purpose of the services provided by Equifax was not to
furnish telecommunication services but, instead, to furnish check guarantee services. Construing the
taxing statute in Equifax’s favor, we conclude that, despite Equifax’s reliance upon


also Tenn. Code Ann. § 67-6-102(25)(B) (1998 & Supp. 1999).

                                                  -6-
telecommunications to provide its check guarantee services, these services did not constitute taxable
telecommunication services within the meaning of the Retailers’ Sales Tax Act.

       Accordingly, we affirm the trial court’s judgment and remand this cause for further
proceedings consistent with this opinion. Costs of this appeal are taxed to the appellant, Ruth E.
Johnson, Commissioner of Revenue, State of Tennessee, for which execution may issue if necessary.




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